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Economics backs net neutrality, say researchers

The dollar has spoken

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Net neutrality is not just the fairest way to organise the internet but the most economically effective, according to two US academics. Their economic analysis of the policy claims that it is the best way to encourage investment in online services.

Subscribers pay internet service providers (ISPs) for access to whatever information is published on the internet. Some ISPs want to charge content providers for special fast delivery over their networks.

Opponents of that scheme want all information to be treated the same by ISPs so that consumers can make free choices about what content to see. This is called net neutrality.

US telecoms regulator the Federal Communications Commission has proposed enforcing rules that would guarantee net neutrality. Two academics at the New York School of Law say that these rules are the best way to ensure the economic future of the internet.

"Without net neutrality rules, new technologies could lead to pricing practices that transfer wealth from content providers to ISPs, a form of price discrimination that would reduce the return on investment for internet content – meaning website owners, bloggers, newspapers, and businesses would have less incentive to expand their sites and applications," said Inimai M. Chettiar and J. Scott Holladay in their report, Free to Invest: The Economic Benefits of Preserving Net Neutrality.

The researchers made an economic analysis of the neutrality policy and found that while it had some economic downsides, it was the best way to create incentives for creators to make content, which in the end increased web-based economic activity and made the web more useful for everyone.

"The internet... produces billions of dollars of free value for the American public: information is shared, reused, and reconfigured without fees or penalties," said the report, recounting some of the economic downsides fundamental to the internet. "Websites are not compensated when their content is repurposed or passed on – that means fewer subscriptions to paid services, fewer direct page views, and a loss of advertising dollars."

"Without net neutrality rules preventing priority pricing techniques, there could be changes in the way content appears online. If ISPs create 'priority' or 'fast lane' access to content providers at a fee, users could experience uneven access to websites and applications," said the report. "While some content providers may benefit from this architecture, many type of websites will be especially harmed. Ultimately, prioritization could reduce incentives for content creators, potentially lowering the overall value of the internet for all users."

The researchers said that the rules of net neutrality as set out by the FCC were likely to protect investment in online content. They added that if ISPs could charge content producers for privileged connections on their networks, then wealth would be transferred to ISPs, where it would be unlikely to be spent on improving online infrastructure.

"Most additional revenue generated for ISPs is likely to be transferred to their shareholders rather than invested in expanding broadband lines," it said.

Net neutrality has been a controversial subject, particularly in the US. Telecoms companies there have said that they believe that they deserve a share of the revenue earned by businesses which depend on consumers connecting to them over the internet.

Neutrality advocates have argued that ISPs are paid to deliver consumers the whole internet and that to give some services privileged status is an abuse of their uniquely powerful position.

In the UK the issue has been less hotly debated, but ISP BT said last year that it wanted producers of online video services such as the BBC and YouTube to contribute to the costs it faced in delivering video to consumers.

An OUT-LAW Radio investigation discovered that the UK has no laws or regulations that enshrine a consumer's right to an ISP service based on net neutrality.

The New York School of Law researchers have set those arguments aside to come to purely economic conclusions.

"By giving players the best incentives for optimal investment, net neutrality encourages a cycle that breeds more content, which in turn breeds more users," their report said. "A combination of policies that protect content providers and judiciously deploy government resources to augment private investment in physical infrastructure is the right mix to ensure that the internet continues to grow and flourish, generating massive benefits for the American public."

Copyright © 2010, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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