Arrested Development How Policy Failure Impairs Internet Progress RICHARD BENNETT DECEMBER 2015 AMERICAN ENTERPRISE INSTITUTE Arrested Development How Policy Failure Impairs Internet Progress RICHARD BENNETT DECEMBER 2015 AMERICAN ENTERPRISE INSTITUTE © 2015 by the American Enterprise Institute for Public Policy Research. All rights reserved. The American Enterprise Institute for Public Policy Research (AEI) is a nonpartisan, nonprofit, 501(c)(3) educational organization and does not take institutional positions on any issues. The views expressed here are those of the author(s). Contents Executive Summary .........................................................................................................1 The Science of Network Innovation ................................................................................3 Moore’s Law .................................................................................................................3 Network Innovation .....................................................................................................6 Device Innovation ........................................................................................................6 Application Innovation .................................................................................................6 The Technology of Network Convergence ......................................................................8 Technical Constraints on Network Innovation ...............................................................8 Structural Issues ............................................................................................................9 Overcoming Interconnection Bias ................................................................................10 Signs of Progress ..........................................................................................................10 Freeing the Untapped Potential ...................................................................................11 Case Studies ...............................................................................................................11 Network Innovation Policy ............................................................................................22 How We Got Here ......................................................................................................22 Excusing Policy Inequity ............................................................................................ 24 Arguments for Differential Regulation .........................................................................25 An Example of Differential Regulation ........................................................................27 The Firewall Model of Internet Regulation ..................................................................28 The Integrated Model of Internet Policy .......................................................................29 Conclusions ...................................................................................................................30 Notes .............................................................................................................................31 About the Author ..........................................................................................................36 iii Executive Summary he Internet and related networking technolo- While the technical elements of convergence have Tgies have fueled unprecedented, disruptive change been well developed for nearly 20 years, policy, law, and across the entire global economy. These technologies regulation have failed to keep pace with technology. have enabled entrepreneurs to reinvent the creation and Unwinding the regulatory apparatus established for the sale of news, entertainment, professional services, shop- traditional networks—especially the public switched ping, and a host of other cultural and economic activities. telephone network—has proved to be a more substan- While the Internet has ushered in remarkable tial challenge than developing the technology. changes, it has so far left many activities relatively The refusal of regulators to embrace the opportu- untouched. Experiments are underway in telemedi- nities provided by Internet convergence is a peculiar cine, remote learning, and remote group and individual development. The low-water mark of the regulatory conferencing, but progress in these fields has been slow obstruction of convergence is the Federal Commu- despite jaw-dropping increases in network speed and nications Commission’s (FCC) 2015 Open Internet device power brought about by Moore’s Law–driven order, a remarkable departure from the regulatory con- technology advances. The Internet has yet to upend sensus that prevailed in the mid-1990s. The collected interpersonal communication in the same way that it papers from the 1995 and 1996 Telecommunications has disrupted content distribution. Research Policy Conference clearly show regulators, The Internet technical community has engaged in scholars, and policy analysts of all stripes embracing a developing the means for communications applications consensus that the Internet must be a deregulated space to connect to richer network services for a very long in which competition rather than regulation would time; such means were actually incorporated (in a basic provide market discipline. way) in the Internet’s original design. In fact, Internet While the emphasis on competition remains a teleconferencing standards play a vital role in today’s LTE strong feature of intellectual discourse on Internet pol- mobile networks. Network engineers actually realized icy, other voices dominate the wider political and social advanced networking capabilities were important appli- debate on Internet policy. Progress toward a converged cation enablers long before application developers did. Internet cannot continue until regulators balance the The technical work that enabled the Internet to positives that can come from convergence against the support applications traditionally enabled by the tele- worst-case scenarios touted by advocates who seem to phone, cable television, and mobile communications prey on public ignorance, fear, and animosity. networks was reasonably mature by the time the Tele- The Internet has reached an impasse because of inap- communications Act was enacted in 1996 and has propriate regulation. Restoring the Internet’s dynamic improved since then. The migration of these discrete character will require innovation on the part of regula- networks to a common Internet is known as “Internet tors that parallels the innovation produced by the Inter- convergence,” and its essential elements are Internet net engineering community in the wake of the 1996 standards known as Integrated Services and Differen- Telecommunications Act. tiated Services, as well as Quality of Service mecha- The paper consists of three main sections. The nisms in the mobile and fixed broadband networks that first examines technical drivers of innovation, primar- underpin the Internet. ily those related to Moore’s Law. The second section 1 ARRESTED DEVELOPMENT: HOW POLICY FAILURE IMPAIRS INTERNET PROGRESS RICHARD BENNETT examines convergence technologies in network engi- Some portions of the paper delve more deeply into neering through an overview and five case studies. the inner workings of Internet technology than may be Finally, the third section examines the arc of policy reac- customary in policy discourse. The nature of the sub- tions from the innovation-friendly, pro-competition ject matter makes technology discussion unavoidable, consensus of the 1990s to the interventionist and tradi- but those whose interests lie exclusively in politics or tionalist spirit evident in the FCC’s recent order. It con- law may safely treat the paper’s technology exposition cludes with suggestions for restoring a more optimistic as evidentiary rather than explanatory. spirit to Internet policy. 2 The Science of Network Innovation nnovation in networked applications and services is • Between 1973 and 2014, passenger-car fuel effi- Imost visible at the point of use: when we use Face- ciency has improved by 2.5 percent annually. book, Google, YouTube, Instagram, Amazon, Skype, Pandora, Twitter, or iTunes, we are immediately aware • The energy cost of steel declined by 1.7 percent of the cleverness of the entrepreneurs who created these per year between 1950 and 2010.1 novel applications. But entrepreneurs do not work in a vacuum, and innovation is not magic. Individual feats In most fields, performance gains and cost reduc- of creativity are enabled by the human character and a tions range from 1.5 to 3 percent a year, but in elec- host of cultural, legal, economic, and technical factors. tronics these figures have improved by a whopping 50 Technical factors are among the least understood by percent a year for the past 50 years.2 Something special the general public, but they are not difficult to grasp at has been going on in the electronics industry, and that a high level. The bedrock of innovation in information phenomenon is known as Moore’s Law. technology (IT) is Moore’s Law, an observation made by Intel Cofounder Gordon Moore 50 years ago. Tech- nology advances in networks, devices, and applications Something special has been going on may be rightly viewed as side effects of Moore’s Law. in the electronics industry, and that phenomenon is known as Moore’s Law. Moore’s Law Moore’s Law is simply a prediction