Privatization and Commercialization of the Internet Infrastructure: Rethinking Market Intervention into Government and Government Intervention into the Market
Brett M. Frischmann
Yeshiva University - Benjamin N. Cardozo School of Law
Columbia Science and Technology Law Review, Vol. II, 2000-2001
This article analyzes the following general question: Will the full range of end-users be adequately supplied with the Internet in the long-term to satisfy their particular end-uses if the Internet infrastructure remains privatized and commercialized? In other words, if the Internet infrastructure is a necessary input for producing various public and private goods (i.e., in facilitating different end-uses), will procurement and commercial markets adequately supply society with Internet infrastructure? Of course, such a general question cannot be answered in this article, but analyzing the question itself sheds light on fundamental misconceptions regarding our society's exaltation of market-based provision of goods and services in general, and of the Internet in particular. In order to even approach the question, we need to understand what the Internet is, how the Internet is produced, who the end-users are, how the end-users use the Internet, and what we mean by adequate. This article develops a framework for understanding these preliminary questions, and accordingly, is only the beginning of what should be a substantial theoretical and empirical (re)evaluation of the respective roles of government and the market in supplying society with the Internet. As Stiglitz, et al. recently highlighted in their study, The Role of Government in a Digital Age, there is a growing need for re-thinking the role of government by policy-makers, the press, the business community, and academics. In tandem with that analysis, the role of markets must be reevaluated as well.
Part I provides a brief, descriptive account of the evolution of the Internet. It focuses on the establishment, management, and eventual privatization, commercialization, and decommissioning of NSFNET, the precursor of today's Internet. Although initially developed to achieve noncommercial research-oriented objectives, under the management of the NSF the network was gradually transitioned to accommodate commercial interests. Importantly, the roles of government, industry and academia shifted in line with shifts in the expected applications of the emerging technologies. Thus, as the technologies evolved, so did the expected applications and objectives behind continued development efforts, and not surprisingly, so did the roles of government and industry. Furthermore, the transitions were prompted by, among other things, the recurring need to upgrade the Internet infrastructure in the face of growing congestion problems.
Part II provides an economic model of Internet infrastructure, focusing on both its intrinsic and extrinsic nature. Intrinsically, Internet infrastructure is a sometimes rivalrous, nonexcludable good. Often, it acts as a public good and is nonrivalously consumed by end-users, but during peak usage times, it acts as a common pool resource that is rivalrously consumed. In addition, the Internet infrastructure has been built upon an end-to-end architecture, which essentially means that the infrastructure does not discriminate among data packets it carries. This design principle promotes the interconnection of networks (rather than fencing) and focuses application development and innovation on the demands of end-users. Extrinsically, the Internet infrastructure acts as an input in the production of a wide range of goods - private, public, and everything in between. Both the intrinsic and extrinsic nature of the Internet infrastructure should guide an assessment of how society should rely on the market, the government, or both to provide it with the Internet.
Part III then applies the model developed in Part II to assess both the past and the future of the Internet, focusing primarily on the Internet's interconnection infrastructure. In looking at the past, as described in Part I, Part III.A evaluates the justifications for shifting from government ownership and control to private ownership and control: Was privatization and commercialization of the NSFNET justified? Then, by looking at the potential congestion and public goods problems on the Internet in the future, Part III.B considers whether a shift back to some degree of government provision will likely be justified: Will the market effectively supply Internet infrastructure to the public? This Part is a preliminary theoretical assessment of market and government provision of Internet infrastructure that sheds light on what we mean by adequate. As explained below, adequate provision does not equate with efficient operation of the market because social demand for Internet infrastructure will be underrepresented by market demand over the long run. Moreover, if the underlying design (or architecture) of the Internet infrastructure is driven solely by commercial concerns, even in the theoretically ideal market scenario, the Internet commons likely will disappear in future upgrades of the infrastructure.
Part IV takes a more focused look an Internet-dependent application where individuals are the end-users creating important public goods - the public domain for information. This example illustrates a particularly important dynamic. The Internet increases and enhances the opportunities for individuals to contribute meaningfully to the production of public goods. However, in order for individuals to produce these public goods, they must purchase an essential input - the Internet, whether access, interconnection, posting capacity, bandwidth, etc. - from commercial firms. On one hand, individuals may have difficulty assessing social demand for the public goods they produce. On the other hand, even if they could assess this downstream social demand, they may lack the incentives to pay market rates upstream for the necessary Internet inputs. While this dynamic is well known with respect to public goods as a general matter, the synergistic role of the Internet and individuals in the production of public goods is a topic deserving of future study.
Finally, Part V concludes with some observations. Given the tremendous expectations society has for the Internet, privatization, commercialization and deregulation should be tempered by a more careful consideration of social welfare. There is no doubt that market actors have contributed immensely to the evolution of the Internet in terms of investment, products, services, and infrastructure, and furthermore, that the government's light-handed approach to regulation has given producers and consumers substantial freedom to innovate and to self-regulate with respect to many issues affecting the Internet community in ways that have produced substantial social benefits. This article does not challenge either of these general observations. Nor does it directly advocate increased government regulation. The basic and rather straightforward point is that even if the market were to perform perfectly, in terms of allocating resources and satisfying consumer demand, it would nonetheless undersupply society with Internet interconnection infrastructure over the long-run because market demand for the Internet is but some fraction of social demand.
Number of Pages in PDF File: 70
Date posted: November 12, 2003