Saturday, March 11, 2006

Net neutrality and rents in the value chain

Today's Economist (11th March 2006) makes the point that we should avoid knee-jerk reactions when it comes to regulating the Internet to ensure equal access ('net neutrality').

The issue is the desire of US carriers investing in core and access networks to charge content providers such as Google and Yahoo a premium rate for carrying their traffic - at a higher QoS. The carriers make the point that they are investing heavily in new fibre networks, especially in access, and it is difficult to cover these investments based solely on household monthly broadband subscriptions. There are moves in Congress to pre-emptively regulate against this.

At the moment, everyone who connects to the Internet gets a single 'best effort' service, but due to historic massive investment in Internet infrastructure, this 'best effort' is actually pretty good. "Too good", the carriers say, but nevertheless, how could they get any buyers for putatively 'superior' classes of service?

The carriers say they will not actively damage anyone's traffic as they introduce superior classes of service at various price-points. However, a superior service class has to buy something extra, so the most likely story is that the carriers will slowly permit utilisation levels on the Internet to rise until the resulting congestion separates out an increasingly tardy 'best-effort' experience from superior 'gold', 'silver' and 'bronze' services.

The implications of this go beyond the attempt to directly extract economic rents from content providers upstream in the value chain. After all, Google et al could choose to buy their Internet access from many other ISPs. AT&T and Verizon will have to modify the current Internet peering arrangements, charging their peers to carry ingress premium traffic: look out for the arrival of a settlements model.

Now, there is nothing wrong in principle with offering a portfolio of products at different price points - train operators also sell first and second class tickets. The problem is monopoly pricing - exploiting market power. The forthcoming North American duopoly rings a few warning bells.

The best antidote to monopolistic practices is competition rather than regulation. I hope those rumours about Google quietly buying up a lot of transcontinental dark fibre, and investing heavily in WiFi/WiMAX access networks turn out to be true.