No credit for capital in net neutrality

The author of the 6-26-06 Washington Post article “No Neutral Ground in This Internet Battle” (Jeffrey H. Birnbaum) neglected an important factor in his presentation of the net neutrality argument. What about the capital? He focused entirely on who gets billed for the charges, but he never once mentions the money necessary to start and run the business—and that comes from investors. No investor will put up their capital if they cannot make a return on their investment. Birnbaum says “if net neutrality passes, the AT&Ts of the world will be forced to pay for all of their equipment upgrades themselves and could not subsidize that effort by imposing premium fees for premium services. If net neutrality fails, they will be able to recoup more of those costs than they can now from the likes of Google Inc., Microsoft Corp. and other major users of the World Wide Web.”

So ask yourself:

– Would you start a business if you couldn’t charge enough to pay for your costs?
– Would you invest in a business if they couldn’t charge for improvements and expansion?
– Would you invest in a company if the government were likely to set price caps on what they could charge for their products no matter what it cost them to produce?
– If you rented out your car, would you charge the people who used it based on how much they used it? Would you get more cars when there was too much demand even if you couldn’t enough to cover the cost of additional vehicles?

No one who has ever run a business thinks about investing in their business so they can “recoup some of their costs” or be “forced to pay for all their equipment upgrades.” They invest so they can make money, otherwise what’s the point? If you ran AT&T or SBC, would you invest billions of dollars in networks when you couldn’t charge for others using them? A public company has a fiduciary responsibility to its shareholders to increase the value of their investment, not destroy it. And don’t forget that shareholders are the actual owners of companies like AT&T. Many of those shareholders are pension funds—representing the retirement income of workers and grandmas—as pension funds are often the largest investors in large cap companies like AT&T.

You can see the effects of telecom price caps by looking at the effects of the 1996 Telecommunications Act which set up, among other things, TELRIC pricing . TELRIC was a complicated, artificial, and arbitrarily enforced pricing controls from the FCC and local Public Utility Commissions to establish the prices that the network owners could charge networks users irrespective of the network owners’ costs; the network owners were required to maintain the systems and also required to allow anyone who wanted to use their systems to do so at the government-dictated prices. It doesn’t take a genius to figure out what happened. It didn’t pay the guys who owned the networks to invest in upgrading, improving and expanding. Because of this, the U.S. went from No. 1 to No. 16 in the world in telecommunications quality, availability and speed. It did make investors look for other places to take their capital. The result? Capital flows off-shore and countries like China and India welcome it with open arms so they can grow faster. Did you know that there is more and much faster high speed internet access in Korea than in the U.S. by about 10 to 1?

The FCC’s Telecommunications Act of 1996 not only destroyed capital investment (and therefore network quality and availability) it also destroyed many billions of dollars of market capitalization. This cost telecom industry workers their jobs.

Birnbaum is correct when he says, however, that the consumer will pay for it all ultimately. That’s true of every product and service produced—and when did paying for what you use become a bad thing? When you artificially control prices, you distort investment incentives—just ask all those guys who lost their jobs when businesses closed or quit growing—as well as behavior. And you spread the cost of the big users over everyone (like with auto insurance) rather than charging for how much someone actually uses. Distorting prices also distorts behavior. Do you ever waste food at a buffet line just to try something because it’s “free”? Do you do the same thing when you order items off the menu?

By dampening investment incentives, price caps also stifle innovation. Who wants to invent something they can’t charge for? What happened to property rights? The irony is that the guys on the side of net neutrality–Google, Microsoft, Yahoo and other big internet success stories—were once the innovators. Their innovations led to financial success because they could develop their products and services in an uncontrolled market. Now they are lobbying to close that door to others.