Recently, the Washington Lawyer ran a great piece called Net Neutrality: Who Should Be Minding Online Traffic? The article goes back and forth between the extremes of: (1) heavy handed Orwellian like regulation of the Internet by the Federal Communications Commission (“FCC”), and (2) self-regulation and content discrimination by greedy Internet Service Providers (“ISP”). This seems to be a false dichotomy. Even in the absence of heavy handed FCC regulation, which can crush innovation, the Sherman Act (“Act”) is an available tool to punish unlawful Internet hogging or collusion by ISPs.
The Internet is a public good. It was created by the government. Before, it was called ARPANET. It was a tool of the military. As a result, the Internet is akin to a public park. At the same time, there are now Internet Service Providers (“ISP”) who provide Internet users with differentiated access to this public good. Think of the ISPs as competing private tour guides in Central Park. Some tours will be faster but more pricey than other slower tours.
The net neutrality debate wrongly omits how the Sherman Act can help police the ISP market without the need for heavy handed regulation by the FCC. To the extent an ISP has market power and tries to keep competing companies out of the market, the essential facilities doctrine would likely apply. To the extent that there is an oligopoly of price fixing ISPs, then there will be claims under Section 1 of the Act. If an ISP tries to obtain too much market power through a merger, the government can oppose it. The problem with too much regulation by the FCC is that it discourages technological innovation by ISPs who compete for customers by providing better service at a lower price. If the FCC requires such companies to take a one size fits all approach to every customer, competitive innovation will likely suffer. So, too, will consumers seeking faster rides through the Central Park that is the Internet.
“Luckily for us, surfing isn’t an organized sport,” Travis Ferre explains in the May 2011 issue of Surfing Magazine. That is a good thing because it has kept the surfing industry diverse and authentic. Google, which has gotten so bureaucratic that good ideas come to market too slowly, can learn from the surfing industry’s more disorganized and yet innovative ethos.
As Mr. Ferre explains in his article, surfing is not an “Ocean Pacific ad anymore,” since the waves are now full of “tight denim modsters, dreadlocked carvers, trained competitors, soloists who wander alone, flannel-clad grizzly bears that love the cold, sandy groms, ex-cons, teachers, chicks.” There has been press lately that Google has gotten so big and organized that it now takes too long to innovate. A good idea has to be passed through several layers of committees, like in the picture to the left, before the idea comes to market. The problem is, by the time the idea comes to market, a competitor has already beaten Google to the punch. Of course, Google, and others companies like it, are too big to be as disorganized as the surfing industry — or Mr. Jeff Spicoli, the surfer played by Mr. Sean Penn in Fast Times at Ridgemont High. But being too organized can be maladaptive, too. As evidence: Larry Page, one of Google’s founders, has taken the reins from former CEO Eric Schmidt in order to “streamline decision making.” In so doing, Mr. Page wants to bring some cutting edge ethos back to the spirit of the giant company. As such, Google can learn from Mr. Spicoli. Because he didn’t have a committee to govern each step of his behavior, he was the only student to think of having a pizza delivered to class.
Peter J. Wallison, a scholar at the American Enterprise Institute, wrote Dodd-Frank’s Threat to Financial Stability, in which he argues that the Financial Stability Oversight Council (“FSOC”) ruins the competitive landscape by picking those companies that are too big too fail. In so doing, the FSOC also picks those that are too small to succeed. Adam Smith would also not likely approve.
Under Mr. Smith’s theory, a highly competitive marketplace is more or less atomistic — small players with no monopoly power compete against one another. The FSOC ruins this picture. By picking certain companies that are too big to fail, the government is essentially underwriting some businesses over others. To make matters worse, these businesses likely already had market power in the first place. The FSOC only increases this power. As Mr. Wallison points out in his article, this gives unfair competitive advantage to those companies who receive the government’s blessing. And those that are too small to succeed? Well, the FSOC is apparently not to concerned with those companies. The marketplace can afford to lose them, in the FSOC’s view. At the same time, such companies are often the lead innovators because they are quicker to respond to marketplace currents. What is more, small businesses are the largest employer in the country, employing 53% of the American workforce. But even if such companies were objectively worthless, which they are not, is it the proper place of the government to pick winners and losers? Mr. Smith would likely say no. Leave that to the marketplace, not elected officials.