A decade of evidence suggests that Open Internet policies have delivered the opposite effect.
Innovation has been the key argument for implementing net neutrality, or “open internet” rules. While there is no official, statutory definition, Tim Wu suggested it as the broadband network being 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 pushing for net neutrality, claimed: “Without Net Neutrality, the next Google would never get off the ground.” Indeed, net neutral internet regulations have been in place for more than a decade in dozens of countries, but not in others. This inconsistency makes for a global natural experiment, which we studied in a five-year research project at Aalborg University’s Center for Communication, Media and Information Technologies by measuring mobile apps on mobile networks across 53 countries.
Countries with hard net neutrality regulation should have more internet innovation, right?
Testing the premise that net neutrality guarantees internet innovation
The US Federal Communications Commission’s (FCC) 2015 Open Internet Order said that its rules “are designed to protect free expression and innovation on the Internet.” It also said that such “rules will preserve the internet as a platform for innovation.” In the same year, the European Parliament promulgated a law “laying down measures concerning open internet access” 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, made through legislation and administrative decree, entail price and traffic controls on broadband; prohibitions on prioritization and partnerships with broadband providers, and punitive fines for violation. No net neutrality rule countries like Australia and New Zealand opt for ex-post competition law to police net neutrality. Apart from 2015-2017 when the FCC’s Open Internet Order was in place, the US Federal Trade Commission (FTC) has policed the broadband market with competition law. However a volley of lawsuits have been waged on the issue over the years in US.
To test the premise that better net neutrality rules result in higher levels of innovation, we constructed a data-science model to record the degree 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 innnovation (eg South Korea, Japan, Switzerland), however there was no innovation advantage for countries with hard rules (eg Chile, Canada, Brazil).
To avoid spurious conclusions from differently endowed nations, data was further regressed 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 bans on price differentiation in 2012. Denmark produced 115 apps in the study; Netherlands, 102. The differences thereafter were stark: the average Danish app increased in popularity rank to 26 from 42 during the period, whereas the average Dutch app decreased in popularity rank from 31 to 42. Moreover, Denmark succeeded 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, just 20 apps came from countries with hard rules; 150 from soft rule countries; and 130 from no rule countries.
However, the preponderance of US apps complicated the study, an additional 302 apps mainly from the major US platforms Google, Meta (Facebook), Amazon, Apple, Microsoft, and Netflix. They were all founded years before hard rules in the US were implemented, and rules seemed to freeze the status quo in place to cement their advantage.
Looking more closely at Denmark and Netherlands found that while both countries each had 4 advanced mobile networks and many internet developers, Denmark’s commercial freedom to market mobile subscriptions was higher. Danish mobile operators were more liberated to use free data and partnerships to stimulate next generation mobile adoption, things which were illegal in Netherlands under their net neutrality rules. As a result, Denmark enjoyed greater levels of advanced smartphone penetration and post-paid contracts, allowing Danish developers a broader test bed in the local market.
Today, both Denmark and Netherlands are part of the EU’s net neutrality regime, among other EU internet regulations. Before net neutrality rules were imposed, Europe accounted for many of the top 20 internet companies but not anymore. Today the top European enterprise 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 on the world’s 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 which has succeed to produce platforms which rival the US giants — a country which has never had net neutrality rules and which hardly fits the definition of “open.” All the same, 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 exceed downloads for Amazon and Wal-Mart in USA.
Why Big Tech loves net neutrality
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 to free search and social media? Try free, ad-supported broadband. The 2015 FCC Open Internet Order, a centerpiece of Big Tech’s policy strategy, had an important policy feature that divested the FTC’s ability to police competition and privacy on broadband providers. This enabled the FCC to promulgate new, sector-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.
Similarly in Europe, startups are prohibited from the broadband network’s advanced capabilities 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, sheltered by the net neutrality policy, have flourished. They now have the power to exclude minor companies, and therefore their contents, from the Internet market in de facto defiance of the net neutrality principle.” Antitrust scholar Oles Andriychuk suggests that soft net neutrality rules can deliver positive outcomes without causing hard rule problems, noting EU broadband providers are prevented from disruptive innovations.
Extend favorable price controls to other parts of the value chain
While net neutrality was supposed to be about the relationship between the broadband provider and end user on last mile broadband networks, Big Tech opportunistically reinterprets the principle, notably in the exchange of data between networks where market-based prices presumably address asymmetries. In 2014 Netflix launched a campaign calling on the FCC to adopt “hard” net neutrality rules precisely timed to create public pressure during Netflix’s interconnection negotiation with Comcast and succeeded to reduce 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 free, we’ll sick the dogs on you.
In another imbroglio in South Korea, Netflix traffic exploded 24x overnight on broadband networks beginning in 2021, necessitating a major and immediate upgrade which could only be used for Netflix data. However 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 either to eat the upgrade cost or spread it across all customers. Attempts by broadband providers at the South Korea telecom regulator to recoup costs failed. Netflix sued, arguing that it has no obligation to pay or negotiate for the use of others’ networks. Netflix lost, and the case is on appeal. Similar conflicts have emerged in other countries with other platforms, notably with Meta refusing to supply data or to stop paying.
Competition experts will recognize the making of a global cartel with exploitation of market power in such negotiations. When a firm or a group to firms controls and/or maintains a price or condition that would not prevail under competition, it leads to reduced output and loss of economic welfare.
This issue plays out in US 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 unrecoverable 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 receive growing levels of traffic. It should not surprise anyone that Big Tech’s free riding creates shortfalls.
The FCC reports that 17 percent of Americans in rural areas and 21 percent of Americans in tribal areas lack access under the current 25/3 mbps broadband benchmark. All told, some 20 million Americans do not have access to high-speed broadband services. It is worse in the EU where there is a €300 billion gap to achieve targets for fiber and 5G.
The data shows that net neutrality policy doesn’t work as policymakers intended; this is because its features protect the status quo for Big Tech, not competition.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.