@kevindrum Finds Absolutely Ubiquitous Feature of Regulation to be Mysterious

Kevin Drum simply does not understand why Wall Street might be piling into broadband stocks despite proposed "tough new regulations."  He posits a number of hypotheses -- that Wall Street expected the rules to be worse than they turned out to be.  But this can't be it because the hundreds of pages of rules are still a secret.  He also hypothesizes there might be some nefarious secret loophole buried in the rules Wall Street knows about but we don't.

This is crazy!  How can a reasonably bright person like Drum who writes about the political economy not understand the issue of regulatory capture?  Seriously, I have always figured that the Left, which has a seemingly infinite appetite for regulation, must favor regulation because they find the benefits to out-weight the crony-ist downsides.  Is it really possible Drum is unfamiliar with the downsides altogether, or is he just being coy?

Here is what regulation, particularly utility-style regulation, tends to do -- it locks in current business models and competitors.  It makes it really hard for new entrants to challenge incumbents with innovative new business models or approaches, because regulations have been written based on the old business model and did not take the new one in account.  So a new entrant must begin business by getting regulators to allow their new model, which never happens because by this time incumbents have buildings full of lobbyists aimed at the regulatory process.  Go ask Tesla and Uber and Lyft about how easy it is to enter a heavily regulated business even with a superior new business model.

This is particularly true in the technology world.  The biggest threat to incumbency is someone with a new technology or approach to the technology.  Don't believe me?  I suggest you go to the offices of Netscape or AOL or Lycos or Borders or Circuit City or Radio Shack and interview them about the security of their multi-billion dollar businesses in the face of new online technologies.  At best, regulators put a huge speed bump in the way of competitors, costing them time and money to get their alternative business model approved.  At worst, regulators block new competitors altogether.

I will give you a thought experiment.  Let's say these exact same rules were adopted in the year 2000, when AOL and Earthlink dial-up ruled the internet access world.  Would cable and satellite and DSL have grown as quickly?  I can see the regulators now -- "hey, all the rules specify phone dial up.  There's nothing here about cable TV.  Sorry [Cox, Comcast, whoever] you are going to have to wait until we can write new rules.

The other thing that happens with utility-style regulation is that companies in the business tend to get their returns guaranteed.  Made a bad investment in a competitive market?  Well good luck getting customers to pay extra to bail you out from your bad decision when they have other options.  But what happens when your local power company wastes $10 billion on a nuclear plant that never opens -- it gets built into your rate base!

In the cast of broadband, they are locked in what business school students would see as a classic supply chain battle.  Upstream companies like Netflix supply content via downstream broadband companies.  Consumers are only willing to pay a certain amount for this content, so the upstream and downstream fight a lot over who gets what share of that consumer $.    This happens everywhere in the business world, from Cable TV to oil refining to selling TV's at Wal-Mart.  There is a real danger that broadband will lose this fight in the future -- but not now.  Regulated industries never die, they appeal to their regulators for help.

As of yesterday, Wall Street is looking at broadband companies and realizing that they are now largely immune from competition and some level of minimum returns are likely now gauranteed forever.  Consumers should hate this, but what's not to love for Wall Street?

Postscript:  Kevin Drum describes the new regulation this way:  "Basically, under Wheeler's proposal, cable companies would no longer be able to sign special deals to provide certain companies with faster service in return for higher payments."  This is a bit like describing the Patriot Act as a law to force people to take their shoes off at the airport.  Yes, it does that narrow thing, but it does a LOT else.  The proposal is hundreds of freaking pages long.  It does not take hundreds of pages to do the narrow little niche thing Drum (like most neutrality supporters) wants.

This Administration has cleverly taken this one tiny concern people have and have used it as an excuse to do a major regulatory takeover of the Internet.  This is a huge Trojan Horse. But I have already ranted about the details of that and you can read that here.

  • Arrian

    "cable companies would no longer be able to sign special deals to provide certain companies with faster service in return for higher payments"

    Even the Cliff Notes version doesn't make sense: Charge more for better service? What kind of nimrod would want to do that?!?

  • mx

    "The proposal is hundreds of freaking pages long. It does not take hundreds of pages to do the narrow little niche thing Drum (like most neutrality supporters) wants."

    You're ignoring the history here. The FCC tried to take much more limited action. They were sued by Verizon and those regulations were scrapped. The court made it clear that bringing internet service under Title II was the only way to accomplish their goal. The only alternative would be an act of Congress, a body that cannot presently manage to fund an allegedly vital portion of our government responsible for safety and security into the next month let alone craft internet-related regulations that could possibly do more benefit than harm.

    Look, I'm worried about the future implications of these regulations too. I'm not someone who generally things we should have the government more involved in our internet. At the same time, there are actual current threats to a free and open internet that these rules are trying to prevent. This well-thought-out action to address the real threats we face now has to win out over the potential threats of future bad actors.

  • Don

    Their (liberals') faith in regulation is purely religious in nature. It's a cargo-cult of bureaucratic manipulation, where they believe that if they can just put the RIGHT bureaucratic measures in place, the God's of the Copybook Headings return will be put off for a little longer and the Gods of the Market Place will finally deliver on all those wonderful things they promised.

    All you need to know about this behavior was conveniently described by Kipling, and it has a catchy rhyme too.

  • jon49

    MX, What are these threats you are talking about?

  • HenryBowman419

    How can a reasonably bright person like Drum who writes about the political economy not understand the issue of regulatory capture?

    Conclusion: Mr. Drum is actually not a reasonably bright person.

  • Xmas

    He's talking about local ISPs throttling movie streaming from Netflix and Amazon and demanding more money from those content providers.

    The ISPs built their end user networks on their understanding of the internet from 10 or more years ago. High Definition movie streams weren't part of that design. Movie streams require not just high bandwidth, but also high consistency. And while the internet is great, consistent high bandwidth from one point to another is not part of the design. (TCP/IP does not require that packets sent out arrive in the order they were sent. That's how the internet works, each packet gets routed its own way.)

    So, the ISPs have been throttling network traffic from the movie streaming services because the never envisioned a significant minority of their users sitting in front of their tv's on a Saturday night binge streaming Dr Who episodes. They have to throttle because they expect the rest of the internet users to engage in the expected low bandwidth streaming, like with online games, or high bandwidth bursty activity, like downloading pictures or watching cat videos on YouTube.

  • LoneSnark

    Whether they invisioned it or not, does not really matter. What matters is that all they are trying to do is wage a supply chain battle to get a cut of the established movie streaming revenues for themselves...which I can't imagine being a problem. Netflix is not a small startup, it is a rather large corporation. Should we really grant fiat regulatory authority to a bunch of unelected bureaucrats so Netflix's shareholders can sleep a little better?

    That said, I'm rather certain the 200 pages coming from the FCC this year are going to be mundane attempts that only save Netflix and absolutely nothing anyone could seriously object to. This is because the reclassification MUST survive a court challenge, so the FCC needs all the public support it can get. Of course, once the reclassification is held up in court, the FCC is free to abuse reclassification all it wants. So what I fear are the rules the FCC proposes the year after reclassification is settled in court. Those rules will proclaim the whole of the internet to be the FCC's private fiefdom, banning all objectionable content (be it bit torrents, sex, political dissent, or encryption) under the guise that the rules are in the best interest of the industry. Not to mention banning all new entrants that do not obey a long list of technical and financial requirements which a new startup never could match.

  • Joe

    It isn't enough to elect someone who will role back some regulations while in office. To truly end the crony capitalism of regulations we need leaders who will shrink the regulatory state and reduce its powers. We might need a Constitutional amendment that will effectively give Congress a veto power on executive branch regulations. Meaning that Congress can, through a simple majority vote in the House and Senate, rescind any executive regulation the President or his appointees might wish to implement.

  • Xmas

    LoneSnark,

    I agree with you on the potential overreach by the FCC. But the point I'm making is that TCP/IP, the protocol used for most data transfer over the networks and hardware that make up this thing called the "Internet", does a piss poor job of streaming High Definition television. If the FCC is about to jump in and "save" streaming video companies from price discrimination by ISPs they will lock in a suboptimal solution.

  • mx

    It's not just about Netflix. The goal is to try to maintain the Internet in a way where the next guy, who isn't Netflix with a $27B market cap, can stream video without needing the permission and active cooperation of each ISP.

  • mx

    Huh? All executive regulation must come from Congressional authority. Congress can limit or modify the authority it previously granted, thus making illegal any regulation is disapproves of. In fact, Congress formalized this process with the Congressional Review Act nearly 20 years ago. Like any law passed by Congress, an act disapproving of a new regulation requires the President's signature or a 2/3rds vote of the both chambers to override a veto.

    A system like you propose, where a simple majority of Congress is sufficient to rescind an executive regulation, would be inconsistent with Congress's basic structure under the Constitution. Under your plan, bills would be passed in the usual way, but a lower threshold would be required to overturn any regulation.

  • jhertzli

    To a leftist, the term "regulatory capture" sounds like businesses fighting regulations. I recommend using the term "rent seeking" instead.

  • Chris Smith

    That's a nice goal. The result will be locking today's technology as the end state of the internet. But your goal sounds really nice.

  • mesocyclone

    How about waiting until those threats actually materialize? There are other threats to good internet service, and now a new one has been added: over-regulation. Good work.

  • mesocyclone

    Actually, TCP/IP can do a decent job. All you need is for the routers to prioritize streaming traffic. Oh wait! You can't prioritize traffic under the new rules. Oops.

  • skhpcola

    The list of things that Kevin Dumb finds mysterious is infinite...the guy is a leftist retard with a tenuous grasp of reality, history, and facts. Why Warren chooses to (apparently) read Dumb's brainfarts is more mysterious.

  • skhpcola

    Thus the regular consternation of our host, wherein he wonders why Kevin Dumb is a retard. The fact was established years ago, yet Warren continues to waste his scarce time on leftist pabulum.

  • Arrian

    Actually, Netflix and Youtube have made massive infrastructure and coding investments to provide a product that streams pretty well over the Internet without gaining the benefits of prioritized traffic that an ISP could give them

    It could be much easier for a competitor to be able to pay a couple cents per Mb to take advantage of traffic prioritization than to make a multi billion dollar investment in software and hardware workarounds to provide a good customer experience. But Net Neutrality makes that impossible.

    Imagine if there were a "Postal Neutrality" rule out there, not allowing package delivery companies to charge different rates for packages of the same size and weight. Would it be harder or easier for a small competitor to provide the same service as Amazon without the ability to ship via expedited methods? Take note that Amazon has distribution centers all over the country, and therefore no package will have to travel more than, say, 100 miles to reach a customer. That's completely out of reach of a competitor.

  • Mike Powers

    If I can charge more for better service, then I have the option of *not* giving people that option. "Sorry Netflix, we just don't want to provide you with the option of buying broadband service at the speed you need. Tough life, eh? Fortunately for our customers we offer our *own* video streaming service."

  • Mike Powers

    He's paying attention because a lot of other people pay attention as well, and think that what Drum suggests is good advice that everyone ought to follow. And so it's worth asking whether there might be something there that Warren and the rest of us are missing, that makes Drum seem to be saying smart things we should do.

  • Mercury

    Phase II:

    Now that the Internet is a federally regulated, public utility, here is the laundry list of things that will no longer be tolerated on the internet....

  • skhpcola

    There are millions of Americans convinced that Barry Obama and his gang are the smartest folks to ever run the country. There are multitudes that believe that Paul Krugman issues gospel with every word. There are many--but a dininishing number--that think that the Glowball Worming liars have just the medicine for us all. I guess being too obtuse to recognize an agenda based on ideology and/or a thirst for power and control is a virtue, in the eyes of some. The rare nut that squirrelly Dumb might eventually find isn't worth the time or effort to subscribe to his newsletter of lies, omission, and deceit. He and the others that I mentioned are just leftists with a soap box.

  • Rick Caird

    But, it is good to know what the left thinks it is thinking. Warren is reading Drum so we won't have to. It is a public service.

  • Mike Powers

    You are like a parody of a right-wing commentor.

  • http://somercet.livejournal.com/ somercet

    If you want administrative courts, create an administrative court system. Don't let it convict or coerce the unwilling, only hear. Let the various interests show up and scream at each other. These administrative judges would cost less than executives with Lear jets and tend to remain on the bench instead of working for their "clients." They would also remove this hideous temptation from the Executive branch, which has been entirely compromised.

  • http://somercet.livejournal.com/ somercet

    No, they want businesses to pay rent. To them.

  • LoneSnark

    The next guy will always pay more than the current big guys do. Netflix today gets a huge discount on having its data delivered, compared to other companies smaller than it. Netflix just complains that its discounts are not as large as they could have been, as the ISPs refuse free peering upgrades. Any next guy will be too small for the ISPs to know about, much less try to charge for peering. But they will not be large enough to enjoy Netflix's economies of scale.

  • skhpcola

    You are like a holier-than-thou Libertarian, which always come across as parody. In your tribe, it's not so much that you have any pragmatic contributions to solving real-world problems, but rather that "WE URN'T COKE NUR PEPSI!!!" Again, because you seem nice, albeit a bit stubborn in your ideology, seeking advice or knowledge from leftist retards such as Monsieur Dumb is only valuable if you are a leftist retard. Bright people already know that whatever he offers as opinion will be wrong and frequently deleterious to freedom and/or wealth. Nobody with the power to observe, analyze, and learn needs to read what leftists write to know what they're going to say. But you keep plucking that chicken.

  • Mike Powers

    what

  • marque2

    .

  • Jefferson Paine

    Look at it this way: If Title II were such a great regulator regime, why didn't the Title II regulated US telephone system respond to consumer and business demand and evolve into the provider of choice for not only state of the art telephone (wired and wireless) but broadband Internet and HD television/video services as well?

    The answer is that Title II is not about innovation or change or providing better services over time. It is about providing a boring, reliable utility service. It views the service (voice communications) like electricity, something that is a constant. The regulation also provides for mining said utility service for taxes (fees, levies, etc.) and for controlling commerce in the markets that provide the infrastructure and services.

    For example, under Title II, telephone rates are set by state Public Utility Commissions (PUCs). What's to stop them from setting Internet pricing? Answer: Nothing. Changing Title II (which is law) requires Congress. Also, note the FCC commissioner only stated that the FCC would not set rates.. he said nothing about the various state's PUCs.

    Under Title II, it is my opinion (I ran a medium-sized fiber-to-the-home IPTV-cable/Internet/telephone business that competed with Comcast) that the FCC and state PUCs will regulate both hardware and software consumers use to access the Internet. I believe that under Title II, our PCs, Macs, pads, phones, etc. are part of the Internet system just as a telephone is regulated as part of the phone system. That is not the same as the FCC's technical regulations on RF radiation and such. The regulation I'm concerned about will allow govt to regulate browsers and apps - which I think we all know is only a baby-step away from regulating what those programs can and cannot do, in other words, regulating content.

    Non-PC politics (and porn - depending on which corrupt party is in power) will be hardest hit.

  • Jefferson Paine

    First, let's all understand that "better service" or QOS (quality of service) as it's called in the network world is absolutely essential for today's networks and services to work... In addition to allocating necessary bandwidth, isochronous (time-sensitive) data streams like video, voice and gaming have to be given "priority" over non-isochronous data (like file downloads, non-video website traffic like this text) such that every important frame that needs it arrives in a timely manner relative to the frame immediately preceding it.

    A file download or non-video website traffic (the data that forms the page, text, graphics, etc.) does not require the same sort of QOS as video and voice. So, no one really wants *all* data on the Internet to be treated exactly the same. The "net" cannot be "neutral" - it must be biased in favor of classes of traffic. The issue is whether one company can buy better QOS than others relative to and ISPs customers.

    And to be clear, Netflix does buy "broadband service at the speed" they need wherever their data centers are connected to the Internet. They pay for the bandwidth and QOS they need on their access networks (networks that connect their production servers to the Internet)... But the issue is not on their access networks, it is on their customer's ISP's access network.. like Comcast.

    Let's say you are Comcast and I'm Netflix. My business is growing very, very fast. A *lot* of Comcast customers are buying and using my (Netflix) service and streaming lots of HD movies over my access networks (Netflix data centers to Internet). So by definition, the traffic on your (Comcast) access network is increasing rapidly because your customers are using your network to receive video streams from my servers....

    Here's the issue: For every new customer I (Netflix) get, I gain a new revenue stream to pay for the added bandwidth/QOS to my access networks........ You (Comcast) do not. On the contrary, you incur costs to upgrade your access networks to carry my video streams, yet you have no additional revenue streams to pay for it.

    What do you do? Raise rates on all your customers? That makes you the bad guy in their eyes and not all your customers use Netflix... You could create tiered pricing so those who consume more bandwidth and need more QOS on that traffic pay more... but that requires approval from every city/county Cable Commission in the nation where you provide service... (FYI, that takes *years* and not all Cable Commissions will grant you the rate increases...).

    Bottom line, the Comcast-Netflix issue was at core a business issue - not a tech or regulatory issue. Comcast would be a fool to screw with Netflix traffic (for the record I had Comcast and Netflix throughout the entire kerfuffle between them and Netflix and never noted any issues with the Netflix service). I live in CA.

  • TravisJSays

    Better conclusion: Lefitst and socialist ideologies makes otherwise bright people believe stupid nonsense.

    They are bright shiny lies.

  • TravisJSays

    "Here's the issue: For every new customer I (Netflix) get, I gain a new
    revenue stream to pay for the added bandwidth/QOS to my access
    networks........ You (Comcast) do not. On the contrary, you incur costs
    to upgrade your access networks to carry my video streams, yet you have
    no additional revenue streams to pay for it."

    Which btw is why the monopolist content providers Google and Facebook are being very *self-interested* in pushing for 'net neutrality' which really means: "Dont allow heavy bandwidth content providers to be charged for bandwidth access/use."

  • TravisJSays

    "At the same time, there are actual current threats to a free and open internet that these rules are trying to prevent"

    Every regulation is 'well-intentioned'. The road to hell is paved with good intentions.

    The monopolist content providers Google and Facebook are being very *self-interested* in pushing for 'net neutrality' which
    really means: "Dont allow heavy bandwidth content providers to be charged for bandwidth access/use."
    Why favor google / facebook monopolists over the more competitive and less powerful ISPs?

    "that cannot presently manage to fund an allegedly vital portion of our government responsible for safety and security into the next month"

    Sure they can, the House passed full DHS funding already; they are just faced with an executive that can't walk and obey the Constitution at the same time. if Democrats block DHS funding over an insistence on affirming Obama's illegal actions, it's on them. But the fact that political disagreements arise from acts of executive overreach is the worst possible argument for YET MORE executive branch overreach via burdensome regulations with massive unintended consequences.

  • TravisJSays

    "How about waiting until those threats actually materialize?"

    As with the global warming hysteria, if you wait until the threat REALLY happens ... you'll wait 'too long', as in, life will go on, nothing seriously bad will happen, and the conjured crisis will have gone 'to waste'. The wonderful thing about fake crises and threats that arent real - if you pass the 'solution' to the mythical 'threat', you can then take 'credit' for the threat never happening.

    I have a cherry tree sprayer that keeps elephants out of cherry trees. It has a 100% success rate. Not once has anyone using our sprayer found an elephant in their cherry trees. I know there are these denialists who keep spewing lies about there not being a threat of elephants in cherry trees; they are simply anti-elephant-in-trees-science. Now, if we can only get them to shut up and get the government to force all cherry tree farmers to adopt our solution, we'll be in great shape.

  • TravisJSays

    "He's talking about local ISPs throttling movie streaming from Netflix
    and Amazon and demanding more money from those content providers."

    For myself, a non-user of Netflix or Amazon or any streaming services, that's not a threat but a *good thing*. I dont want to be a sucker and subsidize the streaming habits of other users in my own monthly bill. I already pay time-warner cable for TV.

  • http://capitalistlion.com/ Mr. Lion

    If Tesla had anything like a superior business model, they wouldn't need boatloads of government cheese to sell things. The rest of your point, however, is quite accurate.