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It probably wasn’t intentional, but Facebook has again demonstrated why net neutrality regulations are bad for customers.
The company is in talks to develop an underwater data cable that would encircle Africa. Facebook isn’t making any announcements yet, but according to The Wall Street Journal, the aim is to drive down bandwidth costs and make it easier to sign up more users.
What does that have to do with net neutrality regulations? First, notice that I am using net neutrality as an adjective in front of the noun “regulations.” Despite the rhetoric over the past five years, I have found no one opposed to net neutrality business practices, as long as they are done voluntarily by customers and internet service providers. So what we are talking about with net neutrality are regulations that would keep customers and ISPs from doing things that they would like to do.
Second, notice that Facebook finds the African investment profitable — more profitable than ISPs do — because it finances the investment from app profits that are made possible by expanding networks. Net neutrality regulations prohibit ISPs from participating in such profits. The economics works like this: For Facebook, apps are very profitable, so the more app users Facebook can get, the better. Network limitations hinder app sign-up, so it is profitable for Facebook to invest in expanding networks. But for an ISP, which can only sell network access when net neutrality rules are in effect, the app profits are off limits. So network expansion is less profitable for ISPs than for a company like Facebook in some circumstances.
Third, the article finds that Facebook and Alphabet (Google’s parent company) won’t sell network services to others because of heavy regulatory burdens.
Tech companies like Facebook and Alphabet, wary of the wholesale telecom market and the regulatory burdens that come with it, tend to avoid selling bandwidth on cables they help fund. They have access to whole strands of fiber optics, allowing them to shuttle most of their data through private networks separated from the broader internet.
So regulation also leads tech companies to avoid selling capacity on their networks.
But did you catch that last statement in the quoted paragraph? Some tech companies are leaving the public internet behind. So they are leaving the network that would be subject to net neutrality regulations. That’s important to know, too.
Facebook’s investment also says something about vertical integration more generally in tech. A company is vertically integrated when it serves both as a supplier of an input (like networking) and the downstream service (like apps). I wrote in an earlier blog that vertical mergers are attractive for ISPs (like the AT&T–Time Warner merger) because the downstream product provides lots of cash, which is needed for network investment. Facebook agrees. The article says the company has “led projects linking markets in North America, Europe and East Asia, usually sharing the investment burden with traditional telecommunications companies, which lack the cash to lay down the cables on their own.”
Multiple cheers for Facebook for investing in Africa, a continent that has motivated entrepreneurs in need of bandwidth. And multiple cheers for the Federal Communications Commission’s 2018 move to reverse the ill-conceived, 2015 net neutrality regulation decision. The reversal appears to be incenting network expansion in the US.
Let’s hope lawmakers and the courts allow the FCC’s more recent decision to stand and that others around the world understand what Facebook is telling them with its investments in Africa.
(Disclosure statement: Mark Jamison provided consulting for Google in 2012 regarding whether Google should be considered a public utility.)
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