Does Net Neutrality Spur Internet Innovation?

By Roslyn Layton of AEI.

"Key Points

• The 2015 Federal Communications Commission (FCC) declared that its Open Internet Order was necessary to support innovation, but it never conducted an empirical assessment or reviewed the experience of other countries with net neutrality rules. It is in the public interest that the FCC examine this policy empirically, as it directly affects consumers and innovators.
• Evidence from some 50 countries with net neutrality rules made over the past decade suggests that the FCC’s approach will not create more innovation at the edge of the network, at least as measured by new mobile applications.
• Denmark and the Netherlands, two similar socioeconomic countries with multiple advanced mobile networks, employed two different regimes for net neutrality over five years. During this period, Denmark, which employed voluntary self-regulation, experienced an increase in the number, rank, and performance of locally made mobile applications, whereas the Netherlands, which legislated the world’s toughest rules, experienced a decline for the same indicators. Results were statistically significant.

The 2015 Federal Communications Commission’s (FCC) Open Internet Order concluded that hard net neutrality rules are necessary to “protect free expression and innovation on the Internet and promote investment in the nation’s broadband networks.”³ The order’s strongly worded emphasis on protecting innovation and promoting investment implied that the agency had performed a robust analysis, in particular an empirically based assessment of the regulation’s likely impact. But the 400-page order contains no such analysis.

In the vast literature that has developed on net neutrality, almost no one has tested it empirically by comparing the efforts of different national policies and, more importantly, whether the policies delivered the promised results. The net neutrality concept developed by Tim Wu,⁴ Mark Lemley and Lawrence Lessig,⁵ and Barbara van Schewick⁶ suggests there is an inherent problem with private ownership of broadband networks and that only government provision of broadband, or at least heavy regulation of broadband networks, can ensure a “neutral platform” for third-party innovation.⁷ As such, Open Internet policy implements a set of price and traffic controls on broadband internet access service (BIAS) providers to give “edge providers,” or third-party application developers, an advantage.

The goal of net neutrality is to protect a low-cost and unconstrained environment for application and service innovation at the edge, which takes precedence over innovation by BIAS providers and even consumer preferences.⁸ Following the 2015 FCC’s logic, the next app at the edge, whether “Angry Birds” or Instagram, is more important than innovation within the network—for example, the development of the 5G mobile wireless standard. This view conflicts with established academic theories of innovation, such as complementary assets, the idea that apps and networks evolve together symbiotically,⁹ and two-sided markets, the idea that forces of supply and demand allow different parties to maximize their particular preferences and utilities.¹⁰

The 2015 order failed to explain why innovation at the edge should be the priority or why such an extreme regulatory change was immediately required to preserve it. Indeed, the order failed to distinguish between incremental improvements to existing internet products and services and truly groundbreaking invention, or what is referred to in management literature as “disruptive innovation.”¹¹

Because FCC policies can affect America’s digital industries, some one-sixth of the US economy, it is paramount that regulation is based on a solid foundation of empirical research. Too frequently there is a gap between policy research and policy. Consider health care: More than $30 billion annually is spent in the US on research, but the enacted policy rarely resembles the research’s recommendations.¹² A review by Hartsfield et al. identified 107 model public health laws covering 16 topics, but only seven laws were based on scientific information (i.e., research-based guidelines).¹³

My research undertaken at Aalborg University represents a preliminary step to address the gap between research and policy. I investigated the results of net neutrality before and after rules were imposed to see whether the policy delivers the promised innovation at the edge. The investigation was confined to mobile apps on mobile networks. The specific research questions were: To what degree does introducing net neutrality in a given country stimulate edge providers’ innovation on mobile networks? In other words, how many more mobile apps does a country make once it establishes net neutrality rules? How do the different frameworks affect edge innovation?

The investigation found significant statistical support for “soft” voluntary net neutrality rules and increased mobile app innovation, but not for “hard” net neutrality. Countries that adopted net neutrality through legislation and regulation did not display an increase in mobile app development. The results suggest that hard net neutrality policy, such as the FCC’s Open Internet Order with Title II, may not be as necessary and effective as purported.

Read the full report."