Rationale for Regulating the Internet as a Public Utility

So the FCC voted today to regulate the internet as a public utility, reclassifying it as a telecommunications service under Title II of the Telecommunications Act. What struck me most about it is that, according to this NY Times article, 75% of households have only one choice of broadband providers, while 25% have two or more to chose from. Its pretty clear to me that internet service is whats called a "natural monopoly." Now as the name implies, these occur naturally through a competitive marketplace. It takes such a large investment and scale to get started and operate, that only one player can efficiently be in the field. Once a firm has that scale, there's no way to compete. As a service provider grows in size, they can operate more efficiently. This is why (contrary to what free market economics would suggest) internet speeds actually go up as the number of available providers goes down.

Now the problem with all of this is twofold. When there is only one provider they become "price-makers" meaning they control the price and the only thing you can do is not buy it. But like oil, internet service is hard to do without. This means that there will be less subscribers than if it operated like a normal market, leading to what's called a "deadweight loss," and the cable suppliers will be able to harvest outsized profits. Theoretically, we want the most output for the lowest price, which is not the case if left unregulated. So here's to hoping your internet rates go down.