The Federal Communication Commission’s 2015 Open Internet order threatens innovation in three distinct ways. First, by barring paid priority arrangements, the order undermines innovation in the nascent market for real-time applications like telemedicine and HD voice. Second, because sponsored-data plans (including zero-rating plans) may run afoul of its “general conduct” standard, the order could discourage procompetitive offerings that would subsidize Internet access for low income Americans. Third, by reclassifying Internet service providers (“ISPs”) as telecommunications providers under Title II of the 1934 Communications Act, the order will likely slow the flow of investment dollars by ISPs, which will adversely affect innovation.
This Policy Brief examines the potential harm to innovation in qualitative terms, and where possible, in quantitative terms. The major findings are as follows:
The nascent markets for certain real-time applications, including telemedicine, virtual reality, and HD voice, are expected to develop into billion dollar industries in the coming years. Although no application needs priority to function per se, there is a class of applications that need a certain level of quality of service that is not always consistently available on networks, especially across wireless networks that are subject to congestion. The ban on payments for priority arrangements could undermine certain collaborations among ISPs and websites/application providers (“content providers”), and thereby thwart a non-trivial portion of these applications from taking root, potentially costing the U.S. economy hundreds of millions of dollars annually.
By discouraging ISPs and content providers from pursuing different ways to subsidize Internet access for consumers—another form of collaboration—the order could deny the poorest Americans hundreds of millions in benefits annually. There are millions of Americans for whom broadband is just out of reach and who would otherwise be eligible for a subsidy in the form of a sponsored-data plan.
Subjecting telecommunications companies to Title II in the early 2000s caused their capital expenditures to decline by between five and thirteen percent under conservative assumptions. Exposing ISPs to the same regulatory risk could undermine core investment to the same degree. Based on U.S. Telecom’s estimated $76 billion in aggregate capex among U.S. ISPs in 2014, such a reduction would amount to between a $4 and $10 billion decline in investment at the core of the network.
