Seems my week to argue with Phil
Seems my week to argue with Phil
Seems my week to argue with Phil

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    A different perspective from Phil's recent network neutrality posts.

    First, I'll agree that network neutrality is a poor second best to the separation of content and conduit we used to have under the old Computer Proceedings that allowed thousands of independent ISPs to bloom and provide competition and independent service.

    That said, there is a reality here. Phil is right this is a complicated issue. But here's why I think we need network neutrality, defined as a prohibition on letting the handfull of vertically integrated companies that control high-speed access leverage take third party payments for “premium” delivery.

    First, a few terms. Phil is right again that the internet isn't “neutral” in the sense of treating all packets the same. But, as market analyst Blair Levin observed in testimony on net neutrality back in May, the greatest danger to optimizing value occurs when you have a non-transitory bottleneck that restricts economic growth. Here, any individual subscriber faces a relatively small number of providers of high-speed broadband. In some markets, that number is limited to one. In most markets, at least for residential services, it's two (telco dsl and cable). Some markets may climb higher. None reach the four equal-sized firms that the standard antitrust metric (“HHI”) consider “moderately concentrated.”

    Now add in that the largest residential providers are vertically integrated (they provide services that compete with what others want to provide over the network). Worse, they are dominant in a relavant neighboring product market, creating opportunities to leverage this dominance and incentive to prevent competition to their dominant product market emerging.

    To translate that into English, cable companies have incentive to prevent real video competition from emerging via the internet, and telcos have incentive to prevent real voice competition. Both companies have the capability and incentive to protect their core video and voice markets, as well as the usual incentive to maximize profit by extorting money from both subcribers and “upstream” content providers. For anyone who has followed the history of the cable industry, this is very well-trodden ground.

    To get around the fact that we have different ways to push bits faster, I distinguish between “subscriber tiering”, where I charge customers more for a bigger pipe, “producer provisioning” in which third party providers invest in methods to deliver stuff faster (like peer-2-peer). I call a high-speed ISP charging third parties for “premium” delivery to its customers “Whitacre” tiering, in honor of the Chair of AT&T who popularized the idea.

    I think a world that permits subscriber tiering and producer provisioning provides a virtuous cycle of ever-expanding bandwidth and innovation in delivery systems. By contrast, I think permitting Whitacre tiering locks us into a pathetically slow architecture. You can read my more complete analysis here. Briefly, and a little technically, allowing ISPs to charge third parties for “premium” delivery reduces down to an auction for speed among numerous providers indifferent to actual user desires. Whitacre tiering therefore creates an incentive for providers to restrict bandwidth to the point where they maximize the value of the “speed lane.” Worse, the ability of the ISP to slow traffic removes the incentive for providers to innovate or pay others(like Akami) for faster transport. Why bother, if the ISP can neutralize the advanatge and capture that revenue for itself? Finally, this will add a whole new level of expensive transactions for third party providers.

    Meanwhile, I am also worried that the ability to charge top dollar for a delivery advantage has very real consequences for democracy. My lengthier analysis here. Again, I'm operating on the assumption that allowing ISPs to offer a premium service amounts to an auction for speed, resulting in much higher prices for transmission of high-bandwidth content with no ability of the user to control preferences. I am not even assuming a deliberate intent to favor a particular message, which cable operators already do in the cable advertising world. I'm basing this analysis on broadcaster behavior under the current rules that require them to offer the same terms to every candidate.

    Finally, I am concerned about something I call virtual redlining. I assume that third party providers will not spend money trying to reach customers they don't find “desirable”, and that access providers will accomodate this. For analogy, consider how advertising rates in broadcasting are now linked to demographic ratings analysis. Companies pay top dollar for advertising on television shows that attract white 18-35 year old males, and pitch their products for that market on shows that command that demographic. Other shows with different demographics get different advertisements and advertisers pay less for these “less desirable” customers.

    I see no reason we will not see the same phenomenom if third parties must pay for premium access to customers. Third party providers of content and services will seek to maximize delivery to “desirable” customers in the wealthiest zip codes. Providers and services targetting particular demographics will pay greater or lesser premiums based the percieved desirability of maximizing access to those zip codes. I leave it as an exercise to the reader to determine if this is a positive market efficiency or not.

    I've read Phil's “Third Way” paper and agree with much of what he says. My problem is that Phil seems to think that bad results would occur only if ISPs acted from an anti-competitive bias. Accordingly, increasing transparency (for both efficiency and ease of enforcement) and prohibiting anticompetitive discrimination solve the possible problems while allowing markets to capture efficiencies.

    I don't think that's true. Bad results can happen, as I hope my arguments above (and spelled out in more detail on the posts to which I have linked) show, even if we follow Phil's recommendations of having clear and neutrally available “premium” policies. Because allowing ISPs to sell premium access to thrid parties, indifferent to user preferences, creates its own set of negative consequences independent of any discriminatory intent.

    I am also deeply suspicious of the supposed superiority of post hoc enforcement to prophylactic regulation. (Unsurprisingly, I've written at length on this subject as well.) Prophylactic rules let parties know in advance what they can and can't do. Combined with swift enforcement for clear violations, they save a lot of time in negotiations. By contrast, making rules on a case-by-case basis via after the fact adjudications encourages parties to keep pushing the envelope on prohibitted behavior until they get smacked by the agency. Then they complain that the agency didn't give them fair warning.

    Please note that prohibiting “Whitacre tiering” does not mean the end of innovation or even the end of tiered provisioning. What I object to is allowing third parties to establish user preferences. I, at least, would be happy with a system that lets users designate certain third parties for premium delivery (essentially a specialized form of “subscriber tiering”). For example, this could be something like Comcast's “power boost,” but where a user pays to get available excess capacity for downloads on a transaction by transaction basis. This would concievably capture many of the advantages that Phil and others forsee in differentiated offerings, but not create the negative incentives and negative consequences I've described above. It would also resolve the problem of the so-called “power users,” where a handful of users absorb the vast amount of available capacity on the network.

    I recognize that my policy prescription may cut off some potential benefits. Not all deals between ISPs and content or service providers would necessarily be bad. But, trying to predict the behavior of the various actors, I think we have a much better internet, and therefore a much better public policy, if we keep the internet open and don't let last mile providers get in the way.