Leave the Internet alone, please

There has been no public debate in the Baltic states concerning the new sweeping legislation to overhaul the European Union’s (EU) telecoms regulation. This is quite surprising given the Internet-savvy nature of Baltic populations and high probability that these new rules will seriously alter the delivery of Internet services.  The new rules should not concern only a small number of experts, as this new package of legislation on the electronic communication networks and services[1] will have an impact on all Internet users because of potential increase in prices and also because of some privacy concerns.

The European Parliament (EP) approved the so-called telecoms package this fall.  If the legislation is approved by the 27 EU member states at the EU’s Council, it would give more power to regulators to intervene in the operations of communication networks. Such regulatory capture of the Internet may actually postpone future upgrades to communication networks as market participants may lack incentives to make new investments.  This is because the regulations prohibit  “hindering or slowing of traffic.”  At first sight it might seem like a small issue, which would not be opposed by anyone. Who wouldn’t want their Internet connection to run smoothly without any slowdowns or hindering in its workings?

Nevertheless, the prohibition shows a failure by the EP to understand how the Internet actually works. In fact, it is a demonstration of a regulatory overkill, which will bring about broader negative externalities.  The reason goes to the heart of the way we use the Internet today. 10 years ago, we used the Internet just for email and website browsing but today we have moved way beyond that by using dozens of significantly more data-intensive applications.  For instance, the Internet is increasingly used for watching television shows and movies, for making telephone calls through Skype, playing games, sharing music files and so on.

Complexity and the growth of data

These Web 2.0 type applications are creating a crushing new burden of data on our networks.  The BT Wholesale recently calculated that 30 minutes of TV content accessed over the Internet consumes the same amount of online bandwidth as about 78,000 emails.  As companies push more content onto the Internet, at some point, our networks will reach their top capacity.  For users, the Internet will resemble the traffic in the center of Riga during a rush hour.

This data growth is also adding a significant new complexity to the way the Internet works.  Some data, for instance, a live sports event or a telephone call, must go immediately from one party to another or else the experience is ruined.  Other data such as email can be delayed a few seconds and the user will never notice. This flexibility and ability to discriminate among different uses and users is important for a smooth functioning of the Internet. In many ways this flexibility is required for dealing with complexity and mutual interdependence of global communication networks. One regional organization, be it as powerful as the EU, is obviously not an optimal way for handling the nature of the Internet traffic flows. The EP’s new rules are based on the assumption that someone somewhere is or could be in charge of the Internet. In fact, no one is or could be in charge. The functioning of the network requires global cooperation of many Internet service providers (ISPs) and other market participants.

Traffic anomalies and black holes

Research by Josh Karlin from University of New Mexico[2] shows that anomalies of Internet traffic flows such as slowdowns occur 200 times a day. Most of these anomalies are small and disappear in a few hours. However, some them are huge enough and allow making a simple point in understanding the global interdependence of the Internet. For example, YouTube disappeared from the web one Sunday afternoon in February 2008. YouTube managers did not take it down. Nor did network operators in the US. The whole incident occurred because a Pakistani telecommunications company started accidentally rerouting the traffic to an Internet black hole. Black holes are gaps in the Internet where request to visit a website and/or send an email gets lost in the pathway that was known to work before. The new research by scholars at University of Washington shows that these are more common than thought before.

The bottom line is that the EP’s new rules do not recognize this new Internet reality.  It is as if our national traffic laws began mandating maximum roadway speeds regardless of whether the road is a highway between Riga and Ventspils or a country road without a pavement and full of potholes somewhere in rural Latvia. Such insensitivity to local context and a blind aspiration for extraterritoriality would be unimaginable in regulating traditional traffic. Surely, the Internet is different from regular traffic networks but local circumstances still matter in securing its smooth functioning. Indeed, its tremendous growth has been caused by accommodating local contexts and innovations at the edge rather than at the core of the decentralized yet universal network.

Increase in subscription prices

The new EP rules do not just represent new costs by making the use of the Internet less convenient due to the increased congestion, but will increase the prices of the Internet connectivity.  There is no available data of what impact the rules have on subscription prices in the Baltics. However, Copenhagen Economics, a consulting firm, has calculated that average monthly broadband subscription prices could rise from 33 euros to 44 euros in Sweden and from 29 to 39 euros in Germany. According to their estimates, in Germany, the loss of consumer welfare could total 1.7 billion euros as a result of new rules[3] The price hike stems from the inflexibility of the new rules, which will pass the cost of scarcity of networks onto all consumers.

Under current circumstances, network operators could discriminate between different users. A user who primarily sends emails and a user who watches data-intensive videos online pay the same price. Operator can delay emails for a few seconds if the network is congested to secure the delivery of a video in real time. However, if the traffic cannot be slowed down, the capacity has to increase and new investments are required. Since the real effect of new rules implies that different prices from the different types of use cannot be charged and the same speed for the delivery of data has to be ensured, the cost of average subscription has to go up. Hence, the result is an increase in the broadband prices, which, in turn, may suppress the demand for broadband.

Security and privacy

Furthermore, as with any new intervention, there are unintended consequences. The effects of prohibition against slowing and hindering web traffic are not only limited to economics of Internet but could potentially have national security implications. This is particularly relevant issue for the Baltics because the cyber-attacks against Estonia in spring 2007 clearly demonstrated that the Internet can be used by outside forces to create serious problems.  The answer to this threat is to have a network that recognizes these dangers and responds rapidly. Yet the EP’s new rules are so broad and vague that even potential technologies identifying and repulsing a cyber-attack could be prohibited.

Even if the EP’s rules are eventually interpreted in a way to allow for “national security” technology that helps repulse cyber-attacks, there are other potential unintended consequences. The effectiveness of the new sweeping regulatory intervention depends on regulators' ability to monitor and collect digital data on people’s activities on the Internet. This raises a clear privacy concern that must be addressed.  Hence, another potential cost of the regulation is decreased privacy of Internet users unless regulators make it explicitly clear how citizens rights to privacy will be preserved by the new regulations.

Benefits of a minimal regulation

So far, the minimally-regulated Internet has served the Baltic states well. The 2008 United Nations E-Government Survey[4] grouped Estonia, Latvia and Lithuania together with the Nordic countries, not with other Central and Eastern European states. Estonia is among the world's leaders in online banking and online government services. All three countries have high per capita Internet penetration rates compared to other new EU members.  The future development of the Baltic states depends on the ability to continue deploying advanced new technologies faster than other countries in Europe.  But the EP’s new rules directly threaten this as they may create bottlenecks for the development and supply of new online services.

The EP approved its new Internet rules in an effort to maintain what it calls an “open” Internet but this is not achievable with universal regulatory overhaul in a top-down fashion. A better enforcement of the already existing legislation such as competition rules would deliver the ' open Internet' more effectively than the imposition of new rules. The recent history of the Baltic states demonstrates clearly that an accessible Internet can be delivered to a wider population with limited and simple regulatory framework. This is a lesson that the EU must consider when it aims to legislate something that does not really require legislation.

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[1] http://www.europarl.europa.eu/...

[2] See Wentworth, Karen, ' Mysteries of Unregulated Internet,'  livescience,com,   http://www.livescience.com/technology/080725-bts-internet-traffic.html

[3] See Tait, Nikki, ' Net neutrality could rise broadband prices,'  Financial Times, http://www.ft.com/cms/s/0/8d0c0df8-9ece-11dd-98bd-000077b07658.html

[4] http://unpan1.un.org/intradoc/groups/public/documents/UN/UNPAN028607.pdf