[powerpress]

In this podcast, we talk to Roslyn Layton all the way from Copenhagen about academic research on net neutrality regulations and innovation. Layton is a Ph.D fellow at the Aalborg University Center for Communication, Media and Information Technologies in Denmark, where she teaches telecom regulation. She’s also a Visiting Scholar at AEI, a vice president at Strand Consult. She was a member of the FCC Landing Team during the recent presidential transition.

Academic Studies and Natural Experiments

After 15 years of debate on this question it’s not really surprising that there’s a rich literature. 50 nations have enacted some sort of net neutrality regulations by now, all but two through the legislative process. The US and Canada are the outliers, attempting to shoehorn Internet regulations into existing telecom law. Layton expresses surprise a the way the FCC approached this question in the 2015 Open Internet Order:

I was astounded by the FCC’s approach to net neutrality. They didn’t look at any of [the academic studies on innovation].  They invented their own model, one that hasn’t been discussed in the literature.

The way the policy process works is you decide the outcome in advance and then later on you figure out what the evidence is. If you can make a winning argument you’re off to the races.

Layton’s Ph.D. research developed a taxonomy of net neutrality regulations, dividing nations into the categories of “soft rules”, “hard rules”, and no rules at all (China). She then applied conventional metrics of innovation to see which approach had been most successful at stimulating app development and diversity.

The Spotify Story

One of her findings is that the nations with hard rules have the least traffic diversity among applications:

In countries with hard neutrality rules, there is less Internet traffic diversity because incumbent apps dominate.

Where hard rules are applied, as in the US, incumbent app developers (such as members of the Internet Association) are effectively shielded from competition from new entrants. Without tools such as zero rating and partnerships with wireless carriers, it’s hard to new apps to gain a foothold in the market.

Spotify is the only European application application most people have heard of now that Skype is owned by Microsoft. For Spotify to be financially successful, it needs customers to sign up for its premium tier, which is easy now that it’s well known, but was a challenge in 2008 when it was new.

Spotify got going by using non-neutral techniques. Spotify leveraged relationships with carriers to get more people to sign up for premium service. It’s a choice that customers have on their mobile phone bills.

Getting a place on mobile bills gave it cash flow and recognition.

Innovation in Denmark and the Netherlands

Denmark and Netherlands are similar countries in terms of size, demographics, and Internet use. Netherlands has an advantage over most of Europe because it hosts the major European Internet Exchange, and because most people have two wires coming into their homes: a telco line and a cable connection.

While Denmark has managed to produce a number of world-class applications, especially for gaming, Netherlands has largely struck out. Layton attributes his disparity to net neutrality regulations: while Netherlands has had hard rules since 2011, Denmark has adopted a much softer self-regulation approach:

Comparing Denmark and the Netherlands to see which country had produced the most apps, I found Denmark improved by one-third over a five year period (with a self-regulation approach) while Netherlands had fallen a third with its hard rules. Denmark has produced world-class apps while Netherlands hasn’t.

One nation has been successful, consistently ranking one or two in academic digital innovation metrics and the other has fallen behind.

The Denmark De-regulation Story

In 2011, Denmark eliminated its telecom regulator, moving responsibilities to four other agencies:

Denmark privatized its telephone network ahead of other EU nations on 1994. The country has had a multi-party consensus on deregulated telecom for a long time: the telecom regulator was phased out in 2011 and responsibilities were transferred to four agencies. With the end of [sector-specific regulation], Denmark made cybersecurity a key focus…Former employees of the telecom regulator say they aren’t being lobbied in their new jobs.

With the end of sector-specific regulation, the focus on communications policy is completing the transition from a monopoly carrier to a fully competitive market with four networks and a number of MVPDs. This approach gives carriers and apps creators greater freedom to develop working relationships:

Danes have enjoyed more commercial freedom in networking. They’ve been using free data for more than ten years to adopt new networks and services. The more flexibility you give your operators, the better things are for innovators. You get more people on board in whatever efficient ways you can. Getting new customers is the main objective.

It’s ironic that US politicians who praise Denmark for its social welfare safety net have so little interest in the country’s corporate tax rate, regulatory climate, and Internet policy environment.

Data-Driven Policy

If we based Internet policy on data and desired outcomes, we would have very different net neutrality regulations than the ones currently on the books. Highly prescriptive net neutrality regulations aimed at preserving traditional relationships are understandable (if not strictly correct) in noncompetitive markets like those in the segments of Europe that lack cable networks.

But we’re continuing to apply regulations devised for noncompetitive communication markets to the highly competitive mobile space. Four to six carriers is enough to ensure that companies fight hard to win customers on the basis of price, quality, and a number of other factors.

What are we losing by pretending that mobile broadband is a noncompetitive market that needs to be tightly managed by a Washington-based regulator? We can’t know that in the US because we only have the market we have. But data from other countries suggests that we’re not seeing the explosion in mobile apps development that we should expect.

Epilogue

For more on Layton’s research, see the white paper she wrote for the Mercatus Center with Joseph Kane, Alternative Approaches to Broadband Policy: Lessons on Deregulation from Denmark. Here’s the abstract: