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The Digital Divide and Other Economic Considerations for Network Neutrality. Net Neutrality Special Issue Blog #7

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While the Internet seems ubiquitous, digital divides remain, particularly across incomes. In the U.S., adults making less than $30,000 per year are significantly less likely to use any type of digital device and to have broadband Internet access in their home[1]. The 2015 Open Internet Order (2015 OIO) was adopted, in part, to reduce the divide by expediting broadband deployment and removing obstacles to the market.

In their recent work “The Digital Divide and Other Economic Considerations for Network Neutrality,” authors Michelle Connolly, Clement Lee, and Renhao Tan question whether or not the 2015 OIO is likely to help bridge the digital divide. They argue that despite its rhetoric, the 2015 OIO did not properly consider its effect on the digital divide. In fact, net neutrality rules may depress investment, exacerbate the digital divide, and decrease the quality and diversity of Internet content.

This post is the seventh in a series featuring the contents of a recent special issue of the Review of Industrial Organization, organized by the Technology Policy Institute and the University of Pennsylvania’s Center for Technology, Innovation, and Competition. The paper uses the 2015 OIO prohibition on Internet Service Providers (ISPs) charging fees to Content Providers (CPs) as a jumping-off point for analysis of the potential impact on price, content, and accessibility and, by extension, the digital divide.

In an unregulated market, ISPs might charge both CPs and end users (EUs). Under net neutrality regulations, ISPs must cover all their costs through fees charged to EUs, pricing some low-income EUs out of the market. At the same time, a smaller EU base decreases the incentive for ISPs to invest in additional deployment and for edge companies to invest in content and services.

Fewer options for generating revenue and financing investment may cause ISPs to manage their capacity and deployment differently than they would otherwise. They might, for example, reduce their geographic reach or increase traffic (and congestion) on existing capacity. Such a response could yield outcomes ranging from decreased or re-directed investment in broadband Internet services to exiting less lucrative (read: underserved, rural, and/or likely low-income) markets. Even setting aside potential investment effects, net neutrality rules still do not allow ISPs to allocate bandwidth efficiently, potentially decreasing revenue and generating the responses listed above.

In sum, the authors argue that net neutrality regulations may affect the digital divide, but not in the way the FCC intended. By causing ISPs to increase prices to EUs, net neutrality regulations will price some low-income users out of the market. In reducing the overall revenue that ISPs can generate, net neutrality regulations will reduce or redirect ISP investment in broadband infrastructure. Taken together, these results may exacerbate the digital divide.

The implications of the digital divide are far-reaching. It has bearing on the social, educational, and economic outcomes of children and families. The authors make the case for greater consideration of this trend as the FCC revisits the 2015 OIO. As it weighs net neutrality regulations, the FCC should consider the value of access to both CPs creating and organizing information, and EUs consuming it.

[1] See the suite of studies from the Pew Research Center for more information.