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Net Neutrality Is Much Ado About Nothing

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The political controversy that has erupted over "net neutrality" is a waste of time because net neutrality will have no real effect on the Internet or the way companies do business. The truth is that net neutrality will have virtually no impact on real people in the real world.

For those of you who have not been paying attention to the chattering classes, net neutrality is a set of rules passed by the Federal Communications Commission (FCC) on Feb. 26. The idea behind these rules is to make the Internet an equal playing field by requiring all users to operate at the same speed.

Critics like Rush Limbaugh claim this will stifle free speech and free enterprise. Supporters like FCC Chairman Tom Wheeler claim net neutrality would ensure equal access to web content for all citizens.

Both Wheeler and Limbaugh are wrong because "net neutrality" is essentially meaningless. The rules will have no little or no effect because they are technically unfeasible and practically and possibly legally unenforceable.

Four Reasons Why Net Neutrality Is Meaningless

The major reasons why net neutrality is meaningless and unenforceable are:

1. Litigation will delay the implementation of net neutrality for the foreseeable future. The rules will be challenged in federal court, which means they cannot be enforced until the courts rule on them. The Los Angeles Times reported that attorneys are already working on such a challenge. Since such a challenge will have to be appealed to the U.S. Supreme Court, that process will take a minimum of two or three years.

It is not clear if the Supreme Court would uphold net neutrality. The most likely outcome is that the Supremes would use the Commerce Clause to the Constitution to get out of making a decision, like they did when they upheld the individual mandate in Obamacare in 2012. Either way it will be two or three years before we know if net neutrality is legally enforceable. Note: It seems as if President Obama himself is aware of this; he wants to make sure that he'll be safely back in Chicago when the doctrine goes into effect.

2. By the time the courts get around to ruling on net neutrality, we will have a new president. President Obama cannot run in 2016 because of term limits, so we'll have a presidential election. The President appoints the FCC; if we get a Republican President, he will appoint a new FCC that will simply throw net neutrality out. The two Republicans on the current FCC voted against the doctrine. If we have a Democrat in the White House, he or she is also likely to appoint a new FCC, which could modify or scrap the doctrine.

3. Nationwide net neutrality is technologically and practically unfeasible. The only way that net neutrality could work is if all Americans had the same speed Internet. Obviously we do not; only residents of a few cities, such as Austin, Texas, and San Jose, California, have access to very fast high speed broadband. Most regions have only one broadband provider, and many rural areas have no broadband service all. Since it is doubtful that Congress is going to spend the money to bring such service to every home and business in the country, it is hard to see how this would work..

The limitations to broadband are only one of several technical reasons why net neutrality will not work. CNET writer Marguerite Rearden did a great job of listing the other reasons why it is technically impossible in this article.

4. Regulatory capture will effectively nullify net neutrality before it takes effect. Regulatory capture is what occurs when those being regulated get control of or undue influence over the regulators. Simply put, the entities being regulated pay off the regulators.

Large Internet operators such as Google Inc. (NASDAQ: GOOG), which has a net income of $14.44 billion and a TTM revenue of $66 billion, would simply get out their checkbooks and buy off the FCC. Startup entrepreneurs, nonprofits and others without financial resources will get shut out because they lack the cash to impress the regulators.

Companies like Google, Amazon.com Inc. (NASDAQ: AMZN) and Netflix (NASDAQ: NFLX) could easily influence policy by promising FCC members and staff high-paying jobs with stock options after they leave "public service." If the FCC does not want to play ball, they'll simply write a few checks to presidential candidates and get a new FCC willing to follow orders appointed.

Regulatory capture is why there have been few changes on Wall Street since the Great Financial Crisis. Large investment banks like Goldman Sachs Group (NYSE: GS) went out of their way to buy off the regulators and the politicians who appoint them. This Wall Street Journal editorial does a great job of describing how the process works.

Regulatory capture might be the real reason for net neutrality; FCC members like Mr. Wheeler and their retainers are trying to arrange a nice payday for themselves when they leave office. They want to make sure there is plenty of work for lobbyists and lawyers with FCC connections when President Obama leaves office.

At the end of the day, net neutrality is much ado about nothing; it will not change the way the Internet works, stifle free speech or speed up your Netflix service. Instead, all it will do is ensure more work for bureaucrats, lawyers and lobbyists.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: The author conducts retail sales through Amazon.com and uses Google Advertising tools in his business.