A decade of evidence suggests that Open Internet policies have had the opposite effect.
Innovation has been the main argument for implementing net neutrality, or “open internet” rules. While there is no official, legal definition, Tim Wu suggested that the broadband network was a “neutral platform” for innovation. Open Internet Rules are a set of price and traffic controls for the treatment of Internet traffic.
Save the Internet, an international advocacy organization that advocates for net neutrality, said: “Without net neutrality, the next Google would never get off the ground.” Indeed, non-neutral internet regulations have been in place for more than a decade in dozens of countries, but not in others. This inconsistency creates a global natural experiment, which we studied in a five-year research project at the Center for Communication, Media and Information Technologies of Aalborg University by measuring mobile apps on mobile networks in 53 countries.
Countries with strict net neutrality regulations must have more internet innovation, right?
The US Federal Communications Commission (FCC) 2015 Open Internet Order said its rules “are designed to protect free expression and innovation on the Internet.” It also said such “rules will preserve the Internet as a platform for innovation.” In the same year, the European Parliament promulgated a law “establishing measures regarding open internet access” to “to guarantee the continued functioning of the internet ecosystem as an engine of innovation” (emphasis added).
To test these claims, we coded the panel countries in our study for their type of net neutrality regulation: soft, hard, or none. Soft rules include guidelines, multi-stakeholder models, and self-regulation with reported key performance indicators. Hard rules, created by legislation and administrative decree, include price and traffic controls on broadband; ban on prioritization and partnerships with broadband providers, and criminal fines for violation. No net neutrality rule countries like Australia and New Zealand opt for ex post competition law to police net neutrality. Except for 2015-2017 when the FCC’s Open Internet Order was in place, the US Federal Trade Commission (FTC) policed the broadband market with competition law. However, many lawsuits have been brought over the years in the US over the issue.
To test the premise that better net neutrality rules result in higher levels of innovation, we constructed a data science model to capture the extent to which the introduction of net neutrality rules stimulated mobile app innovation in the given country. Two enterprise-level mobile app store measurement tools provided the data for app frequency, downloads, rank and revenue for the period 2010-2016, before and after rules were imposed.
This analysis found statistical support for soft net neutrality rules promoting innovation (eg South Korea, Japan, Switzerland), however there was no innovation advantage for countries with hard rules (eg Chile, Canada, Brazil).
To avoid false conclusions from different endowed nations, data were further re-reported on two similar socio-economic countries with advanced mobile broadband networks but different rules: Denmark, which launched a ‘soft’ self-regulatory regime in 2011, and the Netherlands, which legislated the world’s toughest rules to date including ban on price differentiation in 2012. Denmark produced 115 apps in the study; The Netherlands, 102. The differences after that were big: the average Danish app increased in popularity rank to 26 out of 42 in the period, while the average Dutch app taken away in popularity rank from 31 to 42. Moreover, Denmark managed to export the killer app ‘Subway Surfers’, which had more revenue and downloads than the top 18 Dutch-made apps. Of the foreign apps used in the two countries over the 5-year period, exactly 20 apps came from countries with strict rules; 150 from soft rule countries; and 130 from no rule countries.
However, the predominance of American apps complicated the study, an additional 302 apps mainly from the major American platforms Google, Meta (Facebook), Amazon, Apple, Microsoft and Netflix. They were all established years before tough rules were implemented in the US, and rules seemed to freeze the status quo in place to cement their advantage.
A closer look at Denmark and the Netherlands found that although both countries each had 4 advanced mobile networks and many Internet developers, Denmark’s commercial freedom to sell mobile subscriptions was higher. Danish mobile operators were more freed to use free data and partnerships to encourage next-generation mobile adoption, things that were illegal in the Netherlands under its net neutrality rules. As a result, Denmark enjoyed greater levels of advanced smartphone penetration and post-paid contracts, allowing Danish developers a wider test bed in the local market.
Today, both Denmark and the Netherlands are part of the EU’s net neutrality regime, among other EU internet regulations. Before net neutrality rules were imposed, Europe was good for many of the top 20 internet companies, but not anymore. Today, the top European company is Germany’s ‘Delivery Hero’ at #53 in the global internet market value ranking. Europe’s share of global Internet value is less than 2 percent of the world total and will soon be surpassed by Africa. Meanwhile, the US enjoys two-thirds of the internet’s market value.
China is the only nation that has managed to produce platforms that compete with the US giants – a country that has never had net neutrality rules and that hardly fits the definition of “open”. However, China’s TikTok surpassed Google to become the world’s most visited domain with 150 million US users and CapCut, the Chinese mobile video editing platform, has 200 million. Chinese apps like Shein and Temu outnumber downloads for Amazon and Wal-Mart in the US.
Big Tech is the primary lobbyist for net neutrality and funds many academics and civil society organizations to advocate for it. This may sound counterintuitive, but net neutrality delivers big economic rents for Big Tech. Here’s how it works.
Block competitors from the market
What would be a compelling, competitive advertising offer for free search and social media? Try free, ad-supported broadband. The FCC Open Internet Order of 2015, a centerpiece of Big Tech’s policy strategy, had a key policy feature that curtailed the FTC’s ability to police competition and privacy on broadband providers. This enabled the FCC to promulgate new, industry-specific privacy rules on broadband providers, effectively making them unable to compete in online advertising. The FTC’s jurisdiction has since been restored, but an important window for competition was lost.
As in Europe, startups are barred from the advanced capabilities of the broadband network to get a leg up on Big Tech. In The Paradox of (Inter)Net Neutrality: An Experiment on Ex-Ante Antitrust Regulation researchers test net neutrality in dictator game theory and conclude, “Big Tech companies, protected by the net neutrality policy, have flourished. They now have the power to destroy small exclude companies, and therefore their content, from the Internet market in de facto violation of the principle of net neutrality. Antitrust scholar Oles Andriychuk suggests that soft net neutrality rules can provide positive results without causing hard regulatory problems, noting that EU broadband providers are preventing disruptive innovations.
Extend favorable price controls to other parts of the value chain
While net neutrality would be about the relationship between the broadband provider and end user on last mile broadband networks, Big Tech opportunistically reinterprets the principle, especially in the exchange of data between networks where market-based prices are thought to address asymmetries. In 2014, Netflix launched a campaign urging the FCC to adopt “tough” net neutrality rules just in time to create public pressure during Netflix’s contract negotiation with Comcast and succeeded in reducing the fee by two-thirds. The message to broadband providers was clear: if you don’t offer us access at a significant discount, if not for free, we will make the dogs sick on you.
In another imbroglio in South Korea, Netflix traffic exploded 24x overnight on broadband networks in early 2021, necessitating a major and immediate upgrade that could only be used for Netflix data. But only 5 million of South Korea’s 23 million broadband subscribers watch Netflix. One way to handle that is to add a Netflix delivery fee to the broadband bill. However, Netflix wants broadband providers to eat the upgrade cost or spread it across all customers. Attempts by broadband providers at the South Korean telecoms regulator to recover costs failed. Netflix sued, arguing that it has no obligation to pay or negotiate for the use of other people’s networks. Netflix lost, and the case is on appeal. Similar conflicts have arisen in other countries with other platforms, especially with Meta who refused to provide data or stopped paying.
Competition experts will recognize the creation of a global cartel with exploitation of market power in such negotiations. If a company or a group of companies controls and/or maintains a price or condition that would not prevail under competition, it leads to reduced production and loss of economic welfare.
This problem is playing out in American rural broadband today. One study shows that 75 percent of network traffic comes from just 5 video streaming platforms. Every $1 in streaming revenue to Big Tech creates $0.48 in sunk Internet exchange costs for broadband providers. These small players with a few thousand customers have no market power to negotiate with Big Tech and simply get growing traffic levels. It shouldn’t surprise anyone that Big Tech’s free ride creates deficits.
The FCC reports that 17 percent of Americans in rural areas and 21 percent of Americans in tribal areas do not have access below the current 25/3 mbps broadband benchmark. All told, about 20 million Americans do not have access to high-speed broadband services. It is worse in the EU where there is a gap of €300 billion to reach targets for fiber and 5G.
The data shows that net neutrality policy is not working as policymakers intended; this is because its functions protect the status quo for Big Tech, not competition.
Articles represent the opinions of their authors, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.