Net Neutrality and Mobile App Innovation in Denmark and Netherlands 2010–2016

1 Introduction

The 2015 Federal Communications Commission’s (FCC) Open Internet Order concluded that hard net neutrality rules are necessary to “protect free expression and innovation on the Internet and promote investment in the nation’s broadband networks.”^[1] The order’s strongly worded emphasis on protecting innovation and promoting investment implied that the agency had performed a robust analysis, in particular an empirically based assessment of the regulation’s likely impact. But the 400-page order contains no such reference.

The European net neutrality legislation titled “laying down measures concerning open internet access” states that its goal is to “guarantee the continued functioning of the internet ecosystem as an engine of innovation”^[2] (italics added). Note that the term “net neutrality” does not appear in the statute.

In a press release announcing the new guarantee of an Open Internet, the European Commission explained, “Creating the right conditions for digital networks and services to flourish is a key objective of the Commission’s plan for a Digital Single Market… The EU will have the strongest and most comprehensive open Internet rules in the world.”^[3]

It further noted,

Net neutrality is crucial for users and businesses. It ensures that Europeans have access to the online content and services they wish without any discrimination or interference (like blocking or slowing down) by internet access providers. This is also very important for start-up businesses that commercialize their products and services via the internet and need to be able to compete on an equal footing with larger players.^[4]

The FCC offered its own theory of internet innovation in the 2015 Open Internet Order, declaring that “Internet openness drives a ‘virtuous cycle’ in which innovations at the edges of the network enhance consumer demand, leading to expanded investments in broadband infrastructure that, in turn, spark new innovations at the edge.”^[5] However these rules were removed 2 years later as the agency found no evidence for the purported claims of innovation, and it also documented declines in network investment and deployment during the period the rules were in place.^[6] Consequently the FCC restored the regime internet to oversight by the Federal Trade Commission which had been in place from 1996.^[7] Nevertheless, internet regulation such as net neutrality remains controversial and is being litigated in court, driven by supporters of the virtuous circle theory, notably a trade association for the large platform companies of Silicon Valley.^[8]

Net neutrality rules are frequently, though not entirely, based on the premise that such rules will protect and/or stimulate “innovation” by third party application providers (“edge providers” in American parlance).^[9] The rules are associated with a series of requirements and restrictions for broadband and internet services providers (ISPs). “Without Net Neutrality, the next Google would never get off the ground,”^[10] observes Save the Internet, a leading global advocate for net neutrality.

While policymakers and advocates express the urgent need for rules, they are not clear whether such rules will ensure the status quo level of application innovation or increase innovation. If the former, it would seem to follow that countries without such rules would fall in their level of innovation. It suggests that European policymakers expect their rules to make the European innovation economies more productive, as Europeans overwhelmingly use American and Asian internet innovation. While the Body of European Regulators for Electronic Communications issues annual report on the implementation of the legislation,^[11],[12] there is no official report investigating whether the legislation achieves its policy promises.

Tim Wu, who developed the net neutrality concept, professed that broadband networks should be operated to deliver a “neutral platform” for third party applications and services.^[13] Wu asserts that “network neutrality must be understood as a concrete expression of a system of belief about innovation.” His premise is that there is an inherent conflict between “private interests of broadband providers and the public’s interest in a competitive innovation environment centered on the Internet,” and thus telecom regulators must therefore enforce a “non-discrimination” regime on broadband providers. His non-discrimination principle can be summarized as, “Absent evidence of harm to the local network or the interests of other users, broadband carriers should not discriminate in how they treat traffic on their broadband network on the basis of inter-network criteria.”

Wu’s premise is that there is an inherent conflict between “private interests of broadband providers and the public’s interest in a competitive innovation environment centered on the Internet.” He mentions the debate between proponents of “open access” who want structural remedies to prohibit the vertical integration of content and broadband provision to ensure the “neutrality” of the network versus those who believe that such remedies will slow broadband development. In Wu’s conception, net neutrality is necessary to ensure “fair evolutionary competition in any privately owned environment” and states that regulation “tries to help ensure that the short-term interests of the owner do not prevent the best products or applications becoming available to end-users.” He states that net neutrality is necessary to preserve “a Darwinian competition among every conceivable use of the Internet so that the only the best survive.” The end game of net neutrality, Wu’s “design principle,” appears to be an “open network” where there is little to no intellectual property. This underpins the notion of free information in the “creative commons” espoused by Larry Lessig, Wu’s thesis advisor.^[14]

Wu’s analysis remains compelling, but the opposite outcome should also be considered. Net neutrality could cement the position of the largest players to the detriment of new entrants. Indeed, rules that require treating data the same have the perverse effect of rewarding the large companies which already have traffic, revenue, and users. It is precisely start-ups which need differentiation in order to be found and to compete. Policymakers fail to realize that in the countries with the strictest net neutrality rules, the market shares of the largest American platforms have only increased.^[15] Indeed, the only countries which have innovated platforms which compete at the scale of Google and Facebook are Russia and China, countries with no net neutrality rules. It could be that net neutrality is a policy that works to strengthen existing American platforms over competing innovation. As such, it could be counterproductive to Europe if the policy goal is to promote European innovation. In the vast literature on net neutrality, there are little to no empirical tests comparing the efforts of different national policies and, more importantly, whether the policies delivered the promised results.

The goal of net neutrality is to protect a low-cost and unconstrained environment for application and service innovation at the edge, which takes precedence over innovation by broadband internet access service (BIAS) providers and even consumer preferences.^[16] Net neutrality implements a set of price and traffic controls on BIAS providers to give “edge providers,” or third-party application developers, an advantage. Following the 2015 FCC’s logic, the next app at the edge, whether “Angry Birds” or Instagram, is more important than innovation within the network – for example, the development of the 5G mobile wireless standard. This view conflicts with established academic theories of innovation, such as complementary assets, the idea that apps and networks evolve together symbiotically,^[17] and two-sided markets, the idea that supply and demand allow different parties to match their preferences.^[18]

The 2015 order failed to explain why innovation at the edge is more important than in other parts of the network or why such an extreme regulatory change was immediately required to preserve it. Indeed, the order failed to distinguish between incremental improvements to existing internet products and truly ground-breaking invention, or what is referred to in management literature as fundamental or “disruptive innovation.”^[19]

Research undertaken at Aalborg University represents a preliminary step to address the gap between research and net neutrality policy.^[20] This article summarizes that research which focused on a systematic investigation across 53 countries to determine the results of net neutrality before and after rules were imposed to see whether the policy delivers the promised innovation at the edge. Note that all tables are printed from the original research.

The research investigated changes in mobile app stores over the period 2010–2016. The investigation was confined to mobile apps on mobile networks. The specific research questions were: To what degree does introducing net neutrality in a given country stimulate edge providers’ innovation on mobile networks? In other words, how many more mobile apps does a country make once it establishes net neutrality rules? How do the different frameworks affect edge innovation?

Following the net neutrality logic, it hypothesized that countries that made more “hard,” stringent, and strict net neutrality rules with price and traffic controls via regulation or legislation would perform as measured by the number of new mobile apps at the edge versus countries which merely adopted “soft” multistakeholder or voluntary rules.

The investigation found significant statistical support for “soft” voluntary net neutrality rules and increased mobile app innovation, but not for “hard” net neutrality. Countries that adopted net neutrality through legislation and regulation did not display an increase in mobile app development. The results suggest that hard net neutrality policy, such as the rules adopted in the EU and the US in 2015 may not be as effective as purported.

2 Research Design

Policymakers could learn a lot from studying the experience of net neutrality around the world. Over the past decade there have been a series of natural experiments on net neutrality at the nation-state level, providing an opportunity to study the policy instruments and their effects.

Net neutrality rules around the world can be characterized as either “soft” or “hard.” Soft, or voluntary, rules consist of principles, codes of conduct, multi-stakeholder dialogue, and self-regulation. In soft regimes, the telecom regulator plays the role of a facilitator, allowing experimentation and partnerships in the internet value chain but maintaining the ability to intervene if harm occurs.

Hard rules, on the other hand, are mandatory and punitive. Promulgated through legislation by a parliamentary body or regulation by a sector specific national regulatory authority, these rules generally prohibit blocking, throttling, and prioritization as well a price and traffic differentiation.

Beginning in 2009, the Nordic countries implemented voluntary soft rules. For some 5 years these rules were largely successful: Mobile application innovation continued, there were no significant violations, and there was no litigation against regulators.

However, in April 2016, the 28 nations of the European Union and subsequently Norway implemented hard rules through legislation. Significantly, the Netherlands and Slovenia were the first European movers to create a net neutrality law in 2012, following Chile, which in 2010 became the first nation to make such a law. Most nations in Latin America have adopted hard net neutrality rules. India imposed a 2-year ban on zero rating in January 2016^[21] and is still in the process of making net neutrality rules^[22] (See Table 1). Unsurprisingly, the effort to make harder, bright-line rules has been coupled with litigation against regulators in many countries, as bright-line rules frequently conflict with competition principles and constitutional laws.^[23]

A separate study on the mobile app economy notes that about 95 percent of the value of the mobile app economy is concentrated in just 10 markets.^[24] While this was not a study about net neutrality policy, the high-level results suggest that benefits from the policy do not necessarily flow to the countries that make rules. Countries in Latin America that have had hard net neutrality rules for years comprise a small fraction of the value of the mobile app economy, while China, which has no rules, continues to count for an increasing share of mobile app innovation. China became the world’s largest app market by downloads in 2016, with more than 50 billion downloads and some USD $10 billion in revenue.^[25]

3 Data

4 Conclusion

This paper described an empirical study on net neutrality policy around the world, which explored whether net neutrality rules in different countries created more innovation at the edge. Hard rules were not associated with edge innovation, but soft rules were. This does not explain the success of countries such as Russia and China, which not only have no rules, but produce significant innovation at the edge. The work represents a preliminary attempt to assess the policy and should encourage other researchers and regulators to undertake investigations.

For example, in its recent report on the Open Internet to the European Parliament, the European Commission justifies the legislation by stating,

… end users and content application providers express great satisfaction with today’s state of affairs…One of the regulations objectives was to support the internet as an engine of innovation. Today, digital businesses are clearly flourishing as evidenced by start-up clusters in very dynamic places across Europe.^[35]

No survey of end users and content application providers is offered to support such a conclusion. Moreover, it is interesting that the Commission looks to clusters, which existed well-before the legislation, as proof that the policy is working. An important counterfactual had legislation not been implemented. It is also interested why “very dynamic places” are noted as important. Was it not that net neutrality was supposed to work in all places, under all circumstances? Does it work differently in Greece compared to France for example? These are important elements of net neutrality policy which have not been duly addressed by net neutrality policymakers, and suggest areas of further research. Indeed if the number of startups and their concentration is to be measured, it can be noted anecdotally that since the repeal of the 2015 Open Internet rules in the US, the number of startups increased from 34,000 in 2017 to 40,500 in 2018.^[36]

In any case, the research summarized here, a holistic assessment of the experience of net neutrality policy around the world, suggests a nuanced picture.^[37] The peer-reviewed literature shows that net neutrality is not unambiguously good; sometimes the policy could be helpful, but at other times not.^[38] The internet has many multifaceted markets with plenty of opportunities for abusing market power by app stores, operating systems, device makers, and content providers; broadband providers are not the sole actors of concern.^[39] Moreover, a holistic analysis would have described the benefits of competition, partnerships, and differentiation that emerge when actors across the value chain depart from purely “neutral” or pro-edge arrangements. Most important would be the recognition that net neutrality policy is frequently detrimental to consumers,^[40] particularly in prohibiting their ability to tailor their broadband experience across a range of parameters including price, quality, service, and security – not just speed, which the 2015 FCC misleadingly claims is the relevant metric.^[41]

This paper provides a review of empirical research of net neutrality policy and mobile app innovation and highlights the deficiency of the original theory. Some possible inferences can be made for 5G mobile networks. Indeed, the leading countries for the rollout of these new networks are the US, China, and South Korea,^[42] all countries with either soft or no net neutrality rules. Europe is lagging on deploying this technology. While 5G deployment is largely a function of investment and rollout policy, the net neutrality incantation that edge innovation matters more than that the fundamental innovation in networks falls flat in world where people expect to have next generation mobile standards.^[43]