US Study Claims Network Neutrality Would Negatively Impact 1.5 Million Jobs

Another day, another doom and gloom study. This time, Coleman Bazelon of The Brattle Group claims that if network neutrality were put in place, nearly 1.5 Million jobs would be in jeopardy by the year 2020.

Note: This is an article I wrote that was published elsewhere first. It has been republished here for archival purposes

First portion of the paper

There’s been quite a lot of wild studies being published lately. Today, theres a study (PDF) that appears to be against network neutrality in the US saying that close to 1.5 million jobs would be impacted thanks to network neutrality by the year 2020.

It’s an interesting finding, so we looked at the paper to find exactly how the jobs would be lost. As we went through the paper, there were even more stranger claims such as this:

The employment losses associated with those reductions is found to be significant—14,217 direct broadband sector jobs lost in 2011 growing to 342,065 jobs lost by 2020; and economy-wide, affecting 65,404 jobs in 2011 growing to 1,452,943 by 2020. These additional jobs include both employment in sectors that feed into the broadband sector, such as equipment manufacturers, as well as employment created from the increased broadband sector income—everything from jobs in dry cleaners to retail and manufacturing.

It seemed a bit of a stretch to say that network neutrality would cost a local dry cleaner their jobs, but nevertheless, we continue on through the paper. We did, in section two, get to the point about money which states, “End-user service revenues for 2008 were almost $52 billion.”

It’s an interesting note because it’s not like there isn’t revenue going to the ISPs in the first place. So where exactly does these job losses come from? The paper says, “The 2008 revenues are projected out to 2020. The point of this projection is not to predict exactly where the broadband market will be in 10 years, but rather to estimate the economic impact of network neutrality regulations on that market development.”

While it is always a pain to have guesswork, nevertheless, in this case, we are looking in to the crystal ball here, so, of course, guesstimation is much more forgivable because no one truly knows exactly what the future holds. The paper then says, “Overall, broadband sector revenue is projected to have grown at a 23% annual rate in 2009, with that growth rate decreasing to 10% per year in 2016 and staying at that level through 2020.”

The network neutrality issue

The paper then says, “Proponents of network neutrality regulation are concerned that broadband providers will increase the share of revenue they extract from this sector by imposing variable pricing and other discriminatory practises on content providers. Although revenues from sales to content providers would be expected to increase in any event with the growth of the content sector, the sustained high growth rates compared to end-user service revenues reflected in the baseline incorporates the assumption that the broadband providers will likely find new ways to charge content providers.”

This is accompanied by the footnote: “Sales to content providers have experienced higher growth rates in recent years compared with sales to end-users.”

That’s the part that is puzzling. The content sector will be making money and will be growing anyway, so who cares if their content is discriminated against because the sales would be made anyway? If users can’t stream legal content because the ISP provider is discriminating against their traffic, then the end user can’t use that given commercial service to begin with – thus a loss in revenue for the content provider. Users will more likely go to services that are faster, thus making ISPs gate keepers of which business survives and which does not. Why can’t the free market work itself out? I’d call that argument a bit ambiguous to say the least.

The fourth section had this interesting point, “The academic literature on possible effects of network neutrality regulation does not provide a consensus view on whether such regulations should be expected to help or harm the broadband sector, although several economists have concluded that such regulation would be harmful.”

It’s a bit strange to say in passing that academics have debated this and move on to say that there are economists who don’t like network neutrality. Isn’t that like watching a basketball game and the teams are tied, then asking someone in the audience who do they think should win and declaring a winner based on the answer given?

The paper provided examples of why network neutrality is bad and offers this odd example as one of a number of examples:

In Europe, several studies have attempted to examine the impact of open access regulation on investment in broadband. Typically such studies focus on service penetration, assessing the impact of open access regulations on measures such as broadband subscribers per 100 inhabitants. These studies find that facilities-based competition based on competing networks, as opposed to access-based competition based on regulatory opening of private networks, drives broadband penetration.

Maybe this is a little beyond us, but how is acknowledging the positives of competition in Europe’s ISP sector relevant to network neutrality in the US when a US customer is more then likely to experience either a monopoly in a given area or a comfortable duopoly in a given area? Isn’t talking about ISP competition in Europe in general a bit of a leap from network neutrality in the US?

Core argument: DSL vs. Cable argument

So, as a more direct comparison, the author used the difference of DSL connections and cable modem connections (as one was regulated and the other wasn’t and used projections based on that. The description:

A study by Thomas Hazlett and Anil Caliskan of George Mason University estimates the
effect of deregulation on DSL service. At the end of 2002, unregulated cable modem
subscriptions outnumbered regulated DSL subscriptions by two-to-one. By 2006, 4 years after
deregulation began, DSL lagged behind cable modem service by less than 15%.

Can one blame regulations on the situation exclusively? We looked at an article on prices of both and the closest we found was in 2003 which had the following:

DirecTV Broadband had a reputation for providing fast, reliable service at a bargain price. The company charged $50 per month for DSL, slightly below the industry average of $51.36, according to research firm ARS.

The monthly price for cable modem service averaged $45.31 per month as of June 2002

The price of DSL at the time? $51.36 on average.
The price of cable at the time? $45.31 on average.

Stunningly, price point was not mentioned in the report even though it was a far simpler explanation on why subscriptions were the way they were. It’s strange that the paper doesn’t talk about price point at all to say the least since that is a huge factor for consumer purchasing habits. Surely there are a number of factors related to cost that doesn’t have anything to do with regulation.

We looked at prices in 2005 and found this on CNET:

Verizon gives the monthly customers the $29.95 rate only if they subscribe to the company’s unlimited local and long-distance phone plan–$44.95 to $59.95 per month, depending on the state–or the unlimited local package, ranging from $21.95 to $32.95.

Like its other Baby Bell cousins–SBC Communications, Qwest Communications International and BellSouth–Verizon has been offering low-priced broadband to catch up to cable’s dominance in the business. Many of these deals are priced under $30 for more than 1mbps of speed.

So, these examples show the following in direct pricing:
Cost for DSL: $32.95
Cost for cable: Under $30

While one example, it shows that there are cases where cable, again in 2005 which would account for what was seen when 2006 rolled around (because the paper explicitly said “by 2006”) Isn’t that an easier explanation as to why Cable modems were outselling DSL?

Regardless of any actual reasons, the paper then concludes the reasoning with this:

The DSL experience should not be taken as determinative of what will happen under the proposed network neutrality regulations. Rather, it is suggestive of the general size of the impact such regulations can have.

The paper then takes the difference in sales and takes 15% away from total revenue of the ISPs projected revenue. The argument, in short, is DSL performed poorly compared to cable, DSL was regulated and cable was not, therefore regulation is bad for the industry.

Since the author blames regulation exclusively for the differential in revenue, rather then other possible factors like price points as I have demonstrated as but one other possibility, then one can’t really make a projection like this, so the argument fails.

Since the projection in revenue is flawed, the argument about subsequent job losses cannot really be made as what the paper then proceeds to do concluding that, “In [2020], the $100 billion in reduced broadband sector revenues would have generated 342,065 broadband sector jobs and the $292 billion economy-wide impact would have supported 1,452,943 jobs.”

Content sector argument

The paper discusses job growth in the content sector with the following:

Some proponents of more comprehensive network neutrality regulation proposals have suggested that job losses in the broadband sector might be offset by increased employment in the Internet content sector.

It then proceeds with the first part of the argument:

The Internet content sector comprises all of the websites and Internet based services that broadband end-users access over broadband connections. For the content sector, the effect of potential discrimination in pricing and services is ambiguous. Simply put, a regime of network neutrality regulation will likely have different content winners than a regime without network neutrality regulation

This is certainly an agreeable. If network neutrality were in place, the big players online would be different then if ISPs could control what packets have priority. There is, however, a very significant difference between the two outcomes. With network neutrality, the online marketplace can effectively sort itself out through competing services. It network neutrality were not imposed, then ISPs can decide which services are the winners and losers. Correct me if I’m wrong, but isn’t a free market as seen in a neutral network how the automotive sector formed to what it is today in the first place?

Quantity of content argument

The paper then says this:

Larger commercial sites have the potential of doing better or worse under network neutrality regulations. On the one hand, potentially lower costs of access should benefit them; on the other hand, potentially less developed broadband infrastructure could harm their businesses. With some content winning and some content losing, there is no reason to believe that the total amount of content will be more or less (or more or less valued by Internet users) under one regime or the other. Some business models will do well under one regime, others under the other regime.

While it is difficult to gauge how much content is available in either a neutral or non-neutral scenario, it misses the point about network neutrality and that is which is the winner and which is the loser. If a company and not an overall marketplace decides what content is the winner and loser, then quality could very well be affected. Either way, this part of the argument has little to do with how the online content sector would perform and how it would impact jobs, so it is really simply off topic.

The dollar on the job argument

It’s a very strange argument and this is how it is described (note: this part contains no footnotes):

This offsetting growth would require more than simply the content sector capturing the broadband sector’s losses—it would take almost $300 billion in content sector revenues to offset the employment impacts of a $100 billion loss in the broadband sector—because each dollar spent on content supports less employment than a dollar spent on broadband.

So by this own paper, the amount of revenue created by the content revenue is expected to be triple the amount projected to supposedly be lost by the ISPs (a flawed number as argued already) Yet, the author still argues that 3 times the revenue means fewer supportable jobs. What?

When one looks at a commercial website that sells physical goods, there needs to be, at the very least, a network to process orders, companies to manufacture those goods, companies that store and redistribute those goods and subsequent people to ship those goods in the first place.

Even if a content provider only sells digital content like movies, they need lawyers to negotiate rights (if they were to deal with organizations like the MPAA for instance), they need staff for server maintenance, they need staff to maintain the site itself, they need staff for troubleshooting and customer service and who knows what jobs like that would indirectly support in both digital and physical jobs. Why are jobs fewer in the content industry? The paper fails to explain that other then two tables with numbers based on flawed reasoning (as we discussed already). With a lack of further reasoning or explanation, the argument fails due to lack of sound evidence.

The jobs quantity argument

Section C is a little more vague and chooses to rely on predictions on how money would be spent on both sectors saying, “any transfers of wealth induced by network neutrality regulations—of a flow of revenue from broadband providers to content providers—would be expected to have a negative impact on employment”

Still, this is basing predictions on a developing industry – the online content industry. In a non-neutral internet in the US, the jobs would effectively be moved out of the country to other countries that have a neutral network. There is the potential for innovation online to this day and who knows where the internet will go, but impeding traffic through ISP level interference as a non-neutral network would mean that the jobs in the online sector would vanish in the US. While the paper relies heavily on the idea that infrastructure investment is leading to job creation, it also has admitted that market saturation is also a possibility. If big ISPs choose not to lay down more lines (as there have been cases where ISPs refused to roll out things like FiOS in the past in the US), then those jobs that laying down new lines would require would never have been created in the first place. A non neutral network can lead to less use of the internet in the first place if fewer services are possible, thus relieving ISPs of obligations to upgrade their infrastructure, thus leading to fewer jobs anyway.

Ultimately, the argument suggests that its best to put money in a market that is currently being saturated and possibly slowing then it is to put money in to a sector thats in a state of major growth with many areas that could be expanded. It’s ultimately a bit senseless, really.

Conclusion of the paper

One thing that sticks out in the conclusion is the following, “If implemented, network neutrality rules could lead to a broadband sector that is almost 18% smaller than it would otherwise be by the end of the decade.”

Yet, earlier on page 11, the report states, “An increase of 18% translates into roughly 15% when measured as a decline in the growth rate.”

Since these are the only two places 18% is even mentioned in the paper, why not stick to the conservative value used to make so many calculations in the first place? Would this lead some to speculate that the number could be somewhat inflated to make a harder hitting conclusion?

The report concludes, “Consequently, network neutrality regulations would be counterproductive to reaching the FCC’s goals of increased broadband connectivity and the associated economic benefits that connectivity would bring.”

ZeroPaid’s conclusion of this paper

I will give the author some credit over the fact that of all the papers I have gone over with a fine toothed comb, this isn’t the worst out there that I’ve ever seen. A lot of papers I’ve read which tries to make really wild claims end up in the category of papers that are so full of errors, ambiguity and not thoroughly researched points, that one may as well just discuss the most glaring holes. This paper doesn’t necessarily fall in to that category.

Another positive thing to say about the paper was that researching the group and the author doesn’t immediately turn up conflicts of interest where a number of papers in the past requires minimal research to determine whether there was a conflict of interest. An example of this would be a paper that argues that tougher copyright is needed and that the paper in question was done independently and in an unbiased manner, but the author in question is a registered lobbyist for the major record labels for instance.

All that being said, going through the paper, going through the arguments and figuring out where the evidence is to back up the claims, I have to say, in critical parts of the paper, the evidence was either too weak or non-existent outside of identifying a given model to make a few general projections that don’t have anything to do with what potential losses there could be in the industry with network neutrality. Almost all of the arguments used to support that 1.5 million jobs would be affected by network neutrality didn’t have enough evidence to back itself up. One particular argument only required a few minutes of Googling to debunk. So, overall, the paper definitely fell short of proving its claims.

Drew Wilson on Twitter: @icecube85 and Google+.

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