The Netflix neutrality farce

Any day now, the Washington, D.C., Circuit Court of Appeals will rule on the Federal Communications Commission’s regulatory coup over the Internet, commonly known as net neutrality. And not a moment too soon. Because the FCC’s rules are quickly descending from tragedy to farce.

Netflix, whose streaming content makes up around one-third of Internet traffic at peak hours, was a chief advocate of the far-reaching rules, which, beginning in 2015, regulated the Internet for the first time. Citing an existential threat to Internet openness, Netflix demanded that Internet service providers (ISP) be prohibited from blocking or degrading data traffic. The threats were largely imaginary — few if any cases of such behavior had ever been reported. So sinister was the possibility, however, that it required a new regulatory regime for the digital economy.

Last month, however, The Wall Street Journal revealed that Netflix has been throttling, or capping, data rates (and thus video quality) for customers of some mobile carriers but not others. And that it has been doing so for at least five years, including the period when it was lobbying the White House and FCC. This is like finding out that Solyndra, the beneficiary of federal green-energy largesse, was actually a coal mining concern.

FCC Commissioner Michael O’Rielly told a gathering on Tuesday that “these revelations call into question the entire foundation and rationale for the net neutrality decision.”

In its admission, Netflix says slowing the bit rate is intended to help consumers stay below their mobile data limits. But why not disclose it? And why throttle consumers with AT&T and Verizon service but provide full quality to Sprint and T-Mobile users? The new FCC regime includes a transparency rule that requires ISPs to divulge such practices, and the very heart of the neutrality rule was to prevent such differential treatment based on whim.

Netflix’s epic hypocrisy exposes nearly every deficiency of net neutrality that critics have warned against for the last 15 years.

For example, Web and content firms often have more market power than ISPs and are just as capable of controlling the content and quality of data flows. And yet the FCC applied its rules only to broadband service providers while exempting companies like Netflix and Google.

Critics also said the rules would be especially harmful to mobile networks, which are more technically tricky and bandwidth-constrained than wired networks. In 2010, the FCC agreed and exempted wireless from its second attempt at writing rules. And yet this FCC, at the White House’s urging, applied the onerous new rules to mobile broadband providers. Netflix’s secret throttling of certain mobile carriers, and its rationale — that it was just trying to help economize on mobile data usage — shows that the critique was spot on.

Critics said any rules should focus on the welfare of consumers, not competitors. And yet the White House and FCC insisted on a policy entirely tilted to benefit Web and content firms, shackle ISPs and mostly disregard consumers. Sure enough, Netflix’s throttling harmed both particular mobile ISPs versus their competitors and also those ISPs’ customers. In a double irony, these actions are allowed under net neutrality but may violate existing competition laws, which we said were sufficient to address exactly these types of squabbles in an environment as complex as the Internet.

Critics said the rules would discourage creative partnerships and win-win transactions between ISPs and content firms, such as paid peering and sponsored data, that could rationalize the economics of the Internet and speed content to consumers. The new rules, however, may ban such cooperative programs as T-Mobile’s Binge On and Verizon’s FreeBee, which are designed to ameliorate the very data-limit problem Netflix says it was trying to solve with its secretive, selective throttling.

Before The Wall Street Journal asked Netflix if it was the source of the mobile slowdown, the company was content to let the world believe that the poor quality was the fault of AT&T and Verizon. This wasn’t the first instance of Netflix sanctimony. In 2014, Netflix in sensational fashion charged ISPs with blocking its traffic at interconnection points. More than any other single incident, this narrative provided the momentum for the regulation of the Internet. Except it was false. After looking at traffic patterns, it became clear that the poor performance was due to Netflix’s own routing decisions. It was a manufactured publicity stunt, which led to the downfall of one of the nation’s most successful economic policies of the last few decades.

In the next few days or weeks, a federal court may begin the restoration of American Internet freedom.

Bret Swanson is president of Entropy Economics LLC and a visiting fellow at the American Enterprise Institute.