U.S. and Canada take diverging paths on net neutrality

The Trump administration recently announced its plan to repeal virtually all of the U.S. government’s existing net neutrality rules. Under the Obama administration, net neutrality rules subjected Internet service providers (ISPs) such as AT&T and Comcast to utility-like regulation. In particular, the rules barred ISPs from blocking or slowing down access to content or charging customers more for content if they are non-subscribers to the ISP’s network.

The policy change opens the door for ISPs to strike special deals with “over-the-top” content providers for faster delivery of content along with higher prices.

The current chief of the Federal Communications Commission (FCC), Ajit Pai, said the FCC would vote at a meeting in December to rescind the net neutrality rules. With three Republican and two Democratic commissioners, the repeal of U.S. net neutrality rules is virtually certain to be approved.

The U.S. government move provoked a reaction from Canada.

For example, Navdeep Bains, the federal Minister of Innovation, Science and Economic Development, stated that the Trudeau government remains committed to the principles of net neutrality in the interest of diversity and freedom of expression. Canadian Heritage Minister Melanie Joly also affirmed that the principle of net neutrality remains at the core of Canadian cultural policy.

However, the proposed U.S. initiative has potentially important implications for Canada. Most directly, Canadian Internet traffic often transits through the U.S., so Canadian content providers seeking to attract U.S. customers may face demands for payments to have their content delivered at acceptably high speeds.

Less directly, but perhaps more importantly, a divergence of U.S. and Canadian regulatory policies toward net neutrality might, over time, unfavourably affect the quality of Internet service in Canada relative to the U.S. In particular, the demise of net neutrality in the U.S. should promote greater investment in efficient Internet capacity and new technologies that will enhance the efficiency and capability of U.S. carriers to deliver new and advanced services.

ISPs have long argued that utility-style regulation reduces their incentives to invest and improve Internet service. The basic notion is that ISP costs associated with increasing the speed and quality of service, under net neutrality rules, must be recovered proportionally from all users, even though some subscribers have much greater use for high-speed services than users. The result is that ISPs earn less revenue than they would earn if they could create different tiers of service that would be charged different prices depending upon the chosen speed and quality of Internet access. Therefore, ISPs have less money to invest in new and improved technologies.

A consequence of net neutrality regulations has been that large and profitable users of Internet infrastructure such as Google, Facebook, Amazon and Netflix, have been implicitly subsidized by a multitude of much smaller users. It is, therefore, truly cynical of these giant Internet companies to threaten a lawsuit to prevent the repeal of net neutrality in the interest of “fairness” when the relevant concern of those companies is higher costs of a major input.

The debate about net neutrality primarily turns on the degree of competition among ISPs. Competition ensures that the consumers’ interests are protected against arbitrary blocking of Internet content or monopoly prices charged for access to popular content. The FCC is ultimately making an assessment that ISP competition is sufficiently robust to bring benefits to consumers that economists typically expect from competition. Conversely, Canadian government officials apparently continue to believe that regulation will produce better results for consumers than will unregulated competition.

Much is at stake in terms of which view of the ISP marketplace is correct. In the very fast-changing world of communications technology, it seems very unlikely regulators can assess the future more accurately than industry investors. Nor can regulation avoid imposing unnecessary delays in the introduction of new technology, given the ongoing need to adjudicate competing demands of interest groups.

If U.S. policymakers’ faith in market competition is justified, U.S. Internet users will enjoy increasingly superior communication services compared to Canadian users. The result will be an expansion of the existing productivity gap between the U.S. and Canadian economies.