Net Neutrality: Impact on the Consumer and Economic Growth

Download report: Impact_of_Net_Neutrality_on_Consumers_and_Economic_Growth.pdf

This study has been reposted with permission from Frost & Sullivan.

As a result of questions from Stratecast’s subscribers concerning the impact of possible net neutrality regulation or legislation, Stratecast launched a project to explore the dynamics of net neutrality insofar as they affect the business of network operators and service providers. The objective was to ultimately estimate the effects that such principles would have on consumers and the economy generally.

To this end, we adopted what we believe is a novel approach to assessing net neutrality impacts: we have chosen to assess net neutrality from the perspective of decision makers in the network operators who must determine if making investments to expand network capacity are justified from a business sense. Such a process typically involves assessing risk and projecting revenues and expenses. As a consequence, the exercise is one of attempting to look at the world through the eyes of the CFO who is charged, both from a legal as well as a business perspective, to invest the funds of the company wisely.

However, an important caveat to the results we obtain is in order.  There are those who would view subjects such as net neutrality as inherently simple with obvious answers. Our modeling suggests that net neutrality is, in fact, fairly complex. In an effort to reduce the analytical complexity, our model assesses the view that a business analyst at a network operator would have when presented with the implications of net neutrality.

The model indicates that operators, in the presence of net neutrality, would likely reduce investment due to the increased risk. However, what if the operators maintained investment and simply recovered the costs associated with doing so from another source? To the degree that operator costs are increased due to net neutrality, the model indicates those costs are ultimately borne by the consumer.  An operator denied the opportunity to generate service revenue would be forced to adopt other methods for covering deployment costs: These could include simply passing along the costs to the consumer; creating service bundles that limit consumer choice; or passing the cost along to content providers. In the case of cost allocation to the consumer, these costs could be substantial: net neutrality could impose anywhere from $10 to as much as $55 each month on top of an average broadband access charge of $30.00.  To the extent that consumers were unwilling or unable to incur such costs, net neutrality could, ironically, have the effect of actually reducing broadband penetration.

Of course, an operator doesn’t necessarily have to deploy broadband infrastructure.  If the operator were unwilling or unable to recover the costs from the subscriber base, then the model predicts that   the operator would simply reduce or curtail network investment. This would not only lead to an eroding infrastructure, but will lead to the erosion of jobs and overall economic growth. Even assuming a best case scenario in terms of the amount of GDP impact and job growth, the Stratecast model still predicts that in 2011 alone, net neutrality could impose a seven billion dollar a year overhead on the economy with a commensurate job impact of up to 70,000 jobs.

In fact, the model indicates that net neutrality acts like a tax on the Internet.  It imposes overheads on network operators which, in turn, decrease network investments, providing less opportunity, not only for the operators, but for those that use the operators’ networks as well.

Indications are that, if net neutrality must be adopted, options which impose the lightest load on operator decision making should be considered.  Based upon this analysis, a narrow interpretation of net neutrality would seem to minimize the financial impact on both the consumer and the economy.

In any case, this report provides evidence to support the notion that net neutrality is much more complex than simply encouraging a level playing field. Policy which seeks to manage competition by influencing the investment decisions of operators could have a significantly negative impact on consumers, job growth and the economy generally.

This report will be of special interest to public policy makers, legislators, service providers and network operators.