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**ISSUE ANALYSIS**

**NET NEUTRALITY, SMALL BUSINESS, AND BIG GOVERNMENT**

Wayne T. Brough, Ph.D. [^1]

and

Arthur A. Fleisher, III, Ph.D. [^2]**^\*^**

June 15, 2007

**Net Neutrality, Small Business, and Big Government**

**by**

**Wayne T. Brough and Arthur A. Fleisher, III**

> We should remember that the current leaders in Internet innovation all
> began with essentially nothing. Google, eBay, Yahoo! and Amazon all
> started as simple websites providing limited, but fantastic, services.
> ...That competition would be threatened by access-tiering.[^3] ---
> Larry Lessig

The quote by Larry Lessig has become a rallying cry in the debate over
"net neutrality," a fuzzy concept most generally meaning
nondiscriminatory and open access to the Internet. More specifically,
many oppose the notion of access-tiering, or charging different rates
for different services provided. Proponents of net neutrality seek to
expand the Federal Communications Commission's regulatory scope over the
Internet through new mandates that would define and regulate access to
the internet.

Although advanced under the banner of internet freedom, these proposals
require unprecedented new government authority and price controls on
internet service. Open access entails a full suite of regulation, from
defining and enforcing nondiscrimination to monitoring and regulating
prices to ensure there is no discrimination in the provision of
services. In effect, the internet would become a common carrier, replete
with all the maladies of a regulated industry.

In practice, net neutrality may yield unintended consequences that
generate benefits for some while imposing substantial costs on others.
Most importantly, price controls would push all costs to end users in
the name of net neutrality. Unfortunately, these price controls would
have the effect that price controls always have on the workings of the
market---less output, less innovation, and less investment in the
infrastructure critical for the deployment of broadband. Much has
changed in how the internet is used, yet new mandates threaten to lock
in an architecture that may limit the deployment of new technology.

**Wither Innovation?**

An important claim in this debate that often goes unchallenged asserts
that entrepreneurship and innovation will be stifled without new
mandates for net neutrality. In essence, without government
intervention, innovation on the internet will dry up. Despite the
significance of this claim, there has been scant evidence offered in its
support. At the same time, this claim ignores evidence on the dilatory
effects of regulation on innovation and entrepreneurship. Turning the
internet into a common carrier---which concerns over tiered pricing and
open access ultimately require---is fraught with its own concerns of
regulatory delay, federal oversight, and political interference.[^4]

Undoubtedly, corporations such as Google that support net neutrality
have been significant innovators and benefit from the current pricing
scheme, but locking in a "neutral" network creates costs as well. If
hospitals are willing to pay for guaranteed service at specified speeds,
or if gamers are willing to pay for a better managed network to improve
the performance of their products, would consumers be better off? Are
Virtual Private Networks, which provide an added layer of security over
standard internet communications, violating some sense of net
neutrality? When such experimentation is disallowed on the internet,
innovation of a different sort is limited by mandating new content and
applications use a specific technology and run in the same network as
spam and downloads (legal and illegal) of the latest Harry Potter movie.

Christopher Yoo, of Vanderbilt University Law School, suggests that
network differentiation, rather than network neutrality, could increase
consumer welfare.[^5] Already, retailers, content providers, and
applications developers are experimenting on the web, pushing technology
to its limits. Just as significantly, they are also experimenting with
pricing for content and applications---much of which would be challenged
by the stated principles of net neutrality.

Moreover, it is difficult to decide the "correct" price for the network
without experimentation. Should broadband consumers pay none, part, or
all of the costs related to deploying, maintaining, and improving the
infrastructure of the internet? How much of these costs should be borne
by end users relative to content or application providers? Newspapers,
for example charge readers very little for the daily paper, recouping
the costs from advertisers. Would a similar approach be efficient for
the internet?

It is a challenge to answer these questions *ex ante*. The market system
is the most reliable mechanism available for allocating scarce resources
and establishing efficient prices. But net neutrality advocates would
discard this system in favor of a regulatory allocation of resources. In
this paper we examine the internet as it has emerged as well as the
tenets that underlie mandated net neutrality. We also examine the impact
of new mandates on innovation and entrepreneurship, as well as potential
adverse effects on consumers. Finally, we attempt to identify the
concerns that may arise when attempting to operationalize a net
neutrality mandate. Based on regulatory history, current and future web
usage, and the costs of government regulation, we suggest that net
neutrality mandates would reduce social welfare, harming both consumers
and businesses.

**Innovation and the Internet**

The internet is clearly one of the largest transformational events of
the last 100 years, generating what some have referred to as an
e-revolution, with an economic impact akin to the industrial revolution
of the 19^th^ century. In fact, the internet has touched almost every
aspect of the economy, expanding markets, boosting productivity, and
enhancing consumer welfare. One study notes, "The deployment of internet
business solutions has yielded to date a cumulative cost savings of
\$155.2 billion to U.S. organizations. U.S. organizations that are
currently deploying internet business solutions expect to realize more
than \$500 billion in cost savings once all internet solutions have been
fully implemented by 2010."[^6]

It is not intuitively obvious that net neutrality mandates are required
to continue this progress. Indeed, as new technologies emerge and
broadband expands to an even greater population, the internet is showing
its age. Streaming video is replacing the static web page, and real
quality of service (QoS) issues are developing. Net neutrality mandates
effectively freeze the internet's development at a stage that may be
inappropriate for future use patterns. In an age of BitTorrent and IPTV,
it is not surprising that new tools for network management may be
required.[^7] One study notes, "Greater bandwidth and processing power
alone will not solve all congestion and QoS problems on the Internet.
This is because the Internet involves the use of scarce resources, and
when treated otherwise, theory and evidence suggests that congestion
will become a problem, undermining convergence and the development of
services that require superior QoS statistics."[^8]

Net neutrality proponents, on the other hand, are wary of new pricing
mechanisms for better network management. Instead, they propose to
regulate access, something that may limit innovation. A simple survey of
the marketplace suggests the potential impact of regulation. Since the
deregulation of the market for telecommunications, there has been an
explosion of products available for the end consumer. The regulatory era
was marked by a limited set of choices for consumers, with most
consumers having access to little more than a simple rotary phone.
However, beginning with the Carterphone decision in 1968, the FCC eased
regulatory restraints on third party hardware connecting to the phone
network and the result was a rush to market of new products, from fax
machines to answering machines to any number of telephones, all of which
was marked by significant decreases in price.[^9]

At the same time, a more dynamic internet creates more opportunities for
entrepreneurs. A faster and more agile internet paves the way for more
powerful applications and a larger audience. It must be remembered that
those upgrading the internet can only generate profits by providing a
product that consumers are willing to purchase. Investments in the
future of the internet are not made to deter consumers; rather, expanded
deployment and better traffic management are efforts to bring more
consumers online. This encourages more participation by consumers and
more opportunities for developers of both content and applications.

Far from killing the next Google, then, a more developed internet offers
a host of new opportunities for the next generation of entrepreneurs.
Importantly, it would allow entrepreneurs and developers to take full
advantage of the latest standards to bring consumers a better online
experience. Indeed, the latest web applications such as YouTube and
BitTorrent require the full capabilities of high-speed broadband access.

**What is the Internet?**

Today's internet is the product of yesterday's technology, and its age
is beginning to show.[^10] The internet was created to move
data---disassembling, moving, and reassembling bits and bytes---that did
not necessarily require the same demanding standards that current and
future applications require. As many have noted, the internet was not
developed as a network per se, rather; it was a means of interconnecting
a number of smaller networks. These early networks were typically
Ethernets, and the early internet was fundamentally a project connecting
these various networks.

Data is transferred across the internet in packets, with data broken
down and moved forward using any route available, only to be reassembled
upon final delivery to the end user. Routing these packets of
information required new tools, or protocols, such as TCP/IP as a means
of controlling traffic on the internet. This is the basis for much of
today's network management. The IP, or internet protocol, moves data
packets forward in a "best effort" approach, with no guarantees that
they will arrive or they will arrive in order. The transmission control
protocol, or TCP, has the function of creating and then reassembling
data packets at the destination in the correct order.

Since its inception, the internet has evolved into a means of global
communications. Email and text bulletin boards dominated much of the
early traffic, and eventually a file transfer protocol became popular as
a means of transferring larger amounts of data. The development of the
visual browser and the World Wide Web in the mid-1990s pulled mainstream
America online. More recently, new applications that allow sharing
photographs, audio, and video content have attracted even more users
who, in turn, run significantly more data-intensive applications. Today,
there are more than one billion users worldwide---almost 17 percent of
the world's population. (See Figure 1.) Growth continues to be strong,
and since 2000, use has increased by more than 208 percent.[^11]

For connectivity, the internet relies on a high-speed backbone that
connects internet Service Providers (ISPs) to one another, allowing
users to go anywhere on the network. The ISPs typically use a regional
provider that links to the backbone. The backbone, in turn, is comprised
of a multitude of high-speed networks and routers, which allow data
packets to move across the country and across the globe. These networks
are highly redundant, and internet protocols allow packets to find
numerous paths to the end user in real time.

Owners of the internet backbone negotiate with one another to establish
commercial agreements to cover the transfer of data. Interestingly, many
of the transactions between networks are done without fees. Networks
with similar loads of traffic establish "peering agreements" in which
they will transfer data for one another at no cost. If there are
significant asymmetries in the data loads, with one network sending far
more data across another than it receives in exchange, the network
owners will use commercial agreements to come to terms.

The development of the internet differs in important ways from earlier
telecommunications networks. Earlier networks relied on centralized
hubs, which connected individuals in a point-to-point fashion. The goal
was a quality connection between one user and another, and managing the
network meant investing in the switches and central stations that made
this possible. The switches remained on as long as one party was
connected to another.

![](media/image3.wmf){width="6.479166666666667in"
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Source: Internet World Stats, available at
<http://www.internetworldstats.com/stats.htm>.

The internet, on the other hand, is not a means of simply connecting one
individual directly to another. It connects an individual user to a vast
number of sources at once, anywhere in the network. The goal is to allow
any computer at the edge of the network to send and receive data from
any other computer anywhere in the network. Notably, the internet
developed initially to move data and text files, rather than large video
or audio files; as such, it did not need the sophisticated load
balancing, latency management, and overall bandwidth of today's internet
communications.

**An End Run around the Middle?**

Early on, internet development focused on allowing those on the edge to
effectively share data and applications, the center of the network---the
pipes and wires---were viewed as secondary, serving only to route data
and provide connectivity to those on the edge. This principle is known
as end-to-end connectivity, with the goal of establishing all
intelligence at the edge of the network; the pipes providing the
connection were viewed as "dumb."

Advocates for net neutrality uphold the end-to-end principle as a policy
goal. Neutrality means that the internet merely transfers data while
applications at the edge manage the data (e.g., spam filters, etc.) and
determine how the data is used (e.g., email, web browser, etc.). They
see the creative component of the internet exclusively at the edge; the
pipes are simply a mechanism to connect these islands of creativity. Yet
a significant amount of innovation already occurs within the pipes in
order to route data packets at higher speeds and lower costs. Increasing
traffic and new applications highlight the need for even better traffic
management, and ensuring QoS requires an even greater dose of
intelligence for what are often assumed dumb pipes.

By definition, mandated dumb pipes would functionally operate as a
common carrier. Not only does this limit innovation, but it may also
reduce competition in the "last mile," the very concern that fuels much
of today's debate. In a competitive market, investments will only be
undertaken if there is a reasonable chance to generate a return on the
capital outlay. Innovation and experimentation allow broadband providers
to offer new opportunities for networks and deployment.

Dumb pipes, on the other hand, are an undifferentiated commodity, which
reduces incentives to deploy in an area already served by an incumbent
broadband provider. In today's market, it is the new capabilities of
high-speed broadband, including faster internet connections, video
programming, and internet telephony, that are driving deployment.
Providers are competing in terms of both speed and service, seeking to
offer consumers a unique and enjoyable online experience. WiMax
providers offer the additional benefit of mobility, another
characteristic of demand that many consumers rate highly. However,
mandates that reduce the network to a commoditized service limit the
margins for competition, reducing incentives to invest in critical
infrastructure. Consequently, net neutrality requirements could generate
greater concerns over market power than exists in today's internet,
while making QoS and pricing experimentation difficult.

Given the emphasis on simple emails and file transfers in the early
years of the internet, latency and jitter (delays and problems in the
data at the end of the pipe) were not significant problems. However, the
shift from moving text files to streaming video and internet telephony
has highlighted the importance of quality of service: "As originally
envisaged, the Internet was not designed for services with real time
requirements.... \[A\]s opposed to the traditional telephone network\'s
use of switched circuits that are opened for the duration of a telephone
conversation, the Internet uses datagrams that may have other datagrams
just in front and behind that belong to different communication sources
and are destined to terminate on a different host."[^12] Unlimited
bandwidth, once thought to be a solution, cannot address the more
fundamental problems of managing packets of information. Quality of
Service (QoS) is a legitimate concern, and an attribute that many
consumers demand.

Although proponents of net neutrality endorse the "end-to-end" view of
the internet, it is a view not shared by all. A joint statement by
several leading thinkers endorses the notion of a smarter internet: "The
current Internet supports many popular and valuable services. But
experts agree that an updated Internet could offer a wide range of new
and improved services, including better security against viruses, worms,
denial-of-service attacks, and zombie computers; services that require
high levels of reliability, such as medical monitoring; and services
that cannot tolerate network delays, such as voice and streaming video.
To provide these new services, both the architecture of the Internet and
the business models through which Internet services are delivered may
have to change."[^13]

**What Would Net Neutrality Regulate?**

The internet can be viewed as a series of layers---content,
applications, logical, and physical---each performing a distinct
function. Proponents of net neutrality focus on the physical layer that
underlies the network, including the wireline, wireless, cable, and
satellite services that transport information. They contend that the
physical layer should become simply a regulated transport provider, with
additional steps taken to ensure that monopoly power is not leveraged
into activities that take place in higher layers, such as content or
applications. Those providing the physical infrastructure would not be
allowed to discriminate between packets or show any preference for
content or applications they provide.[^14]

Any service made available to one content provider must be made
available to all in a nondiscriminatory manner, which suggests that
prices could not vary for different content providers. The wires,
switches, and cables that move information would be regulated to limit
market power and ensure access that allows consumers and content
providers to exchange information on an equal basis. This physical layer
would be further divided into last mile access regulations and internet
backbone regulations. There are numerous backbone providers and there
have been few concerns raised about market abuse on the backbone. Last
mile access is at the center of the controversy over net neutrality.

The logical layer, which is just above the physical layer, is the code,
or architecture, of the network, such as TCP/IP and other protocols, and
would engender its own regulations, such as whether data packets can be
prioritized. Above this is the application layer, which is the software
that provides users an interface, such as e-mail or a web browser. The
final layer is the content layer, which provides the information viewed
on the web page, or the video or data stream relayed to the end user.

The major concerns of net neutrality advocates center on the fear that a
monopoly broadband provider in the physical layer could charge
application providers for connecting them to consumers, or that the
broadband providers could expand into providing content and set prices
to favor their content over others. To avoid such scenarios, there are
two key provisions included in net neutrality mandates. First, broadband
providers would not be able to tier access to the internet. All content
and applications would pay the same fees to move across the wires; no
"fast lane" could be established to move certain data at more quickly.
Second, broadband providers would not be able to prioritize data, or
move certain packets to the head of the queue when transporting data.
All packets of information are to be treated equally as they are routed
to the end user.

**Where's the Monopoly?**

Net neutrality supporters typically point to the threat of monopoly in
this last mile as a primary reason to adopt new regulations. Yet,
studies by the FCC suggest broadband internet usage is increasing at a
significant pace. In the first half of 2006, for example, the increase
was 26 percent, bringing the total number of lines in use to more than
64 million.[^15] (See Figure 2.) Most of the nation live in zip codes
that have 2 or more broadband providers, and more than 75 percent of the
population has three or more choices, and these numbers are
improving.[^16]

Figure 2

Total High Speed Lines

![](media/image4.wmf){width="5.999305555555556in"
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> Source: Federal Communications Commission, "Local Telephone
> Competition and Broadband Deployment," available at
> http://www.fcc.gov/wcb/iatd/comp.html.

Additionally, emerging technologies should further allay fears of
anticompetitive behavior among broadband providers. New providers offer
alternative avenues to consumers, with WiMax creating the potential of
wireless networks covering entire towns or cities. Other technologies
under development, such as broadband over power lines (BPL), also hold
promise for future deployment and new competitors. In fact, DirecTV has
announced that it is already experimenting with this new
technology.[^17]

Blocking particular websites or limiting web access, common assertions
of made by net neutrality advocates makes little sense in a dynamic and
expanding market. Competition requires providing consumers with what
they are seeking: the best online experience possible. For broadband
providers, then, blocking websites or limiting access does not increase
broadband penetration.

Moreover, it must be remembered that large content and application
providers may exhibit a degree of market power themselves. For, example,
if Verizon tried to block a popular site such as Amazon or Google
because they could not come to terms on pricing, consumers may abandon
Verizon in favor of a broadband provider that does connect to sites that
consumers demand, which raises an important issue. Namely, where does
the monopoly threat end? If, in fact, Google, with more than half the
market for internet searches, does have market power, is regulation
required in the name of net neutrality? Similarly, even content
providers may possess market power, with a provider such as ESPN able to
extract surplus from ISPs.

A firm in any layer can expand to provide new services on the internet,
as has been witnessed by Google's jump from the application layer to the
content layer with the \$1.65 billion purchase of YouTube.[^18] The
major concern is whether a firm can leverage market power in one layer
into market power in another layer. Proponents of net neutrality assert
that broadband providers have monopoly power in the last mile that could
be used to create market power in the content layer. But Google's search
engine had a market share of over 64 percent; indeed, in March 2007, the
two top search engines have a market share just over 75 percent,
according Nielsen/Net Ratings, but it would be difficult to demonstrate
that this warrants new regulations.[^19] All of these situations can be
addressed by existing antitrust laws should abuses occur. These are
phenomena that are general to any market and no legislation or special
rules are warranted.

Google has leveraged itself into the content market with YouTube and
other services. With respect to advertising, the search giant is clearly
engaged in a two-sided market, matching advertisers to consumers using
algorithms to extract as much surplus as possible. While this may be an
example of an application that is expanding into the content market, it
does not seem to suggest that Google is abusing market power. Similarly
with broadband providers, in the absence of evidence of abuse, new
regulations are not required. The existing antitrust laws are more than
ample to address any such concerns.

As the online world emerges, questions of market power may arise that
cut across all market participants. Net neutrality has, to date, focused
primarily on the physical layer. Yet market power can exist elsewhere.
The diversity of potential sources of market power suggests that the
existing antitrust laws embody a degree of flexibility that makes them
more aptly suited to addressing any problems than would an *ex ante*,
proscriptive net neutrality regulation.

**Network Effects, Pricing, and Two-Sided Markets**

To properly understand broadband fees and assess the existence of
anticompetitive practices, it is important to understand how the market
for broadband services operates. Broadband is an example of what recent
economic literature has described as a two-sided market.[^20] In a
two-sided market, two different groups interact with each other through
a shared platform. For example, a newspaper provides a platform for both
readers and advertisers, and a broadband provider offers a platform for
internet users and content providers hoping to attract customers.

Unlike the standard market of economic analysis, the two-sided market
raises new questions about costs and pricing. In a standard market,
prices are set to cover the costs of all inputs, as well as normal
returns for the entrepreneur whose capital is at risk. But the two-sided
market adds a new element to the analysis. Namely, how does the platform
allocate costs between the two markets? In the newspaper example, the
reader pays a very low price for the product, while revenues from
advertisers are a more important stream of income. However, what the
newspaper can charge the advertisers is a function of how many readers
can be claimed. In effect, the question of pricing becomes an exercise
in joint maximization, where both sides of the market must be considered
simultaneously.

This interaction between the two sides of the market is the result of
what economists call "network effects" and makes the optimal pricing
strategy a more difficult issue than the standard market. In short, the
value of the network increases as the number of people who use the
network increases. Consider the simple example of a phone, which is only
valuable because it allows the user to connect with others on the
network. The more users, the more value the phone provides. It is the
same with high-speed broadband internet service. The greater the access
to content, the greater the benefits created for the end user. But in
this two-sided market, the reverse is true as well: the greater the
number of end users, the more attractive it becomes to provide content
on the network. The fundamental question then becomes how to maximize
the overall value of the network to both content providers and
consumers.

Prices on each side of the market affect the other side, which means the
costs of the network must be allocated across both sides of the market
in a way that increases the value for everyone. As Rochet and Tirole
note, "Platforms \[such as high-speed internet providers\] must perform
the balancing act between the two sides along various policy dimensions
and not only with respect to the price structure. They therefore often
regulate the terms of transactions between end-users, screen members in
non-price related ways and monitor intra-side competition. In all
instances, they sacrifice profit by constraining one side to boost
attractiveness for and recoup losses on the other side."[^21]

From the broadband provider's perspective, this means balancing both
sides of the market and establishing prices to optimize the overall
value of the network. These prices are tempered by competition between
broadband providers and with alternative forms access to content.

Competition occurs on both sides of the market. Consumers are looking
for providers offering universal access to the worldwide web at the best
price. Content providers, on the other hand, are looking for access to
the largest number of end users at the lowest price.

Clearly, both sides of the market have different demands that must be
addressed. Prices are set by broadband providers based on the economic
characteristics of demand by both consumers and providers. One important
component for establishing the appropriate rates is the elasticity of
demand on both sides of the market. This is nothing more than a measure
of how sensitive both sides of the market are to price changes. Using
this joint methodology, broadband fees could be set at a point where
more revenues are generated from content providers rather than end
users.

In the end, the fee should attempt to reflect the value of the service
being offered to content providers and end users, who both clearly
receive a great number of benefits from the availability of a broadband
network. However, some of the largest providers of content, such as
Yahoo and Google, oppose attempts to optimize prices across a two-sided
market. In effect, they propose the costs of broadband deployment and
maintaining the network be collected exclusively from end users. At a
hearing on net neutrality, Vinton Cerf, of Google, testified before the
Senate: \"The broadband carriers are fully compensated by their
residential customers for their use of the network. These companies can
charge their own customers whatever they want, in order to make back
their investments.\"[^22]

In an analysis of various pricing strategies, Gregory Sidak notes that
content providers are proposing a particular pricing policy for the web
that focuses on end users. [^23] He looks at pricing bandwidth according
to two variables: bandwidth and priority. Tiered pricing can use either
of these. There is little debate over the former, as all parties
generally agree that all users---content providers and
consumers---should pay for the bandwidth they use. Yet tiered pricing
may, in fact, be a beneficial activity and should not be viewed as a
form of discrimination. Importantly, Alfred Kahn notes that such
measures are not, in fact, price discrimination in an economic sense.
Price discrimination entails charging different prices for the same
good, based on individual elasticities. But in this instance, they are
not the same good. Charging more for a higher tier of service is not
price discrimination, no more than charging different prices for apples
and oranges.[^24]

Fees charged by broadband providers attempt optimize the value of the
network. However, quantifying the benefits of the network to content
providers is often difficult. This has led many, who would prefer to pay
less for access to end users, to call for cost-based regulation, which
is nothing more than price controls for broadband providers. Both tiered
access and packet prioritization would be prohibited. Historically,
price controls have performed poorly, generating market distortions and
market inefficiencies. These dangers are even greater in a two-sided
market, where the economic theory is still unsettled.

**Increasing Loads Create New Challenges for the Network**

As the internet has become more ubiquitous, how it is being used is also
changing, making concerns over network management even more important.
The shift from email to BitTorrent has put new strains on the internet
that will only increase as more users and more bandwidth-intensive
applications become available. One recent study found that BitTorrent, a
peer-to-peer network application, was already responsible for more than
30 percent of internet traffic by the end of 2004. Overall, peer-to-peer
traffic is currently responsible for more than 60 percent of internet
traffic and poses real concerns for internet service providers, and can
affect QoS for all subscribers.[^25] Internet telephony and IPTV also
loom on the horizon, and as many have noted, the amounts of data being
moved across the internet raise significant concerns over carrying
capacity.

Moving forward, then, two tasks are required to create the networked
world of the future. First, broadband providers must continue to invest
in the fundamental infrastructure of the internet. Doing so requires
investors to allocate billions of dollars to extend networks to reach
rural and other customers.

In addition to a wider deployment of broadband, there is also a growing
need for improved network management. Bandwidth-intensive applications
and content are placing new strains on the internet that threaten to
diminish the benefits for everyone. Not only is more bandwidth required,
but that bandwidth must be managed more efficiently. New technologies
for traffic shaping and deep packet inspection provide new management
tools for the internet, allowing broadband providers to more efficiently
allocate network resources. Net neutrality mandates, however, would
limit the applicability of these tools.

Net neutrality mandates would generate a typical commons problem. That
is, whenever prices are set too low, there is a predictable outcome.
Economics and history tell us that a good whose price is set below a
market-clearing level will lead to a shortage in which the quantity
demanded will exceed the quantity supplied. By eliminating tiered
pricing and packet prioritization, net neutrality mandates would lead to
a world of over-used, clogged pipes. For example, net neutrality
mandates could lead to a world in which spam e-mail has equal access to
the clogged pipes as a patient's EKG required by a heart specialist. As
in any situation with an under-priced good, there is little, if any,
incentive to innovate, expand, or upgrade.

This is especially true when examining the emerging applications such as
IPTV, gaming, telephony, distance learning, and medical technologies,
all of which require more data to be moved with greater levels of effort
to ensure quality of service. And it is not as if these applications are
replacing many of standard uses of the internet, such as email and file
sharing. These activities remain popular and will actually expand as
broadband deployment brings more people online. The new applications and
social networking under development are an expansion on top of the
existing uses of the internet, requiring even more data to be delivered
to an expanding set of applications and increasing number of users.

In fact, the term "exaflood" has been coined to describe the crush of
information that is coming to the internet. An exabyte is one billion
gigabytes, and the exaflood raises the challenge of how the internet
will manage the surge in information. One study found that "in 2006 some
161 exabytes of digital information were created and copied. That amount
is equal to three million times all the books ever written. According to
the IDC \[International Data Corporation\], the amount of information
created and copied in 2010 will surge more than six fold to 988
exabytes---a compound annual growth rate of 57 percent."[^26]

**Net Neutrality, Defined**

Despite the highly public debate over net neutrality, there is perhaps
little consensus over its meaning among its loudest proponents. Some
couch the debate in terms of internet freedom, claiming the debate is
about limiting individual access to various sites on the web. Others
emphasize the role of tiered access, and whether broadband providers
should have the ability to market higher speeds or better QoS for
specific content or applications.

The unifying element of all these definitions, however, is a larger role
for the FCC. Interested parties are requesting the FCC impose new
standards on pricing and access to the internet. What net neutrality
ultimately means, therefore, would be determined through a rulemaking
procedure, with federal regulators attempting to meet the demands of the
various interested parties.

The mandates advocated to keep the net neutral all lock in some
idealized notion of the internet that would mark a significant expansion
of the FCC's regulatory authority. Although the Internet, up to this
point, has evolved largely in a market-based setting, the new mandates
pose a potential threat to all businesses using the Internet,
particularly with respect to broadband deployment and upgrading the
Internet to handle new data-intensive applications.

From a regulatory perspective, federal policies toward the internet can
be traced to a speech by then FCC Chairman Michael Powell where he
discussed net freedom. In this speech, Powell noted that the internet
was free, and it was in the self-interest of broadband providers to
maintain its openness. He also noted that there was little evidence of
market power problems:

> Based on what we currently know, the case for government imposed
> regulations regarding the use or provision of broadband content,
> applications and devices is unconvincing and speculative. Government
> regulation of the terms and conditions of private contracts is the
> most fundamental intrusion on free markets and potentially
> destructive, particularly where innovation and experimentation are
> hallmarks of an emerging market. Such interference should be
> undertaken only where there is weighty and extensive evidence of
> abuse.[^27]

Since that speech, there has been little evidence to suggest that "net
freedom" is in jeopardy. However, Chairman Powell challenged broadband
providers to ensure that the internet would remain free in the future,
and he outlined the principles by which that freedom could be measured.
With some clarification, the Federal Communications Commission, under
new Chairman Kevin Martin, released a policy statement on internet
freedom in 2005 that included four main principles:

1.  Consumers are entitled to access the lawful Internet content of
    their choice.

2.  Consumers are entitled to run applications and services of their
    choice, subject to the needs of law enforcement.

3.  Consumers are entitled to connect their choice of legal devices that
    do not harm the network.

4.  Consumers are entitled to competition among network providers,
    application and service providers, and content providers.[^28]

More importantly, the Policy Statement also asserted that the FCC had
the authority to ensure that the internet was operated in a neutral
manner. Nonetheless, advocates of net neutrality find these principles
wanting, and are seeking legislation to strengthen these principles. In
particular, they hope to add a fifth principle on "nondiscrimination"
that would prohibit distinctions between data packets.

Nondiscrimination is most clearly described in the Network Neutrality
Act of 2006, introduced by Rep. Ed Markey (D-Mass.). The legislative
language adds a precision to the debate that gives far more detail to
the concept than the generic slogans of the movement's advocates. The
legislation notes, "if the broadband network provider prioritizes or
offers enhanced quality of service to data of a particular type," then
the broadband provider has the duty to "prioritize or offer enhanced
quality of service to all data of that type (regardless of the origin of
such data) without imposing a surcharge or other consideration for such
prioritization or quality of service"[^29]

Despite assertions that net neutrality is about access and not network
management, this language would have significant implications for the
internet. Indeed, Richard Bennett, an early pioneer of the internet,
notes, "On the technical side, my objection to the 'Net Neutrality'
bills (Markey, Snowe-Dorgan, Sensenbrnner \[sic\], Wyden) is the ban on
for-fee Quality of Service (QoS). QoS is a legitimate offering,
especially in the day of BitTorrent and what's to follow it....The
End-to-End is fine for error recovery in file transfer programs, not so
fine for congestion control in the interior links of the internet. For
the latter, we need QoS, MPLS, and address-based quotas."[^30]

Perhaps the most notable effect would be the disincentives created for
investing in new technologies or expanded broadband deployment.
Requiring firms to share new innovations with their competitors would
significantly reduce investments in new technologies. The 1996
Telecommunications Act provides a useful analogy. In the spirit of
promoting competition, the law required incumbent service providers to
unbundle their networks and allow their newly created competitors---the
competing local exchange carriers (CLECs)---access at rates determined
by the FCC.

Unfortunately, this did little to create new competitive networks.
Rather than invest and build facilities to compete with the incumbents,
the CLECs simply used the incumbent's networks at the regulated prices,
which were often set at below-market rates.[^31] As a result, CLECs
relied increasingly on regulated access rather than investing in new
facilities to compete with the incumbents.

At the same time, the incumbents have little incentive to expand their
networks under such conditions, because any investments in the network
are immediately available to competitors at prices that do not
necessarily allow the incumbents to recoup their investments. For
consumers, this means a delay in expanding the size of the network, and
a delay in adopting new technologies.

In much the same way, when mandates require any updates that enhance or
prioritize the ability to move information across the internet to be
immediately available to anyone using the network, there is a reduced
incentive to invest in better network management. Enhanced quality of
service or tiered access that prioritizes the delivery of specific
packets of data may no longer be available as an option, which can have
important consequences for the operation of the internet.

Proponents of net neutrality are always quick to point out that the new
requirements do not prohibit network management. This may be true, but
the more fundamental issue is whether the incentives for improving
network management exist in a world where any such changes are
immediately available to everyone on the network at the same price.
Without an opportunity to recoup such investments, tomorrow's internet
may look very similar to today's from a technological perspective,
despite the very real changes in how the internet is being used.

To date the internet has evolved relatively free from federal
regulation. This flexibility has created an important resource that
continues to evolve to meet a growing demand among consumers and
businesses. Moreover, that demand has generated new products that may
require new tools for network management. It is not in the public's
interest to give the government the job of controlling this evolution.
Whether pipes are dumb or smart should be determined by those using the
network, as should decisions on handling the burgeoning flow of
information over the internet.

It is the users that will determine the most efficacious and efficient
structure for the internet---consumers, broadband providers, internet
service providers, and applications and content providers. These
relationships have been defined in the marketplace, and given the
absence of market power, there is little reason to interfere.

It should be remembered that federal antitrust laws continue to provide
significant regulatory oversight of the market, even in the absence of
new net neutrality mandates. In the most significant example of
anticompetitive behavior relating to internet access, it is worth noting
that the FCC immediately intervened, as did Canadian authorities. An
ISP, Madison River, was blocking Vonage on its network, and regulatory
authorities promptly issued a fine and forced the ISP to allow access to
its network.[^32]

Despite the availability of federal and state antitrust laws to address
anticompetitive behavior, many still advocate *ex ante* regulatory
authority to promote net neutrality. Proponents of this view suggest
antitrust enforcement is burdensome and slow, making it difficult to
apply to a fast-changing technological world.[^33] It must be
remembered, however, that regulatory lags can be just as slow, if not
slower, as interested parties challenge regulatory oversight at both
state and federal agencies and within the courts. Significant components
of the 1996 Telecommunications Act are still shrouded in legal
uncertainty. Cases have been challenged up to the Supreme Court before
resolution, and the case of unbundled access, for example, was only
resolved in 2005. Given current antitrust enforcement and the structure
of the market, the burden of proof lies with those advocating new
mandates.

The FCC has already issued its Policy Statement on internet
freedom---something that will guide its behavior in future rulemakings.
In addition, the agency has used its enforcement powers to curb market
power on the internet, as evidenced in the Madison River case. Moreover,
given the fact that broadband is no longer treated as a common carrier,
the Federal Trade Commission has also asserted its ability to address
concerns over market power. Nothing has changed in the broadband market
to suggest additional federal action is required. Indeed, if anything,
broadband deployment has expanded, prices have fallen, and new entrants
have joined the market. These are hardly signs of market failure, or a
need for new legislation or additional government intervention.

**Small Business and the Internet**

The technology revolution has been a driving force in boosting
productivity and expanding economic output in the United States.
Currently, more than 91 percent of American business have
broadband.[^34] One study notes that, "...in the United States IT was
responsible for two-thirds of total factor productivity growth between
1995 and 2002....and virtually all of the labor productivity growth."
Perhaps one of the most significant beneficiaries of the internet
revolution has been small business. The internet has provided new
opportunities to expand the market and reach new customers, create new
niche markets, and outsource traditional activities such as payroll and
accounting. New opportunities for using the internet are constantly
being developed. In many ways, technology and innovation have allowed
small businesses to challenge big business in ways never possible
before. Mass customization has strengthened niche markets, offering
alternatives to products generally dominated by big businesses.

Small business has the potential to be a large winner due to increased
broadband deployment. In his book *Long Tail,* Chris Anderson argues
that the internet allows for extreme niche markets that small (and large
business) can exploit.[^35] Through lower search costs, both retailers
and consumers create markets not limited by geography. Amazon, eBay, and
many others have exploited this opportunity very well. But it is not
just the large firms who can profit from the long tail markets; small
firms are serving these markets as well. For instance, independent music
bands are able to reach potential fans who can listen to music free (or
for a small fee) that would never be heard without the ability to share
audio files over the internet.

Such niche markets are a good example of Adam Smith's famous proposition
more than 200 years ago that "the division of labor is limited by the
extent of the market." Broadband deployment has allowed connections
between disparate buyers and sellers to create markets in virtually
anything, which is why, for example, listeners can hear many music
artists that they may not hear otherwise. The wide reach of the market
and cheaper distribution costs have provided numerous small businesses
an expanding set of opportunities.

Yet these opportunities require a fast and reliable internet, especially
when transferring content such as music, videos, or online gaming. While
such uses clearly require more bandwidth than other internet
transactions, they compete for space with all data transfers and must
queue together to reach end users. More bandwidth and better network
management are enhancements that would help all small businesses---not
just those with audio or video content---and foster greater internet
commerce. Net neutrality mandates may inhibit such improvements, to the
detriment of all business.

Small businesses do not have an easy time competing with larger firms,
but the internet provides new avenues for that competition. As Anderson
notes, firms like Netflix and Amazon, with "heir huge libraries of
less-mainstream fare set them apart, but hits still matter in attracting
consumers in the first place. Great Long Tail businesses can then guide
consumers further afield by following the contours of their likes and
dislikes, easing their exploration of the unknown."[^36] Again, these
businesses are filling in voids that larger businesses do not capture,
but doing so requires a reliable network.

One example of this is Pandora, a startup online company that asks
consumers to list bands they enjoy and then offers users similar,
unknown music they might enjoy. How does Pandora "know" what kind of
music listeners like? Pandora runs what they euphemistically call the
Music Genome Project. They have listened to tens of thousands of songs
from thousands of bands, which they break down by musical attributes,
such as melody, arrangement, lyrics, vocal harmony, and hundreds of
other attributes. Based on the bands and songs listeners select, Pandora
starts recommending songs with similar musical attributes on "radio
stations" the user sets up. Listeners give feedback for each song
Pandora thinks they will enjoy, allowing Pandora to learn what music to
provide to different listeners.

It is likely that the biggest winners will not be famous Top 40 bands,
but more obscure artists that have little marketing or corporate muscle
behind them. Pandora creates an opportunity in the Long Tail to be
profitable, and there are similar opportunities for other audio and
video sites. Already, there is competition in this market through firms
like last.fm, and, of course, people can still go to Amazon, iTunes, and
many other outlets. But a fast and reliable internet makes real
competition possible between the corporate giants and smaller upstarts
that can take full advantage of the latest technology on the web.

Although there have been efforts to mobilize small businesses in favor
of net neutrality mandates, regulations that inhibit the deployment of
broadband and new technologies may disproportionately harm small
businesses. Indeed, surveys suggest that a far greater concern for small
business with respect to the internet is a reliable connection. In fact,
one survey of small businesses found that "84 percent said that a less
reliable Internet with slower speeds and periodic outages would have a
negative impact on their business---including 56 percent who said it
would have a major negative impact."[^37]

Another 2007 survey by Wells Fargo shows the enormous benefits that
small businesses gain from the use of the Internet. Not inconsequential
is the response of small business owners when asked what would occur if
they lost internet access: More than one-third of the firms thought the
loss of Internet connectivity would have a major negative influence on
their firm, with 18 percent stating it would put them out of business.
[^38]

From the survey results it is clear that small business finds Internet
connectivity important for success, with one-fifth expecting to fail
*because* of a loss of internet access. The implication is that, at a
minimum, the reliability of the Internet is a main concern to the small
business person.

This massive increase in broadband use will put enormous pressure on the
backbone of the Internet. Capacity will be strained to the limits with
users requiring streaming video, internet telephony, potential medical
usage, and so forth. This demand will require both more bandwidth and
better management of what is becoming an increasingly scarce resource.
Even more importantly, newer applications and content require constant
"jitterless" internet connectivity. The price controls and mandates
inherent in net neutrality would have a detrimental effect on investment
in broadband and inherently limit its value to small business users.

**Myth of Net Neutrality Today**

The internet is home to businesses of all sizes, and small businesses
compete head-to-head with some of the largest corporations in the world.
And while it is true that the internet has benefited all businesses,
those benefits are not necessarily distributed evenly among all firms.
In fact, there are many aspects of today's internet that may provide
more benefits to larger corporations rather than small businesses, which
suggests that even on the current internet, neutrality is a relative
term, creating benefits for some and costs for others.

Under the end-to-end principle of the internet, as mentioned previously,
intelligence is located at the edge of the network. All the applications
and content required to run a business are located at the edge. This
means that the costs of doing business on the internet are located at
the edge as well. Businesses, large and small, must acquire and maintain
the content and applications necessary for online business. Not only
does this include accounting, marketing, payroll, and other business
operations applications, but also security and data management. In this
regard, large enterprises can utilize applications that improve the
internet in ways that many small businesses cannot afford.

A reconfigured internet could move some of these activities to the
network itself, reducing the number of applications an individual
company must acquire to do business online. Security, for example, is an
issue that all firms must address, and small businesses are particularly
vulnerable to malicious attacks on the internet, because they often
cannot afford to hire a full-time information technology staff.[^39]
Worms, viruses, and malware pose a constant threat to business, but most
large corporations have the resources to defend themselves against such
potential problems.

For a smaller firm, allowing the broadband provider to perform these
tasks may be more cost effective. Building these tasks directly into the
structure of the internet may benefit consumers as well. But larger
enterprises, with in-house IT staff may be able to more effectively
address these concerns on their own. Determining the appropriate
solution is something best left to a market, which provides the
flexibility to address a number of different configurations. But net
neutrality mandates could limit the levels of security that broadband
providers are allowed to offer and ultimately raise the costs of doing
business on the internet.

Another application used by many big businesses allows them to store
data closer to end users, speeding the delivery of data over the
internet. Content delivery companies such as Akamai cache information
throughout the globe to enhance the delivery of data and improve QoS.
Rather than have all data query go back to the corporation's server, the
information can be accessed much more quickly from a server located
closer to the user. While very effective in improving internet data
requests, the service is not inexpensive. Most small businesses cannot
afford the service, leaving bigger businesses another advantage in the
internet marketplace. This is not to say that such practices should be
banned; rather, they have been a valuable contribution to the internet.
But broadband providers may be able to provide customers similar traffic
management solutions; arbitrarily prohibiting such behavior does not
improve the internet.

Tools that allow businesses to optimize their use of the internet
clearly add value. Net neutrality mandates, however, place tight
strictures on who can add what value to the internet. In the absence of
evidence of market power abuse, these constraints are unnecessary and
may prove costly for different users. Current federal and state
antitrust laws already provide the power to address any concerns of
market abuse, without limiting the pattern of innovation on the
internet.

**Non-Net Neutrality On-Demand**

Advocates of net neutrality argue that broadband providers should not
have the right to charge for improved access or special handling that
moves specific packets closer to the front of the queue. But the
Japanese NTT's DoCoMo service suggests consumers and content providers
may find real value in more active network management. In fact, DoCoMo
is a clear example of a non-neutral service filling a valuable market
niche. Like other wireless providers, DoCoMo's i-mode is a mobile
internet platform that restricts content, offering what some refer to as
a "walled garden" version of the internet that provides access and is
customized to work with mobile devices. Launched in 1999 with
approximately one million customers, i-mode today has made numerous
technological innovations and counts almost 50 million customers in
Japan.

Yet DoCoMo has flipped net neutrality on its head by providing a very
non-neutral service. Why would customers and content providers flock to
such a gated environment, unless it added value? Although there are some
variations, DoCoMo basically charges consumers a fixed fee and also a
"packet communication charge" that is based on the volume of data
transmitted. If subscription-only content, such as entertainment sites,
is accessed, an additional fixed monthly fee is charged for the
subscription and a per-unit fee for specific usage.[^40]

Although not neutral, DoCoMo plays a valuable role by simplifying the
billing process as a "middleman" for transactions between content
providers and consumers. DoCoMo collects fees from consumers for content
use that are then transferred to the specific content providers, while
charging the content provider a percentage of revenue generated. By
being the middleman to all dealings, they lower the transaction costs
for both consumers and content providers. Establishing prices in a
two-sided market made DoCoMo i-mode service successful---yet charging
consumers and content providers different prices for different services
is explicitly rejected by net neutrality advocates.

**Markets or Mandates?**

At the most fundamental level, the debate over net neutrality is about
allocating scarce resources. As with any good, there are two options,
the market or the government. Markets allow providers and consumers
opportunities for innovation, sending important information signals that
coordinate the activities of everyone involved. These signals can
promote investment in existing networks as well encourage consumers to
utilize scarce resources more efficiently.

As Nobel laureate Friedrich Hayek demonstrated, the knowledge available
in a market is dispersed and beyond the reach of any one
individual.[^41] It is the interaction of all individuals that
effectively generates the knowledge guiding behavior. Government
planners cannot capture this knowledge, making it difficult for them to
replicate the efficiencies of the market. Consequently, in regulated
markets, shortages or gluts are common as regulators overshoot or
undershoot their targets. Similarly, artificial restraints on network
development can have unintended consequences that distort the
development of new internet technologies.

Providing the FCC new authority to manage the internet makes a clear
choice about the allocation of resources. The government, rather than
the market would make critical choices, and regulatory rulemakings would
replace prices as a means of allocating resources. This is not only a
lengthier and more involved process, it is also subject to political
influence that may distort the outcome. As Alfred Kahn states, \"The
process has inevitably reflected a complex mixture of political and
economic considerations. Governmental price-fixing is an act of
political economy.\"[^42]

Net neutrality proceedings would need to establish operational
definitions of what constitutes nondiscrimination and packet
prioritization. To ensure neutrality with respect to QoS, regulators may
have to review and adopt standards for acceptable levels of latency and
jitter; this would ensure that each broadband providers "best effort"
for moving data forward is nondiscriminatory. In effect, new mandates
would require a federal agency to determine which product should be
available at what price, paving the way for a long and active regulatory
chapter in the development of the internet.

There have been several studies demonstrating that economic regulation
actually reduces consumer welfare, in markets such as transportation,
energy, and telecommunications.[^43] Such regulation may pose particular
problems for the internet, a dynamic and continually evolving technology
that must respond to the latest improvements in computing technology.
Regulations evolve in a much slower framework, with important decisions
about resource allocation being transferred to the political process.
Rent-seeking becomes more important than innovation and entrepreneurship
in the marketplace, and the political process can divert attention from
concerns over efficiency to other social goals. For example, in telecom,
universal service has become an important policy driver, generating
significant distortions in the market.[^44]

There is no doubt that innovation at the edge has provided an amazing
array of applications and content that has benefited consumers and
businesses alike. But we have reached the point where the activity at
the edge is testing the limits of the entire structure. The plain choice
for the future is whether to continue to allow the internet to evolve in
a market-based setting, with the flexibility to address new concerns
that arise about performance and deployment, or to cede oversight of the
internet to a federal agency that will use the blunt tools of common
carrier regulation to guide its future development. Based on the
evolution of the internet to date and the history of regulation, the
prudent path may be to allow the internet to continue its development
with minimal regulatory interference, with an understanding the federal
antitrust laws provide more than ample authority to address any
market-power concerns, wherever they may emerge.

[^1]: ^\*^ Wayne Brough (<wbrough@freedomworks.org>) is vice president
    and chief economist, FreedomWorks, Washington, D.C.

[^2]: ^\*\*^ Arthur Fleisher (<fleishet@mscd.edu>) is a professor of
    economics, Metropolitan State College of Denver, Denver, Colorado.

[^3]: Larry Lessig, Testimony before the Senate Committee on Commerce,
    Science, and Transportation, February 7, 2006.

[^4]: See. Alfred Kahn, *The Economics of Regulation*, (MIT Press, 1988)
    for a discussion of the federal regulatory process.

[^5]: Christopher S. Yoo, "Beyond Network Neutrality," *Harvard Journal
    of Law and Technology*, vol. 19, no. 1, Fall 2005.

[^6]: See, for example, Hal Varian, Robert Litan, Andrew Elder and Jay
    Shutter, "The Net Impact Study," available at
    <http://www.netimpactstudy.com/nis_2002.html>.

[^7]: BitTorrent is a peer-to-peer file sharing protocol that allows the
    distribution of very large amounts of information across the
    internet. One study found that "it only takes about 10 BitTorrent
    users bartering files on a node (of around 500) to double the delays
    experienced by everybody else." Cited in Leslie Ellis, "BitTorrent's
    Swarms Have a Deadly Bite On Broadband Nets," Multichannel News, May
    8, 2006, available at
    <http://www.multichannel.com/article/CA6332098.html>.

[^8]: The Wik Consult, *The Economics of IP Networks---Market, Technical
    and Public, Policy Issues Relating to Internet Traffic Exchange*,
    Study for the European Commission, May 2002, p. 162.

[^9]: Robert Crandall, *After the Breakup: The U.S. Telecommunications
    Industry in a More Competitive Era*, The Brookings Institution,
    1991. It should be noted that some have pointed to the Carterphone
    decision as a means of instituting net neutrality (for instance, Tim
    Wu, "Wireless Net Neutrality: Cellular Carterfone on Mobile
    Networks," New America Foundation, Working Paper no. 17, ver. 2.1,
    February 2007. However the analogy is inapplicable here. The initial
    decision was issued in a market defined by a regulated monopolist.
    Carterphone, in effect, eased regulatory restrictions for entering
    the market. In today's broadband market, such a decision, would
    impose a new regulatory burden on a market that the FCC views as
    competitive.

[^10]: See, for example, Mark Handley, "Why the Internet Only Just
    Works," BT Technology Journal, vol. 24, no. 3, July 2006. Available
    at
    <http://www.cs.ucl.ac.uk/staff/M.Handley/papers/only-just-works.pdf>.

[^11]: Internet World Stats, "World Internet Usage and Population
    Statistics," available at
    <http://www.internetworldstats.com/stats.htm>.

[^12]: The Wik Consult, supra, note 5, May 2002, p. 36.

[^13]: David Farber, Gerald Faulhaber, Michael L. Katz, and Christopher
    Yoo," joint statement on net neutrality, June, 2006, available at
    <http://www.interesting-people.org/archives/interesting-people/200606/msg00014.html>.

[^14]: See, for example, Richard S. Whitt, "A Horizontal Leap Forward:
    Formulating a New Public Policy Framework Based on the Network
    Layers Model," An MCI Policy Paper, March 2004, available at
    http://global.mci.com/about/publicpolicy/presentations/horizontallayerswhitepaper.pdf.

[^15]: FCC, Chart 1, Industry Analysis and Technology Division Wireline
    Competition Bureau, "High-Speed Services for Internet Access: Status
    as of June 30, 2006" January 2007, Table 1. Available at
    <http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-270128A1.pdf>.

[^16]: FCC, Industry Analysis and Technology Division Wireline
    Competition Bureau, "High-Speed Services for Internet Access: Status
    as of June 30, 2006" January 2007, Chart 15. Available at
    <http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-270128A1.pdf>.

[^17]: See "DirecTV May Try Broadband on Power Lines," Reuters, May 14,
    2007, available at
    <http://www.reuters.com/article/technologyNews/idUSN1433448320070514>.

[^18]: Google Press Center, "Google To Acquire YouTube for \$1.65
    Billion in Stock," October 9, 2006, available at
    <http://www.google.com/press/pressrel/google_youtube.html>.

[^19]: Cited in ZDNet IT Facts, Avaliable at
    <http://blogs.zdnet.com/ITFacts/?cat=27>.

[^20]: Jean-Charles Rochet and Jean Tirole, "Two-Sided Markets: An
    Overview," Mimeo, IDEI, Tolouse, France, March 12, 2004.

[^21]: *Ibid*, p. 41.

[^22]: Vinton G. Cerf, Testimony before the U.S. Senate Committee on
    Commerce, Science, and Transportation, February 7, 2006, p. 6.

[^23]: J. Gregory Sidak, "A Consumer-Welfare Approach to Network
    Neutrality Regulation of the Internet," *Journal of Competition Law
    and Economics*, 2006. Available at
    <http://ssrn.com/abstract=928582>.

[^24]: Alfred Kahn, "Network Neuatrality," AEI-Brookings Joint Center
    for Regulatory Studies, March 2007, p. 3, available at
    <http://aei.brookings.org/admin/authorpdfs/page.php?id=1374&PHPSESSID=a3701a64cc6321f33088accb799e16d7>

[^25]: Andrew Parker, "P2P in 2005," CacheLogic Research, August 2005,
    available at
    <http://www.cachelogic.com/home/pages/research/p2p2005.php>.

[^26]: David P. McClure, "The Exabyte Internet: An Analysis of the
    Growing Flow of Billions of Gigabytes of Digital Data and Its Impact
    on Public Policy for the Internet," US Internet Industry
    Association, May 1, 2007, p. 6.

[^27]: Michael Powell, "Preserving Internet Freedom: Guiding Principles
    for the Industry," speech delivered in Boulder, Colorado, February
    8, 2004, p. 4, available at
    <http://www.cdt.org/speech/net-neutrality/20040208powell.pdf>.

[^28]: Federal Communications Commission, Appropriate Framework for
    Broadband

    Access to the Internet over Wireline Facilities *et al*., FCC
    05-151, CC Docket No. 02-33, available at
    <http://www.publicknowledge.org/pdf/FCC-05-151A1.pdf>, August 5,
    2005.

[^29]: Network Neutrality Act of 2006, introduced by Rep. Ed Markey,
    available at
    [http://markey.house.gov/docs/telecomm/Markey%20Net%20Neutrality%20Act%20of%202006.pdf](http://markey.house.gov/docs/telecomm/Markey Net Neutrality Act of 2006.pdf)

[^30]: Quoted in Andrew Orlowski, "How 'Saving the Net' May Kill It,"
    The Register, July 17, 2006, available at
    <http://www.theregister.co.uk/2006/07/17/net_neut_slow_death/>.

[^31]: See, for example, Wayne T. Brough, "What's Wrong with this
    Picture?" FreedomWorks, April 9, 2004, available at
    <http://www.freedomworks.org/processor/printer.php?issue_id=1735>.

[^32]: Alfred E. Kahn, "A Democratic Voice of Caution on Network
    Neutrality," Release 2.24, Progress and Freedom Foundation, October
    2006, p. 2, available at
    <http://www.pff.org/issues-pubs/ps/2006/ps2.24voiceofcautiononnetneutrality.pdf>.

[^33]: See, for example, Nicholas Economides, "'Net Neutrality,'
    Non-Discrimination and Digital Distribution of Content Through the
    Internet," AEI-Brookings Joint Center for Regulatory Studies, March
    2007, p. 19.

[^34]: Gary Kim, "As Broadband Access Reaches a Saturation Point, Sales
    Strategies Must Be Remade," Extreme Makeover, Feb. 22, 2007,
    available at
    <http://channelvisionmagazine.com/showArticle.php?id=55>.

[^35]: Chris Anderson, *Long Tail*, Hyperion, 2006.

[^36]: Qutoed in Chris Anderson, "The Long Tail," *Wired*, available at
    <http://www.wired.com/wired/archive/12.10/tail_pr.html>

[^37]: Survey conducted by the Association for Competitive Technology,
    available at
    <http://www.actonline.org/press-releases/060315-KeepInternetReliable.html>.

[^38]: <https://www.wellsfargo.com/press/20070410_SmallBizTech?year=2007>

[^39]: See, for example,
    <http://money.cnn.com/2006/06/05/smbusiness/security_threats/index.htm>

[^40]: See
    http://www.nttdocomo.co.jp/english/service/imode/about/charge.html

[^41]: Friedrich A Hayek, "The Use of Knowledge in Society," *The
    American Economic Review*, vol. 35, no. 4 (Sept. 1945), pp. 519-30.

[^42]: Alfred Kahn, *supra*, note 2, vol. I, p. 42.

[^43]: See, for example, Clifford Winston, "Government Failure Versus
    Market Failure," AEI-Brookings Joint Center for Regulatory Studies
    Washington, D.C., 2006.

[^44]: Raymond L. Gifford, "Universal Service for the Digital Age," in
    *A Digital Age*

    *Communications Act: Essays on the Need for Communications Policy
    Reform*, Progress and Freedom Foundation, 2005, pp. 17-23.