The Reality of Neutrality

I guess it wasn’t hard to figure out what my blog today would be about.  Netflix’s CEO has blogged and made some strong comments about the need for a very broad interpretation of “net neutrality”.  Netflix in fact wants something even more “neutral” than the FCC order that was overturned on appeal would have provided.  Their goal, in my view, is to force the FCC to demand Comcast accept such a position as a condition for their TWC merger.  So is this a good idea?

Let’s get something straight from the first.  Netflix wants a free ride on everyone’s infrastructure to boost their profits.  Comcast wants every content provider to turn over their entire gross profits to the retail ISPs.  Everyone in this process is out for themselves, just like always.  I’d love my Internet service to be totally free.  I’d love my vacations to be free too, and my health care and my lawn care…we all like free stuff.  But we all know we can’t go into a BMW dealer and drive away scott free with whatever car we like and that we’re going to have to pay the bills.  Let’s leave everyone’s latent opportunism out of this.

The problem that’s in focus here is simple.  OTT players connect to the Internet through large wholesale players or directly peer with access providers.  They dump content into the access networks—Comcast, Verizon, and so forth—and they generally do not pay incrementally for the traffic they generate.  Yet the ISPs have to carry it, and as video traffic increases it increases the cost of transporting it.  That forces return on infrastructure investment lower, which discourages that investment.  This old business model, called “bill and keep” has been around from the first days of the Internet, and it worked at first because we didn’t have fast enough broadband to support the kind of demand that would strain networks.  Later on, when consumer broadband came along, we still didn’t have a traffic source big enough to cause a problem—till video came along.

The FCC, Congress, or any regulator lacks the power to order a business to operate at a loss.  Whatever anyone says, the simple truth is that the current cost/price curves for operator infrastructure can’t be sustained for more than a couple of years.  The current model cannot be extended as is because of that, so what we’re arguing about is whether we can force operators to the breaking point or whether we will force somebody to pay.  Netflix knows that as well as I.  Even the FCC’s Neutrality Order, now toast, didn’t forbid notions like allowing content providers to pay for QoS (which would inevitably lead to that happening) or settlement for traffic handling among providers.  It just discouraged that by saying that it would need a justification.  So the FCC also knew that eventually something would have to happen.  By default, the only outcomes of the current situation is steady deterioration of the Internet or increased Internet access prices on consumers.

Which is what Netflix and content providers want, but they want the increased prices to be on all consumers.  If an access provider like Comcast can charge Netflix for transport, Netflix will pass the increase along to its customers, some of which will stop using the service because of the hike.  But if Comcast increases everyone’s Internet charge whether they use Netflix or not, the per-customer increase on Netflix customers is less because the cost is spread over everyone, and there’s no benefit for a customer to drop Netflix because they’ll pay the “content tax” anyway.  That’s what this is really about.  To turn Netflix’s analogy back, we’re asking the FCC and Congress to make all the toll roads free by charging everyone for them, whether they use them or not.  That’s not how transportation works, nor can it be how the Internet works in the long run.

You hear that we need neutrality to spur Internet innovation, right?  Well, that’s crap.  What is happening is that we’re discriminating against Internet innovation in the network sense of the Internet.  We’re creating an OTT ecosystem with an inexhaustible and incrementally free food supply and wondering why everything is getting eaten.  We should be innovating in infrastructure, where it’s almost impossible to get startups funded, and one reason we don’t is that it’s easy money to be an Internet eater and not so easy to be an Internet farmer.

How about those who throw out the US ranking in broadband?  That’s crap too.  First off, how does making an access carrier transport video at a loss incent them to invest more?  But second, the most important statistic in broadband speed is demand density, the dollar network spending opportunity per square mile.  If we normalize the US density to a value of 1.00, we find that Europe on the average has four times the density of the US and some high-density Asian markets have as much as 20 times the density.  We’re behind because we’re spread out, so we need policies that encourage infrastructure investment, not deter it.

Why is Comcast out in front here?  Why do they always seem to be the guy poking a stick in someone’s eye, regulatorily speaking?  The answer is simple; cable infrastructure has lower marginal ccess efficiency than other broadband delivery options.  Yes, multi-customer cable has a lower “pass cost” than FTTH or even deep FTTN, but the problem is that if you fill up a given cable span with streamed video, you force the cable provider to segment the span.  Say a thousand-customer span costs a hundred bucks per pass.  Force that to divide into five spans of 200 customers and you have to run four additional fiber feeds to the span head ends.  Cable is the most worried about video growth, as they should be.

So here’s my point.  We have reached the stage where some EU carriers are offered more incentive to invest in infrastructure in developing countries than in their home service area.  We are giving all operators an incentive to invest more in VoD than to invest in the Internet.  The problem of the Internet’s finances can be fixed easily and fairly by letting the market do what it wants.  We should let ISPs charge for premium delivery, and charge either the consumer or the content provider.  We should allow ISPs to require settlement on traffic passed to them.  We should only prevent the discrimination against a specific type of traffic or a particular source, based on anything other than volume of bits for traffic engineering and charging purposes.  Then the providers who try to gouge will find themselves losing customers or customer QoS and they’ll respond appropriately.  This is likely to increase costs a bit for us, and to discourage some OTT-based startups, so a few VCs and Internet entrepreneurs will make a bit less.  But it will create a healthy industry in the long term, and at a lower cost than we’ll eventually face by being selfish and stupid in the near term.

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