A History Lesson For Those Advocating Network Neutrality Laws

from the unintended-consequences dept

Mon, Nov 10th 2008 2:04pm — Timothy Lee

Over at News.com, Declan McCullagh writes that Barack Obama's election as the next president of the United States has bolstered the hopes of those hoping to impose network neutrality regulations on the Internet. While Obama's key advisors have been cagey about precisely what the new administration's stance on the issue will be, it's a safe bet that we'll be hearing a lot about the issue in the coming months. This seems like a good time for a long-overdue conclusion to my ongoing series on network neutrality regulation.

One of the things that has been missing from the network neutrality debate has been a sense of how it fits into the broader history of government regulations of network industries. It's easy to imagine that the Internet is so new and different that historical comparisons just aren't relevant. But as we've seen with copyright and patent debates, we can learn a lot from historical experiences that may not seem immediately relevant.

I think this is equally true in the network neutrality debate. While the specifics of network neutrality are unlike anything that has come before, the general principles involved—non-discrimination, competition, monopoly power, and so forth—have actually been with us for more than a century. Indeed, today's network neutrality debate bears a striking resemblance to the debate that led to the very first American regulatory agency: the Interstate Commerce Commission, which was created to regulate the railroad industry.

The railroad industry was the high-tech industry of its day, and it had many of the same kinds of transformative effects on the 19th Century American economy that the Internet is having today. As with today's Internet, some parts of the railroad market were highly competitive, while other markets were served by only one or two firms. And people had concerns about the behavior of the largest railroad firms that echoed those that people have about large Internet providers today: that they restrict competition, discriminate among customers.

In 1887, Congress passed legislation (you can read an abridged version here) that is strikingly similar to the proposed network neutrality legislation that we're debating today. The Interstate Commerce Act declared it illegal to charge different prices to different customers for "the transportation of a like kind of traffic under substantially similar circumstances and conditions." It also said that railroads may not "make or give any undue or unreasonable preference or advantage to any particular person, company, firm, corporation, or locality, or any particular description of traffic." Compare that to the leading network neutrality proposal during the last Congress, which would have required network providers to deliver content on a "reasonable and nondiscriminatory" basis without imposing "a charge on the basis of the type of content, applications, or services made available."

Unfortunately, the story of the Interstate Commerce Commission does not have a happy ending. Grover Cleveland appointed a railroad ally named Thomas M Cooley as the first chairman of the ICC. The ICC was widely regarded as toothless for its first couple of decades, largely rubber-stamping railroad industry decisions. Things got even worse after the turn of the century, when the ICC began actively discouraging competition in the railroad industry. The ICC had the power to decide when new firms were allowed to enter the railroad industry, and by the 1920s, the FCC was actively working to discourage competition and push up railroad rates. In the 1930s, the ICC gained authority over the infant trucking industry, and used its authority to slow the growth of the trucking industry to protect the railroads from competition. By 1970, things had gotten so bad that a Ralph Nader report described the ICC as "predominantly a forum at which transportation interests divide up the national transportation market."

What went wrong? The story is too long and complicated to fully describe in a blog post, but I think there are two key lessons. First, the authors of the ICA dramatically underestimated the complexity of the railroad industry and the difficulty of government oversight. One of the reasons the ICC was relatively toothless in its early years is that it was completely overwhelmed with paperwork, as dozens of railroads sent it information about thousands of routes. The railroad industry was simply too complex and dynamic for a few Washington bureaucrats to even understand, to say nothing of regulating them effectively.

Second, the ICC's failure is a classic example of what economists call "regulatory capture": the ability of special interests to gain control of the regulatory process and use it to their advantage. Because the railroads cared more about railroad regulation than anyone else, they were adept at getting their allies appointed to key positions at the commission. Over time, the ICC not only ceased to be an effective watchdog of consumer interests, but actually began actively defending the interests of the railroads at consumers' expense. For about six decades—from about 1920 to 1980—the ICC pursued policies that reduced competition and raised prices in the railroad industry. And when trucking emerged as a potentially disruptive innovation, the ICC helped to limit its growth and slow the corresponding decline of the railroad industry.

The story of the ICC is not an isolated case. Similar stories can be told of the Civil Aeronautics board, which limited competition in the airline industry until the 1970s. And, of course, there's the example of that the FCC actively promoted AT&T's monopoly in the telecommunications market until it was broken up in 1984.

We can certainly hope that Congress has learned from the experiences of the 20th century and will avoid the most egregious mistakes it made in the 20th century. But it's worth remembering that many of the conditions that led to the ICC's problems are still with us. Today's FCC, like the ICC of the 20th Century, has a revolving door between the commission and the firms they regulate. And the Internet, like the railroad industry of the 19th century, is extraordinarily dynamic and complex. As a result, there's a real danger that if Congress gives the FCC the power to regulate the Internet, it will make things worse, either because it cannot keep up with the Internet's rapid evolution, or because industry incumbents will succeed in getting their own allies in key positions within the commission. Either way, the results could be very different from what network neutrality proponents are hoping for.

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Filed Under: history, net neutrality, regulations, regulatory capture, trains, unintended consequences

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chris (profile), 10 Nov 2008 @ 2:38pm

then how do you fix the problem?
passing laws will make things worse, not passing laws will make things worse. things are bad because there is no competition in the market, but encouraging competition just makes things worse too. just how do we stop things from getting worse?

writing letters to coin operated congress critters isn't going to work. voting doesn't appear to have helped. just what are we supposed to do then? pray? sacrifice a goat? say pretty please?

the comcasts and the at&t's of the world have explicitly stated that they want to charge extra for services to work properly on their networks. how do we stop this from happening when there are only two providers (cable and telephone) for high speed internet access?
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- Christopher Smith, 11 Nov 2008 @ 4:26am
  
  Re: then how do you fix the problem?
  This and other comments here highlight what the underlying issue is: Lack of competition.
  
  If we had meaningful broadband competition, then net neutrality would indeed be a non-issue. However, the local telco and cable companies have built, on the backs of their explicit monopolies, enormous infrastructure that can't be practically duplicated by competitors.
  
  Government regulation, for better or worse, created this position where we now have broadband duopolies in most cities. Just dropping regulations while these companies control the infrastructure is sending abuse an engraved invitation.
  
  It seems to me that there are exactly three ways to keep this kind of nonsense under control:
  - Have cities manage a dumb-pipe infrastructure like they manage water and roads. (Or, equivalently, have a separate dumb-pipe-only company handle the last mile like Texas's electrical setup.)
  - Require telcos and cable providers to rent out space and dry loops to CLECs, as used to be the case until the current not-exactly-neutral FCC commissioners got in.
  - Institute net-neutrality regulation and price controls, essentially moving back to where cable was when the government actually required something back in exchange for a monopoly.
  I don't like any of these solutions much, but it seems to me that this situation probably qualifies as an area where private enterprise would not fairly manage a widespread infrastructure system, and so the cities should install last-mile dumb pipes and permit any service provider to colo at the terminators. I'm not entirely comfortable with the idea, but it seems to be the best of the options out there.
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Anonymous Coward, 10 Nov 2008 @ 2:40pm

Very interesting post. Thank you.

Out of curiosity, can you give some examples of the sort of things that the ICC did to hamper trucking?
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- Tim Lee, 10 Nov 2008 @ 6:06pm
  
  Re:
  From the mid-1930s until the late 1970s, you needed a "certificate of convenience and necessity" before you were allowed to ship anything across state lines. The ICC kept prices high by refusing to grant new certificates any time it felt that there was "too much" competition. In the early years, this meant limiting the growth of the trucking industry to keep railroad profits up. Later, the trucking firms themselves gained influence on the commission and used their power to keep new trucking firms from entering the market and pushing down prices.
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- TX CHL Instructor (profile), 11 Nov 2008 @ 7:11am
  
  Re: hampering trucking
  There is an interesting little tidbit in the rules and regs for railroads that prevents them from acting as a "land ferry". If I was an independent trucker, I would love to be able to drive my rig onto a flatbed, and spend a cross-country trip snoozing (or internet surfing, or whatever), even if the cost was equal to the cost of fuel and depreciation on the same trip over the road. That cost would probably be MUCH less. A real no-brainer.
  
  But that's illegal.
  
  First, you can't ship the tractor portion of the tractor-trailer rig at all (It's classified as "hazardous"), and if you want to ship the trailer portion, it has to meet 2 conditions: 1) it has to be on a published tariff list, and 2) the trucking company has to be the owner of the rail car used (I believe they also have to supply the labor for mounting and un-mounting the trailers). This guarantees that small trucking firms are unable to use the substantial time and energy savings available from rail shipping.
  
  One simple change in the law could reduce the use of diesel fuel in this country by more than 30% practically overnight, as diesel tractor-trailer rigs would then use rail whenever possible for long hauls. Not to mention a substantial reduction in the wear and tear on the interstate highway system. Or for that matter, an increase in the income of rail companies.
  --
  www.chl-tx.com
  Without the 2nd Amendment, the rest of the document is wishful thinking.
  Which, of course, is why Liberals want to repeal it.
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  - nasch, 11 Nov 2008 @ 9:46am
    
    Re: Re: hampering trucking
    I don't think they would use rail whenever possible. As one trucker put it when interviewed on NPR (quoting from memory), "Sure [railroads] can get it there for cheaper, but they can't get it there on time." This is due to increasing congestion on the railroads. It's already cheaper to ship by rail, so companies use trucks when either the railroads don't go where they need to go, or are too slow. So altering those regulations would probably be a good idea, and would probably not have a dramatic effect on the amount of truck shipment in the absence of any other changes to the rail network.
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Nick, 10 Nov 2008 @ 3:10pm

Nix the tubes
So... The Internet is a series of tracks!
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ultra, 10 Nov 2008 @ 3:12pm

i've read about this railroad analogy before, i think in the context of a book or article review. if there's more to read on this, could you link me to it? thanks.
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- Tim Lee, 10 Nov 2008 @ 6:03pm
  
  Re:
  There's not a ton of information online, unfortunately, but this is a great summary of the ICC's early years. And here is the Ralph Nader report. There are a few other books on the subject but I can't remember the titles offhand.
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David, 10 Nov 2008 @ 3:13pm

great post. As a student of traditional antitrust law, this really makes sense, although I had previously thought that network neutrality would be a good idea. This is a very strong argument.
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Anonymous Coward, 10 Nov 2008 @ 3:24pm

Net Neutrality or Competition?
I'm part of the anti-regulation camp. I assume that if you give someone an abusable power then it will be abused. Net neutrality would either create a beautocratic drain on the government and consequently society, or it will create a legal clusterf*** as one group sues another over violations of the neutrality law.

I don't think I have any answers for the world, but if we get some real competition or a few providers that really WANT to just be dumb pipes and so wouldn't care where anybody is going or what they are doing then net neutrality might not matter.
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Jon, 10 Nov 2008 @ 3:31pm

Thanks, Timothy. Forwarding this to a couple of my friends.

We should be afraid when the government promises to regulate health care, the money market, telecommunications, the energy industry, the food industry, and now the Internet itself. This type of regulation has been at the heart of the Democratic platform for quite a while. It always looks good on paper, but you have to have some perspective.
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- Tim Lee, 10 Nov 2008 @ 6:19pm
  
  Re:
  Thanks!
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Steve R. (profile), 10 Nov 2008 @ 3:36pm

The Converse Arguement
Good article, it correctly reviews regulatory shortcomings. But there is also an underlying logical disconnect that can be paraphrased as: "Since police have not eliminated crime, the police are ineffectual and should be disbanded." Clearly, even if regulatory oversight is imperfect it may be better that the alternative.

The alternative; we are currently experiencing. The collapse of many of our financial institutions was the direct result of unfettered capitalism. We have already seen many internet providers abuse their "freedom" to act without regulatory oversight. Comcast for example under the pretense of "traffic shaping" has arbitrarily blocked (delayed, held-up, whatever) mail (packet) delivery. By analogy do we really want the post office to arbitrarily throw our mail in the trash because it is simply too inconvenient to deliver or a competitor may benefit???

This post correctly points out the shortcomings of regulation. What bothers me with those opposed to net-neutrality is that they never seem to want to guarantee that they would conform to net neutrality concepts. Instead they insist on hiding behind the tired mantra of "flexibility" which opens the door to arbitrary and capricious actions, witness our financial meltdown. If they do not want regulation, why aren't the anti-net-neutrality advocates not offering any guarantees as an alternative to regulation? The implied conclusion is that they are not being honest in disclosing what they will do and that they want the unilateral power to do whatever they want whenever they want and without consequences. To paraphrase Tim, the results of unfettered corporate power could be very different from what the consumer has been lead to expect concerning net neutrality. A middle ground needs to be worked out.
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- kiba, 10 Nov 2008 @ 3:46pm
  
  Re: The Converse Arguement
  "The result of unfettered capitalism" is a myth. Did you forget the federal bank? They're the one who regulate the interest rate of this country. Don't forget that the government get to "pump" money. If anything, they did not show that unfettered capitalism is a failure. What they did show is that the regulation and their "easy money" policy failed.
  
  If you want unfettered capitalism, the market would be left to mint its own money, control the interest rate, and more. When banks fail, they will have no government intervention to save them. That's true unfettered capitalism.
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  - Steve R. (profile), 10 Nov 2008 @ 4:03pm
    
    Re: Re: The Converse Arguement
    What Went Wrong? – The Only Explanation You’ll Ever Need To Read
    
    Agency’s ’04 Rule Let Banks Pile Up New Debt
    
    NYT wrote "“It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick M. Hills, a Republican who was chairman of the S.E.C. under President Gerald R. Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.” (emphasis added)
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    - kiba, 10 Nov 2008 @ 4:53pm
      
      Re: Re: Re: The Converse Arguement
      Your first article mentioned that the feds drop interest rate. So there is STILL some regulation. So you still can't actually say this is a result of unfettered capitalism.
      
      My point still stand.
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- John Gault, 10 Nov 2008 @ 4:26pm
  
  Re: The Converse Arguement
  At no time has the United States ever had "unfettered Capitalism". The economy in this country has always been a mix of quasi-capitalism and government oversight/control.
  
  If you have ever read Atlas Shrugged it provides a pretty good narrative on what will happen under too much government regulation, and uses the railroad industry as an example.
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  - Hank Rearden, 10 Nov 2008 @ 5:54pm
    
    Re: Re: The Converse Arguement
    Asking the question WHY is the fundamental underpinning of all these processes. Asking the question WHY enough times will finally expose the true nature of any decision. Pg 344 in my copy of A.S.
    
    Alan Greenspan, being a good student of Rand's, relied on the belief in man's need for Productive Achievement as the underlying guide during his tenure as Fed Chairman. He forgot Lord Acton's famous quote - "Power tends to corrupt, and absolute power corrupts absolutely"�as it applies to all forms of government and leadership. This led to Greenspan's admission he was "mistaken" about the importance of Productive Achievement over greed.
    
    He didn't ask WHY enough times, leading him to assume, and we all know what that spells out.
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    - Steve R. (profile), 10 Nov 2008 @ 6:53pm
      
      Re: Re: Re: The Converse Arguement
      The New York Times quotes Alan Greenspan "“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform."
      
      History teaches us that regulation can be counter productive but history also teaches that the free market periodically becomes unbalanced too and crashes. Power corrupts absolutely whether you are a government bureaucrat or a corporate executive. To selectively structure "facts" to claim that a certain aspect of our economy, such as regulation, is bad while conveniently overlooking equally egregious failures of the free market is not a very scientific inquiry.
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- Eldakka, 10 Nov 2008 @ 9:17pm
  
  Re: The Converse Arguement
  We have already seen many internet providers abuse their "freedom" to act without regulatory oversight. Comcast for example under the pretense of "traffic shaping" has arbitrarily blocked (delayed, held-up, whatever) mail (packet) delivery.
  
  There are ways to prevent this without 'regulating' the internet. For example, if it was made illegal, say under privacy laws, to 'deep inspect' packets, then it wouldn't be possible (legally) to identify types of data to determine whether it is data 'worthy' of being let through or throttled.
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  - nasch, 11 Nov 2008 @ 9:51am
    
    Re: Re: The Converse Arguement
    How is that not regulating the internet?
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Spudster, 10 Nov 2008 @ 4:37pm

They'll never learn
Great article. I mainly stick to coding, and these legal things hurt my head. All I know is that anything the government does to impede improvement will only backfire severely. They have no idea of the power self-taught computer programmers have. Especially when a group get together. To this day I'm impressed with the ingenuity I see come about. There is one big difference between railroad tracks and the internet. I can make my own tracks, on my own terms. As much as the government likes to think they can control what streams across the internet, they don't have the man power to do so.
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Fred von Lohmann, 10 Nov 2008 @ 4:41pm

But the FCC already = ICC
I agree with much of Tim's commentary, but he overlooks the fact that the FCC has already declared that it has the same power over the Net that the ICC once enjoyed over railroads. As part of the order disciplining Comcast for its BitTorrent discrimination, the FCC made it clear that it believes it already possesses the regulatory authority to police "net neutrality".

So when someone calls for Congressional action on Net Neutrality now, it would be to reign in the FCC, which I assume Tim would agree is a good thing.
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- Tim Lee, 10 Nov 2008 @ 6:08pm
  
  Re: But the FCC already = ICC
  Well, I think there's a pretty good chance the courts will rein in the FCC. But if they fail to do so, then I would be more sympathetic to Congress stepping in to overturn the FCC's power grab. OTOH, Congress has a way of screwing up everything it touches, so even there I'd want them to proceed cautiously.
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Anonymous Coward, 10 Nov 2008 @ 6:15pm

It wont be long till you are remembering the "good old days" when the internet was useful and affordable.

As you bounce your grandkids on your knee you will lament
"Why I can remember when you could look up anything you were interested in. They called it Google - and it didn't cost extra."

As you suck on your dentures, "Now days you are lucky if you find anything of value on the internet, its just full of ads and merchandise.
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Adam Thierer, 10 Nov 2008 @ 6:30pm

read and heed Fred Kahn
The definitive text on all this is Alfred E. Kahn brilliant 2-volume "Economics of Regulation." In the 1970s, Kahn, a life-long Democrat, worked with Ted Kennedy, Ralph Nader, and Stephen Breyer to deregulate the airline market and abolish the Civil Aeronautics Board because it had become a completely cartelistic, anti-consumer mess. In "Economics of Regulation," one finds the following words of wisdom (and caution):
When a commission is responsible for the performance of an industry, it is under never completely escapable pressure to protect the health of the companies it regulates, to assure a desirable performance by relying on those monopolistic chosen instruments and its own controls rather than on the unplanned and unplannable forces of competition. [...] Responsible for the continued provision and improvement of service, [the regulatory commission] comes increasingly and understandably to identify the interest of the public with that of the existing companies on whom it must rely to deliver goods.
We would be wise to heed the lessons of history before we repeat the same errors in the Internet Age.
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Tubes Stevens, 10 Nov 2008 @ 11:14pm

Plain and simple, ATT, Comcast, Time Warner Cable, and Verizon are monopolies in many areas. They are also venturing into content distribution. So, you either bust up these monopolies into a thousand pieces, or you do nothing, or you regulate.

Doing nothing means these cats will do their level best to make the internet the nextgen cable TV. Sorry Techdirt, you don't rate high enough, so you won't be seen by a majority of web users. Most will be limited to ATT's "Tech Smirk" blog.

So regulate or bust them into shards. I don't care which.
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- arbulus, 17 Nov 2008 @ 6:36am
  
  Re: Tubes Stevens
  Exactly. This is the crucial fact that people need to understand. The ISPs are monopolies in the vast majority of their markets. "Free Market" does not exists when a monopoly is in play. The Web suffers because of this. And if they are not forced to play fair, the Web will only suffer far more. Consumers will suffer. Either prevent the monopolies, break them apart and force competition, or impose strict neutrality regulation. That is the choice here - the only choice.
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Fung Ngo, 11 Nov 2008 @ 1:26am

Shock!
So let me get this straight. Are you actually saying that those who are empowered to legislate or guide legislation abuse that power and make laws to benefit themselves? Who woulda thunk it?

I've got a good idea, why don't we have a really, really big government that has lots & lots of power over our lives. Surely then they'll be benevolent! I mean, if a little government fails, let's have lots more.

My apologies if the sarcasm doesn't make it at this time of morning. What I'm saying is let's just have the market work out the 'net. There's a chance many people will be unhappy, but with the government involved, it's not a chance, it's a guarantee.
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DG Lewis, 11 Nov 2008 @ 7:02am

Railroads and Telecom
Ultra @#4: "i've read about this railroad analogy before, i think in the context of a book or article review. if there's more to read on this, could you link me to it?"

Andy Odlyzko at the University of Minnesota (formerly at AT&T Labs) has written about this fairly extensively. Check out his publication list; in particular, "The evolution of price discrimination in transportation and its implications for the Internet" goes into this for a number of transportation systems (canals, turnpikes, railroads), and the "more extensive manuscript" even more so.

Odlyzko rulez.
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Stephen, 11 Nov 2008 @ 10:41am

Prevent Aquisitions
As an answer to competition.. What if companies were not allowed to purchase one another? Wouldn't this drastically reduce the rate at which monopolies accrue? Or what if this were limited by industry, a trucking company can not eat another trucking company?

The lack of adequate due diligence in acquisitions should be enough to disprove CEOs self interest in protecting shareholders. Tyco looks like a monument to ego. Who can adequately vet, buy, and integrate a dozen companies a year for several years?
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DMNTD, 11 Nov 2008 @ 3:11pm

BLAH BLAH
Deal with it...the true regulation comes from the PEOPLE...if things get so to a point on whatever matter..>WE have to stand up and disown the idea, situation. Smaller government means win win its not hard to understand. This is just as bad as people thinking moving out of America will save you from the jack boots...haha wow.
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realizePhiladelphia, 13 Nov 2008 @ 3:53pm

Check out our blog on net neutrality, including the article "Net Neutrality in a Nutshell" by visiting http://web.illish.us/?p=648
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