The dangers of regulation

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We have no way of knowing what kind of innovations we will preclude by forcing ISPs to comply with neutrality regulations. It's entirely possible that ISPs will find innovative new ways of offering services that will be beneficial to consumers. If these services are made available alongside existing services, consumers will be able to pick the option that best suits their needs. Forcing ISPs to comply with neutrality regulations, however, may prevent them from experimenting with new business practises. If service providers find a way to offer packages that people find appealing by making deals with content providers, should they not be able to give consumers that choice?

Likewise, stopping service providers from managing the traffic on their networks would place a financial burden on them and degrade the quality of service for their customers. While Internet bandwidth has increased rapidly over the last couple decades, it is certainly not an unlimited resource. If a few users of bandwidth-intensive applications are slowing down the entire network, ISPs will lose customers and will be forced to make costly new infrastructure investments, which they may not be able to afford.

“The argument that I've heard… is that this will force the network operators to build-up capacity. That you're literally going to force them to do it by saying… 'you just have to make sure that you've got enough capacity to serve everyone.'” said Steven Globerman, an economics professor and policy analyst with the Fraser Institute. “But where's the money going to come from?” Moreover, imposing an additional cost on ISPs would discourage competition because there would be less money to be made in the industry.

The greatest potential issue, however, is that regulatory regimes often expand beyond their initial scope; become vehicles for companies to limit competition in the industry; and produce unintended consequences. “The reality is that regulation always spreads. The march of regulation can sometimes be glacial, but it is, sadly, almost inevitable: Regulatory regimes grow but almost never contract,” reads a report from the Progress & Freedom Foundation.

The CRTC has been expanding its jurisdiction ever since its inception. Less than ten years after the CRTC was created in 1968 to regulate the broadcasting industry, it had expanded its mandate to include jurisdiction over all telecommunications companies. Moreover, it initially took a hands-off approach to Internet regulation. Its 2009 decision on net neutrality reverses this policy stance.

Until the early '90s, the agency perpetuated a policy that allowed incumbent telephone companies to maintain their monopolies. Deregulating the telecommunications industry has led to expanded consumer choices in local and long distance services, as well as drastically reduced prices. Net neutrality regulation represents a reversal of the trend to deregulate the industry.

Agencies like the CRTC are also prone to having their agendas hijacked by the very industry they are supposed to regulate. According to the theory of regulatory capture, regulatory agendas will increasingly become usurped by the industry they are in charge of. Eventually, the agency's policies begin to reflect corporate interests, rather than the public interest. This creates a situation in which companies use their resources to manipulate the regulatory regime in order to limit competition and gain market advantages, rather than relying on straightforward competition to increase their market share.

The battle over fee-for-carriage highlights this issue all too well. Canada's broadcasters are trying to get the CRTC to force cable companies to pay them to carry their signals, which are available for free over the air. Rather than trying to develop innovative new services that appeal to consumers, the broadcasters are trying to manipulate the existing regulatory regime to increase their profits.

Other historical examples also show that the CRTC has imposed policies that favour incumbents and create barriers for new entrants into the marketplace. For example, in the mid-1990s, the CRTC issued an exemption order that granted a Canadian satellite television company a monopoly position in the satellite market and prevented its American counterpart from offering a competing service to Canadians.

As the history of the CRTC has shown, imposing regulatory restrictions on an industry often limits competition, which means higher prices, limited consumer choices, and less incentives for companies to innovate. We are now threatened with a situation where the CRTC could be placed in the centre of a messy battle between ISPs, application developers, and content providers, each claiming breaches of neutrality in order to gain an advantage. Allowing the state to regulate the Internet—even in the form of a seemingly benign, populist regulation like net neutrality—could easily lead to an expansion of the regulatory regime.

The potential for neutrality regulations to be expanded beyond ISPs is very real. There have already been calls in the U.S. for neutrality regulations to be applied, not just service providers, but to search engines, devices, and applications as well. For example, AT&T has called on the U.S. government to apply neutrality regulations to Google and the myriad of services it controls. Not only would this expand the regulatory regime beyond the service provider industry, it would also put the government in charge of picking winners and losers.

This could easily happen in Canada as well. When I asked Anderson about this, he seemed quite open to the idea of applying neutrality regulations to other industries. “I think we need to keep our eye on the prize of net neutrality. Once we win that one, we need to have a larger discussion about how we want the Internet to work,” said Anderson.

Given the importance of maintaining a neutral Internet and the dangers of regulation, I set out to find another solution to this problem.