National Small Business Week: 4 Big Points on Internet Regulation and Small Business

By at 5 May, 2015, 11:52 am

judges court gavel on a laptop computer

On February 26, the Federal Communications Commission (FCC) voted to move from a light regulatory touch, as authorized by Congress and President Bill Clinton in the 1990s, to a heavy-handed utility-style regulation of broadband Internet – both wired and wireless networks. The FCC, by a vote of 3-2, claimed it could apply legislation initially passed in 1934 for a long-gone Ma Bell telephone monopoly to the dynamic, ever-changing 21st century Internet. (See SBE Council’s media release about the final release of the FCC’s regulations here.) 

President Barack Obama urged the FCC to take such action, furthering his administration’s long track record of hyper-regulation.

Unfortunately, when substantial political power is claimed over an industry through regulation, the economic outcomes inevitably are negative given that politicians and their appointees do not possess the knowledge or incentives to undertake such a monumental task. Few better understand the ills of regulation than small businesses, and the negatives of regulating the Internet as if it were a utility will hit small businesses hard.

That, of course, is troubling given how important broadband Internet is to the entrepreneurial sector of our economy. As SBE Council President & CEO Karen Kerrigan wrote in a November 2014 analysis: “Broadband has been a lifeline to entrepreneurs, helping them get through the recession and weak economic recovery. Business owners have access to extraordinary tools that help them operate more productively, and find customers more efficiently. Innovative new services keep coming online, spurred by private sector investment. Consumers and small businesses have greatly benefitted.”

So-called “net neutrality” regulation is a costly policy that will hurt small businesses, and it warrants attention during National Small Business Week.

Consider these 4 big points on Internet regulation and small business:

Internet Regulation and Small Business #1: Uncertainty

The FCC proposed regulations face challenges in the courts and in Congress. For good measure, the rules themselves provide uncertainty in terms of how they would be applied in the near term and over the long haul as regulatory regimes change. There’s even uncertainty as to when the rules actually will take effect once the legal challenges kick in. As The summed up, “Major phone and Internet companies have long made clear their intentions to file suit, which could drag the issue through the courts for years. ‘To put it briefly, litigation with FCC appeals is a pretty long, drawn-out process,’ National Cable and Telecommunications Association head Michael Powell said earlier this week. ‘I would predict that it’s at least two — and up to five — years before the rules are fully and finally settled.’” Uncertainty means reduced risk taking, delayed decisions, and resources diverted from productive undertakings to dealing with regulatory uncertainty. None of this is good news for small businesses – though it must be noted that challenging and delaying such rules is a better option than their actual implementation.

Internet Regulation and Small Business #2: Increased Politicization, and Lost Investment and Innovation

Private markets benefit consumers in myriad ways, but at its core is the idea that entrepreneurs and businesses work to serve consumers – such as by providing new and improved goods and services – with the disciplines of competition (actual and potential) and those consumers deciding what succeeds and fails. Unfortunately, regulation works in a very different way. In a Stanford University analysis economist Bruce Owens explains, as summed up, that “there is little current evidence to support a call for Title II [i.e., utility] regulation. Indeed, such regulation in the past has caused more consumer harm than good, partly by enhancing industry influence on politicians and regulators, and partly by distorting prices and discouraging investment and innovation.” That is, regulation brings greater political control at the expense of private investment and innovation. Lost investment and innovation are dire outcomes for small businesses, consumers, and the overall economy.

Internet Regulation and Small Business #3: Increased Consumer Costs

In the end, consumers via increased costs pay the ultimate price of regulation. Of course, prominent among broadband consumers are small businesses. Consider that the Progressive Policy Institute summed up the findings of the consumer implications of the FCC reclassifying broadband as a public utility as follows: “We have calculated that the average annual increase in state and local fees levied on U.S. wireline and wireless broadband subscribers will be $67 and $72, respectively. And the annual increase in federal fees per household will be roughly $17. When you add it all up, reclassification could add a whopping $15 billion in new user fees on top of the planned $1.5 billion extra to fund the E-Rate program. The higher fees would come on top of the adverse impact on consumers of less investment and slower innovation that would result from reclassification.”

Internet Regulation and Small Business #4: Telecommunications is a Small Business Industry 

Of course, small businesses will not only be hurt as broadband users or consumers, but as part of the industries that provide broadband services. Consider that according to U.S. Census Bureau data (2012 latest), in the overall telecommunications sector, 98.1 percent of employer firms have less than 500 workers, and 82.6 percent less than 20 employees. So, small businesses make up the overwhelming majority of firms in the telecommunications business.

Given the importance of a vibrant, innovative Internet for small businesses as both consumers and providers, the need to stop misguided and costly utility regulation of broadband Internet is critical to highlight during National Small Business Week. Efforts are building in the Congress for legislation that will provide a balanced response to the FCC’s clear overreach. For the sake of entrepreneurs and small businesses, a legislative solution can’t come quickly enough.

Related SBE Council resources:

FCC’s Intrusive Internet Order Will Choke Innovation and Entrepreneurship

Small Business Advocate Comments of FCC’s Vote to Regulate the Internet as an Archaic Public Utility

Openness Not Exactly a Virtue at the FCC

Internet Regulation and Small Business

Reclassifying Internet as a Public Utility Will Hurt Consumers

Raymond J. Keating, Chief Economist

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