Special Reports

Larry F. Darby
Joseph P. Fuhr Jr.

“Innovation” has emerged as a pivotal element in the debate over whetherthe Federal Communications Commission (FCC) should impose newconstraints on managers and providers of broadband network infrastructures. This study brings to bear facts and analysis emergingfrom a review of much of the literature on innovation and especiallythat bearing on claims by advocates of “net neutrality,” “open networks”and related notions.

We find that innovation is thriving at both the core and the edge of thenetwork in the current policy environment, which has fundamentallyallowed the Internet to evolve with little government involvement.Further, we find no evidence that greater FCC involvement in markets forbroadband services would protect or promote innovation in the InternetEcosystem. Indeed, we believe that such intervention is more likely todiscourage innovation than to stimulate it. In addressing these issues,the study finds and presents support for the following conclusions:

  • Responding to incentives and opportunities availed within the prevailing scheme of regulatory forbearance, network infrastructure providers have compiled an impressive record of innovation reflected in a cascade of new transmission and switching technologies; new local distribution and devices; an impressive array of new services; dramatically increased functionality; and adoption of creative business practices tailored to the changing topology of networks;

  • By any reasonable assessment, core cable, wireline and wireless networks reflect enormous historical and ongoing innovation as marked by the adoption of new technologies, incorporation of advanced equipment
    and software, expansion and improvement of services offerings, and the introduction/diffusion of new business models;

  • Presence of pervasive complementarities among services dictates that core innovations in network platforms have enabled, encouraged and increased the value of important edge innovations that would otherwise
    have been impossible;

  • While good and unambiguous measures of innovation are often lacking, there is an undeniable link between diffusion of network innovation and the enormous network investments now being made by
    broadband infrastructure providers;

  • Many of the innovations now apparent at the edge reflect investment and business model applications of services first introduced by Internet
    Service Providers at very early stages of the development of the Internet;

  • Imposing common carrier type regulation on network providers would diminish network providers incentives and opportunities to continue historic trends in innovation and investment;

  • There is no analysis or data in the literatures on innovation and regulation to prove claims that the proposed net neutrality rules would on balance promote innovation in the Internet Ecosystem;

  • Net neutrality proponents incorrectly characterize the incidence of innovation activities and accomplishments, particularly with respect to core v. edge innovation; and

  • The proposed net neutrality rules might be expected to reduce innovation in broadband networks and those that would be enabled at the edge. They would do so to the extent that new constraints on broadband
    network providers would increase uncertainty and risk, reduce prospects for growth, and undermine network managers’ incentives and opportunities to adapt to rapidly changing technical and economic conditions in the
    Internet Ecosystem.

  • This study finds no support in theories of innovation, innovation practice, or reviews of numerous empirical studies, of drivers of and constraints on innovation, for the main contentions of net neutrality supporters. Available data and analysis do not establish: a) the absence of network innovation in general; b) the primacy of innovation at the edge over the core; or most importantly; c) that greater ex ante regulation of markets for broadband infrastructure is needed, or can reasonably be expected to increase the rate of innovation and consumer welfare creation by network providers and elsewhere in the Internet Ecosystem.

    Our review finds no significant market failure attributable to insufficient innovation by network providers or superior innovation outside network infrastructures. As to the need for new regulations, the public interest would be well served were the Commission to heed the wisdom of Hippocrates: “First, do no harm!”