Sunday, February 22, 2015

What is Net Neutrality Really About?

Let me start by stating my position.  I am very passionate about a low cost, open Internet.  I've shared my opinion with the FCC like thousands of others and advocate for Net Neutrality openly.  However that's about as far as I can go without starting to get into the micro-issues which comprise the real challenge behind Net Neutrality that the average person doesn't understand.  Unfortunately it's not a cut and dry, this or that issue.  Let me shed some light by providing a perspective I have yet to read or hear about in the mainstream or even tech media.

Initial Issue: Fast Lanes
This is the primary concern consumer advocates have latched on to.  Using examples from Comcast and others of intentionally slowing down Netflix traffic; they argue that once one type of data is treated differently than another, the Internet is no longer a level playing field.  Advocates believe the Internet is a tremendous resource driving the global economy because of its equal access.  It's this equal access, proponents argue, which enabled companies such as Facebook, Twitter, eBay and Amazon to blossom.  If Facebook had to pay extra for its bandwidth to get better service, then it would never have survived.  Countering this argument, if Facebook provides a value to their user, their business model should assure their ability to pay for the bandwidth, otherwise there's no market for a Fast Lane.  I too am concerned when any company can arbitrarily advantage themselves by interfering with the service of another company.  Would you react positively to Microsoft Internet Explorer redirecting you to Bing when you tried to access Google's search engine?

Consider who is opposing Net Neutrality: large communication companies who provide consumer Internet access: Verizon, AT&T, Comcast, and Time Warner Cable.  Each of those companies provides, or soon will provide, Internet based video streaming services to compete with Netflix.  Proponents argue this is why Comcast actively throttled Netflix bandwidth, to advantage their own service.  Is that fair?

Netflix doesn't get Internet access for free; they pay for it just like subscribers to Comcast and Verizon do.  And the consumer certainly isn't getting Internet for free last time I checked my TWC bill.  You need to understand what constitutes the Internet.  Large ISP's (Verizon, Comcast, Time Warner, AT&T, CenturyLink, Level 3, Cox Cable, etc.) interconnect their networks to form what we think of as the Internet.  Way back in the early days they decided when connecting to each other there would be an even balance of trade between traffic moving in and out.  As a result the cost implications would be zeroed out and therefore there was no need to bill each other for the traffic switching between their networks.  

Today Internet traffic is not an even balance of input and output.  In fact it's heavily skewed as outflow from producer to consumer.  When the producer and consumer have the same ISP there's no issue.  However once traffic needs to move from one ISP's backbone to another, the receiving ISP now sees a revenue opportunity to re-balance their business model.  They want to use their leverage, their consumer Internet subscriber base which cannot be accessed without their backbone, to extract a payment.  Legally they can't refuse access, so instead they simply limit the interconnection bandwidth unless the producer is willing to pay a premium, the Fast Lane.  However isn't their subscriber already paying for the traffic as part of their monthly fee?  In fact, isn't access to services like Netflix precisely what consumers are paying for?

The answers are clearly YES.  

Again, this is about generating more revenue.  So what are the options for an ISP to increase revenue?  If they don't charge the consumer, the only other option is charging the producer.  Let's assume Fast Lanes are good and play that scenario forward.  Netflix shells out money to the ISP's for the Fast Lanes and as a result Netflix is forced to raise it's subscription fee.  In the end the consumer still pays.  However what's interesting is that ONLY the consumers of Netflix pay; everyone who doesn't use Netflix isn't impacted.  

Let's walk through the other option, charging consumers directly.  There are essentially two models available: 

Option 1: 'Cable TV' Model
In this model, consumers' monthly rates are increased to generate the additional revenue desired by the ISP's.  In doing so, EVERY consumer ends up paying for the traffic of those who consume the most data.  We end up with a subsidy situation analogous to ESPN in Cable TV.  Today the average cable subscriber pays around $6 for ESPN.  However if only those people who watch ESPN paid, the cost per subscriber would be over $40 and thus cost prohibitive.  Cable TV built it's business on a shared burden model just like insurance, sharing costs across the broadest base possible.

Option 2: 'Data Plan' Model
Instead of offering subsidies, the other option is to bill consumers based on actual consumption.  Most likely the ISP's would adopt a mobile phone data model whereby the consumer would pay for a specified amount of data traffic per month with overage fees for exceeding the limit.  People like predictability.  Comcast, Time Warner Cable and others tried this model and it failed miserably.  Opposing the idea, invariably someone argues a 'Data Plan' model disadvantages the poor by disproportionately impacting their scarce income.  In truth, tech geeks including me, who constitute the majority of bandwidth use, enjoy being subsidized by those in the bottom half of the spending curve.  Did you happen to notice this is the same financial model as charging the producers directly?  Only those who use the service pay, but by charging the producer the model is significantly more efficient and therefore will be cheaper to deliver than bringing a 'Data Plan' model to consumer Internet subscriptions.  I not an insider, but I have to believe the failure of 'Data Plan' attempts is the primary driver behind Fast Lanes; achieving the same objective by another means.

Whoa!  What did I just admit to?  Yep.  So it would appear by advocating for Net Neutrality I'm just a selfish oaf who wants to benefit from the subsidies of the common man by forcing ISP's into a corner where Option 1 is the only option.  If that were true, understand I wouldn't be the only one.  According to research on the side of Net Neutrality, someone has determined that Time Warner Cable runs a 97% profit margin on their Internet services, using the numbers provided by TWC in their financial reporting to the SEC.  They're not exactly a charity.

When considering the original argument, supporting Net Neutrality to ensure equal access, the better model is actually Option 2 or the existing controversial Fast Lane model.  In truth the large ISP's are, in essence, subsidizing the Internet by not charging interchange fees to carry traffic.  So is it unfair of them to now ask companies like Facebook and Netflix, who generate billions in revenue via advertising or subscription fees, to pay their debt?  It quickly devolves into a circular argument, because without Facebook, Netflix et al there would be very little consumer demand for the Internet and thus a small subscriber base.

So what's the REAL problem?
Since revenue generation is at the heart of the issue, the real question driving the Net Neutrality debate is whether or not the profitability of ISP's should be limited.  However that question obscures a more fundamental question which is rarely raised in the debate but is the reason I advocate for Net Neutrality: should a monopoly be restricted in its rates?  

When it comes to broadband Internet access, an area where the US lags much of the world and something considered a fundamental requirement of a strong economy today, most consumers have little to no choice in ISP.  For example at my house, to get greater than 5mbps I have one choice: Time Warner Cable.  By definition that's a monopoly.  TWC has worked hard over the past two decades to prevent other companies from entering their markets, just as all the other communications companies have done.  I was involved in a project in 2000 when a new company, Carolina Broadband, secured almost $300M in funding to develop a broadband offering in North Carolina.  They were fought at every turn by Bell South and Time Warner and eventually evaporated.  
Monopolies are a perfectly legitimate business model, but only when properly regulated.  The free market requires competition to work.

As a result, Net Neutrality is a legitimate argument ONLY in those markets where there is no competition for broadband access, such as my market.  To foster competition, the FCC should learn from California's tentative approval of the Comcast, Time Warner Cable merger.  In it they effectively force Comcast to open access to their network to enable competition, the same approach advocated by the cable companies to ensure access to the telephone network 20 years ago.  Of course since the enemy of my enemy is my friend, the big ISP's have banded together to fight any such approach on data networks.

What's it all mean?
In the end, network bandwidth is a limited resource just like everything else is in the world: money, water, healthcare and NFL caliber talent who obey the law.  In Econ 101 you learned about supply and demand; the greater the demand the higher the cost until supply can re-balance the equation. Unregulated monopolies have a long history of restricting supply to drive revenue.  We don't need Net Neutrality, what we need is Broadband Competition.

And that is what Net Neutrality is REALLY all about!

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