Why Does California Want to Adopt India’s Failed Internet Regulation?

In 2015, US regulatory advocates attempted to implement full price controls on internet access and interconnection. While they did not succeed at the Federal Communications Commission, they and their counterparts did succeed in India, achieving a complete ban on flexible pricing. India outlawed and discounted offers, believing that they are harmful and discriminatory, a position confirmed by India’s telecommunications secretary as the world’s strictest policy. Now that this policy has been in place for three years, it’s appropriate to review its effectiveness.

Data from the International Telecommunications Union (ITU) on internet penetration provides preliminary insight. From 2009 to 2014, India’s rate of internet adoption (year-over-year growth) averaged 38 percent, but after 2015, it plummeted to 13.6 percent in the most recent measure. Only one in three Indians is online today, a ratio that hasn’t budged since the policy took effect. Had adoption remained at its previous rate, there could be as many as 400 million more Indian internet users today, almost doubling the number of people online in just four years. Of course, the rate of internet adoption has been slowing precipitously around the world because of lack of relevant content and the inapplicability of traditional advertising models to emerging markets. According to internet analyst Mary Meeker, the “easy growth” of internet adoption ended in 2015. But she notes India as the exception, suggesting that the country with 1.3 billion people could still adopt the internet quickly.

In addition to significant personal and social benefits, internet adoption is important because it improves economic growth. The World Bank suggests that every 10 percent increase in internet penetration in developing countries increases gross domestic product (GDP) growth by 1.21 percent. Had India not discriminated in favor of a single form of access, it could have improved its GDP by as much as $125 billion today. India’s mobile broadband prices are less than half of the world’s average, but for the poor in India, the effective price is two to three times higher because of the cost of a device and electricity.

Learn more: States Join the Net Neutrality #resistance: Will It Make a Difference?

The value of flexible pricing is underscored by economist William Baumol in “Regulation Misled by Misread Theory: Perfect Competition and Competition-Imposed Price Discrimination” (AEI Press, 2006). (Jules Dupuit noted this as early as 1854; Google’s Hal Varian agreed in 1996.) Baumol shows that effective competition drives various price points in the market. Once a broadband network has been built, uniform prices prescribed by regulatory advocates deny the network operator the ability to recoup costs. In the real world, internet providers have no choice but to offer free and discounted options — the market demands it. While regulatory advocates like to invent concepts for regulatory prejudice, such as “zero rating” and “paid prioritization,” these are normal activities across the entire economy, and without them, there would be no market for telecommunications.

While India rejects more than a century of economic evidence favoring flexible prices, dozens of emerging countries have embraced free data mobile apps for basic communications, health, employment, and government services. These countries enjoy internet adoption rates significantly higher than those of India, now ranked at 143rd of 208 countries measured by the ITU for internet penetration. 1 World Connected, a project led by Christopher Yoo at the University of Pennsylvania, is evaluating over 700 projects for broadband adoption to produce evidence-based policy recommendations.

Regulatory prejudice will harm California’s poor and old

Internet penetration is 76 percent in the US. While this exceeds the world average of 51 percent, it falls short of many developed countries. According to the Pew Research Center, Americans aged 65 and older are least likely to access the internet. At least a third don’t connect for fear of online threats and a belief that the internet has nothing valuable to offer. Of California’s 40 million residents, some 5.5 million are 65 or older. Additionally, four in 10 Californians, including 135,000 homeless people, live at or near poverty. These groups — and some 10 million immigrants — would benefit tremendously from free data and differential pricing to access the internet. “Ending free internet data is particularly harmful to younger, low-income and minority Californians,” noted the California State Conference of the NAACP. Nevertheless, it appears that California Democrats want to prohibit such freedoms to please the digital elite’s preferred forms of internet access.

Like Indian legislation, the proposed California Internet Consumer Protection and Net Neutrality Act of 2018 bans flexible pricing for internet access. It also includes this ominous language: “Almost every sector of California’s economy, democracy, and society is dependent on the open and neutral Internet that supports vital functions regulated under the police power of the state.” There is no empirical evidence for this statement. Moreover, we should strongly reject the idea that the internet should be regulated by the “police power of the state,” which clearly violates freedom of speech.

There are serious legal issues for California to make its own internet policy, but as I explain in my forthcoming AEI paper “Tech Policy and the Midterm Election,” state policymakers do it for symbolic reasons, to win media attention, and to fundraise. Adopting India’s policy that unduly burdens two of every three people from getting online can’t be a good idea for California. Leaders should welcome economic instruments that make internet access more affordable and widespread. Promoting internet adoption will improve California’s economy and quality of life.

Learn more: Paid Prioritization: Debunking the Myth of Fast and Slow Lanes

By Roslyn Layton, AEIdeas, July 16, 2018