Some Say State Net Neutrality Rules Thwart New Entrants; Others See No Problem
Net neutrality rules supporters and opponents disagreed how a state-by-state approach might affect competition. State-by-state net neutrality rules in the long term may advantage the largest incumbents -- the very companies that have put up the biggest resistance -- by making it harder for less financially resourced competitors to enter the market, Montana Public Service Commissioner Travis Kavulla told us. But supporters of state rules countered that smaller companies should have no difficulty complying with open-internet regulations.
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Washington state and Oregon enacted the first state net neutrality laws, and five governors ordered net neutrality through executive decision (see 1804100024). California senators plan to weigh a bill Tuesday with support from Ex-FCC Chairman Tom Wheeler and other Democratic ex-FCC commissioners (see 1804120009). Industry challenges to state efforts are expected, with USTelecom threatening action for big wireline ISPs (see 1803260024).
Big ISPs “possess the resources to play the regulation game,” emailed Kavulla, a Republican and former NARUC president. “It'd be ironic if net-neutrality advocates ended up cementing the very networks they suspect of wrongdoing, while making it harder for feisty new entrants to get into the mix.”
“As one raises transaction costs associated with ISP regulation, and that regulation is further balkanized among states, you tend to advantage only very well-resourced firms,” Kavulla said. “Usually those are the incumbents.” Businesses tend to become open to regulation once they’ve obtained enough market share, the commissioner said. “They realize that, if regulation is inevitable, they might as well endorse regulations that codify their business model to the maximum extent, because this impairs the ability of innovative new entrants who may not be compliant with prescriptive regulation.”
Regulatory costs thwart potential competition, said 556 Ventures analyst Bill Ho. “Unless the new entrants are heavily bankrolled and experienced, the national incumbents with multistate experience and bigger scale can bring more to bear.” Google Fiber is struggling to expand because it “encountered state and local regulations that perhaps [it] didn’t account for,” Ho said. Its “ambitions have been vastly scaled back.”
Complying with state net neutrality rules shouldn’t be hard, countered Gigi Sohn, Mozilla fellow and aide to ex-FCC Chairman Tom Wheeler, in an interview. “If the rules are reasonable, I don’t think they disadvantage competitors.” AT&T may have the most lobbyists, but a smaller company will be fine if it complies with the most regulatory state, she said. Federal net neutrality rules would be better, but state regulation is “nothing new,” Sohn said. Opponents of state rules ignore that cable is regulated on a state and local basis and telephone service was regulated state by state, she said.
“It’s not regulation that keeps smaller competitors out,” said Maryland Del. Kirill Reznik (D) in an interview. Reznik co-sponsored a bill that died last week to limit state contracts to ISPs that follow net neutrality principles. “What we’re talking about here are fairly simple industry standards,” and smaller competitors are usually better at complying, he said. “We’re not requiring them to pay for infrastructure that they can’t pay for. We’re not requiring them to front a lot of money that they don’t have.”
It’s true some regulations benefit the big incumbents that possess many lawyers, but with net neutrality, “the regulation is not only reasonable but what most small ISPs inherently do,” said Christopher Mitchell, Institute for Local Self-Reliance director of Community Broadband Networks. “State-by-state rules will advantage smaller, local firms rather than the big monopolies." Most smaller ISPs operate in at most two states, “so worries about balkanization of rules are only applicable to the largest ISPs,” he said.
One national policy is better than many state rules, but regulatory compliance costs for new entrants isn’t a good reason for a national policy, said Information Technology and Innovation Foundation Director-Telecom Policy Doug Brake. “New entrants face the costs of actually deploying a network -- far, far higher than the compliance costs of keeping it neutral,” he emailed. “Instead, we should be concerned with new entrants’ ability to innovate with their business models or differentiate their service from incumbents.” If consumers don’t want paid prioritization, said Brake, “then new networks that brand themselves as neutral should be a hit.”
Maryland’s bill combining net neutrality and ISP privacy rules ran out of time this year, said Reznik. The House passed the measure too late in the session, it wasn’t a top priority for leadership and there wasn’t a state senator waiting to “shepherd it along,” he said. If Reznik wins this year’s election, he would probably revive the bill when the legislature returns in January, he said. The delegate would seek a Senate co-sponsor “and hopefully get it to the other side quicker,” he said. Maryland should pass a bill even if Congress shifts to Democrats next year because passing national law could remain a slog, he said.