Net neutrality in Europe: a nightmarish scenario?

Every year at the end of July, the great migration starts. The EU bubble breaks up. MEPs, parliamentary assistants, EU institutions’ officials and lobbyists leave Brussels for a month of vacation. Some MEPs go home to visit their constituencies, others stay away for an extra week and travel on a delegation outside Europe.

A week ago, a group of MEPs were on a “fact-finding mission” in Silicon Valley, visiting companies like eBay, Google and Facebook. They will be followed in September by another group of EU policymakers including Digital Affairs Commissioner Gunter Oettinger. This time, the trip will focus on startups and fast-growing companies.

They all come hoping to find the recipe that has made Silicon Valley so successful. They are confident that with enough insights they will be able to replicate this success in Europe.

The timing is important. EU politicians are about to issue rules that will shape the future of the digital sector – and not just of European companies. These special visitors are in a thinking mode. They are researching online marketplaces, internet platforms, telecom infrastructure, search engines, social networks and new business models associated with the on-demand economy. They are trying to figure out what regulatory regime they should create to put the European tech industry back on the map while protecting users.

EU policymakers tend to fantasize about Silicon Valley. The region is known for its undeniable economic dynamism, a sort of startup paradise. But European observers often overlook the failures that come with it. The meteoric growth of a few startups hide the underlying trial and error culture.

At the #Reboot2015 conference on July 17 in San Francisco, I learned that, while some EU policymakers dream of Silicon Valley, some American regulators have a simplistic and nightmarish vision of Europe.

The conference, organized by Republican think tank Lincoln Labs, brought together a mix of DC politicians, professionals from local tech companies and engaged libertarians. It opened with a conversation with Federal Communications Commission (FCC) Commissioner Ajit Pai.

The net neutrality rules recently adopted by the FCC took up much of the agenda that evening. Several Republican Congressmen have contested the rules in court. They oppose what they consider to be an attempt to limit the freedom of telecom operators to innovate on their networks and provide differentiated services. Quite surprisingly for San Francisco, the room was filled with many such opponents to the new regime, among whom Pai.

The revealing question came from Carrie Sheffield, journalist and contributor at Forbes. She asked:

“My question is about net neutrality and Europe. So Europe seems to act as basically a guinea pig in so many terrible social policies in my opinion. And as I understand Europe has also experimented with something similar to net neutrality. So, why can’t Silicon Valley see what’s happening in Europe, which I would not call a hotbed of innovation and tech entrepreneurship by any stretch?”

Commissioner Pai answered with a series of references to facts some going back to 2012 that, according to him, demonstrate the damaging impact of net neutrality rules on the European broadband infrastructure and, as a result, on its entrepreneurship culture (full transcript of Pai’s answer below).

When I heard the exchange, something bothered me: what European rules did Sheffield and Pai refer to? Did the impact assessment presented by Pai make sense?

Fruity by bies_CC BY-NC-SA 2.0

Comparing apples and pears (photo by bies, CC BY-NC-SA 2.0)

Which net neutrality regime are we speaking about?

Given the efforts with which net neutrality advocates still push today for a new regime in Europe, one wonders whether Europe actually already has such a regime, as both speakers assumed.

European lawmakers first addressed the issues raised by traffic management, in particular by examples of throttling of Voice over IP on wireless networks, in 2009. A set of rules was adopted as part of the revised EU regulatory framework for electronic communications that became national law in May 2011.

The framework introduced the principle that no content, application or device should be blocked by telecom operators, while, at the same time, allowing reasonable traffic management. It protects end users by requiring operators to be transparent about traffic limitations. It also recalls that national regulators should enforce competition rules to ensure minimum quality of service requirements.

European lawmakers at the time took inspiration from the principles set out by FCC Chairman Michael Powell (a Republican, like Pai) in 2004: freedom to access content, run applications, attach devices and obtain service plan information.

Since 2009, two European countries have adopted laws that go beyond the EU framework: Slovenia and the Netherlands. The Netherlands, in particular, prohibits zero ratings – the practice whereby some services and apps are counted outside the user’s data plan. In two other countries, France and Norway1, the local telecom regulator adopted rules further limiting traffic management.

There are, therefore, at least five different types of what one might call “net neutrality” regimes in Europe today (the umbrella EU framework, and the tweaked versions in Slovenia, the Netherlands, France and Norway).

Since 2013, the European legislator has been working on further regulating traffic management practices, in particular specialized services. Although a political agreement was reached mid-July 2015 over a set of rules, the Council of Ministers and the European Parliament still have to formally validate them.

Final adoption by the full Parliament is not due before October. Net neutrality supporters, especially Green MEPs, may be tempted to suggest changes to the text. This would further delay the adoption of the text. On top of that, once validated at EU level, the rules have to be clarified by national regulators through implementation guidelines, adding another few months to the timeline.

Given the variety of rules currently applicable, and to be adopted, it is hard to identify which ones Sheffield and Pai referred to. Whether the FCC rules and the European regimes are comparable is an additional question.

How do you assess the impact of telecom regulation?

In his reply, Commissioner Pai referred to three indicators: investment in broadband infrastructure, access to wireless services and the state of competition at retail level. He compared the situation in the US and Europe in two out of the three.

I would first note that the figures, dating to 2012, are pretty old and can hardly reflect the impact of rules applying only since 2011. I also found the choice of indicators interesting, seeing no mention of the affordability of telecom services. On that level, many European countries are ahead of the US. According to a study by the Open Technology Institute, many European end users get higher speeds for a lower price than Americans. US prices are sometimes three times higher than European ones.

The significant disparities throughout Europe in prices and availability of broadband services show that net neutrality rules alone cannot account for differences in market structure. For instance, compare prices and availability of competing broadband offers in Belgium, France and the Netherlands2. The fact is that the country with the lowest level of restrictions to traffic management (Belgium) actually has the highest prices, the slowest deployment of 4G and the fewest providers offering access to broadband, cable, VDSL and fiber combined. Other factors like marketing costs, market size or competing infrastructures play an important role there.

Comparing Europe with the US may be appealing and make for a contrasting image. However, using this as a proof point in a political argument can be misleading. It requires a detailed understanding of both regimes and of the complex realities of each region.

To watch the full exchange, check out here. [look for the video called “Lincoln Labs 2015 Reboot Conference (3:27)”; the exchange starts at 1:15]

—————————————-

1Although not technically in the EU, Norway, as a European Economic Area member, applies the rules adopted by the EU that form part of the single market regime, also called acquis communautaire.

2Belgium applies the EU framework; France applies a soft net neutrality regulatory regime on top of EU rules; the Netherlands apply the EU framework complemented by a pro-net neutrality law.

—————————————-

Transcript of Commissioner Pai’s answer:

“That’s a terrific question. It’s one of the arguments I made when net neutrality was a really hot issue. I said ‘Look. Part of the reason why the American internet economy is the envy of the world is precisely because, number one, we have this broadband infrastructure that no other part of the world has, and, number two, because we have an entrepreneurial spirit that lets us thrive, free from heavy-handed government regulation.’

And the kind of point I used was Europe. ‘Look, in contrast to America, Europe explicitly chose the utility style model of internet service provider regulation. And the proof is in the pudding. If you look at the investment figures. In the United States, broadband providers spend $562 per household on broadband infrastructure. In Europe that figure is only $244. American broadband providers deploy fiber to the home twice as often as they do in Europe, which is especially remarkable when you consider the fact that our population is much more geographically dispersed compared to Europe.

I mean, on the wireless side too, the disparity was even greater. When this issue was really hot, when I said, ‘Look, in 2012, 86% of Americans had access to 4G LTE services. In addition, three, hum, 99% of Americans had the choice of 3 facility-based providers, the vast majority of Americans had the choice of 4 facility-based providers and more. In Europe by contrast, in 2012, 27% of people had access to 4G LTE. That’s a tremendous gap.

And the reason is that, look, if you tell internet service providers: ‘We consider you to be nothing more than an electric company, a water company. We don’t think there is innovation in the network. We are going to make sure that we reduce the amount of return on investment you can get, because we just don’t think that you are going to be behaving in competitive ways’, then it’s not going to be a surprise that investment and capitals are going to flow to America and to other places. And you are not going to see this culture of entrepreneurship built on top.”