Neutrality: Shifting Sand or Quicksand?

Net neutrality has been a thorny issue for the industry from the first, and the importance of finding a rational policy increases as network operators come closer to the point of “ARPU turnaround”, when the revenue-per-user curve flattens and then falls.  Since traffic per user is increasing, this turn-around point spells the time when future service profits from the current model are now unlikely.  “Neutrality” closes off some future service models, and so could threaten investment.  It also protects consumers and the industry against anti-competitive behavior, price gouging that’s incentivized by falling profits.

The FCC’s neutrality ruling is still under appeal, but it’s one that neither side of the issue (pro-investment or pro-consumer) seems to like.  Thus, both sides have been pushing their agendas in their own favorite ways.  For those opposed to neutrality (largely Republicans), that’s meant introducing bills or amendments designed to curtail or roll back FCC actions.  For supporters of neutrality the reaction has been more grass-roots, and one prong of the effort has been to put pressure on telcos in particular to vote on neutrality compliance at the shareholder level.  We’ve had developments in both these spaces this week.

The SEC has ruled that neutrality is a significant policy issue and can therefore fairly be put to shareholder vote.  That doesn’t necessarily mean that it will, and even if it were it doesn’t mean it would pass.  In fact, my model says that shareholder votes on neutrality would likely spawn a campaign to explain the issues in terms of stock price, and that would likely result in a defeat for neutrality advocates.  Certainly the large-bloc holders would vote against it.  However, the efforts here would likely push the topic to the forefront (again), and that might have an impact on telco planning.

The other side of this is the legislative efforts to roll back or restrain neutrality, and here the situation is reversed in that anti-neutrality forces have won a victory.  But here again the impact of that victory is unlikely to be meaningful.  Attempts to amend the spectrum legislation before Congress to require that the FCC not impose any new neutrality rules on the services offered with the spectrum were withdrawn.  That doesn’t mean that neutrality rules will be extended to wireless, nor that the efforts to prevent that will end.  It means more debate.

Forgetting the politics of this for the moment (likely a good idea these days if you want to address anything rationally), the question here is how to insure that the Internet remains a fertile ground for innovation.  Unbridled neutrality doesn’t do that, nor does the complete lack of rules to insure neutral behavior.  I think that the place the FCC has gone astray here is in the ruling on third-party payment and settlement.  We should allow websites to pay for priority handling of their traffic and also allow for inter-provider settlement for traffic-handling, because that would be in the best interests of the consumers.  It might hurt the VCs, a group who have IMHO become not much (if at all) better than the bankers who gave us the 2008 crash, and it’s likely no coincidence that Genachowski is from that genre.  I’ve heard rumors that he may leave the FCC in 2013 even if Democrats retain control, and that could be a good thing for the debate.

This week, we got news that ad appearances in streaming video doubled in 2011, and that raises two significant questions.  First, why?  Second, does this mean that we actually need a renewed debate on neutrality?  The “why” of the process could be either recognition that streaming is becoming a real factor in viewing for at least some market segments, or the result of broader application of TV Everywhere principles.  The “do we need to talk” question, I think, has a clear answer.

Anything that drives up traffic without driving up revenue reduces the ROI for the network operator and disincentivizes infrastructure upgrades.  What’s interesting is that until the last year or so, streaming was largely “free”, meaning that there was little revenue generated by it and so little potential for settlement.  Then suddenly Netflix burst on the scene and became the largest single source of traffic.  Now we see paid advertising in streaming opening the door for ad-sponsored use of the Internet as a delivery vehicle.  Add Aereo into the picture, a company who wants to make a money-making business out of taking free-over-the-air onto free-streaming, and you have a picture of a behavior trend that’s shifting from being symbiotic to being parasitic.  Yes, the Internet is creating innovation, but is that innovation focusing on how to game the pricing model or advance the technology?


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