Who Pays For An Inter-Network? (part 2)

Yesterday’s blog covered why the US Department of Justice (DoJ) had got it completely wrong by arguing that neutral net laws might stifle investment and hurt customers. Today we should take a look at why they came to the wrong conclusion.

If you read the full DoJ submission to the FCC on net neutrality it is not hard to find the main principle that sits behind all their arguments. Unfortunately, it is a crude example of political ideology, rather than a well-considered economic analysis befitting an institution supposedly working for the best interests of the populous. Here is the key paragraph in full:

“The Department submits, however, that free market competition, unfettered by unnecessary governmental regulatory restraints, is the best way to foster innovation and development of the Internet. Free market competition drives scarce resources to their fullest and most efficient use, spurring businesses to invest in and sell as efficiently as possible the kinds and quality of goods and services that consumers desire. Past experience has demonstrated that, absent actual market failure, the operation of a free market is a far superior alternative to regulatory restraints.”

There you go. Simple really. Free market good, regulation bad. There is no need to do any fancy maths or economics equations, or take into account the views of free market champions like Google, Amazon and eBay ;) Do not get me wrong. I am no communist. The free market is the right answer, most of the time. Not all of the time. Here are some examples where the free market was not so successful for the US economy:

  1. The biggest mobile handset manufacturer in the world, Nokia, comes from Finland, not the US. The reasons why are pretty simple: Finland is an affluent society with high levels of education but where people are geographically distributed, and Europe got its act together and agreed excellent common standards and rules for mobile networks whilst the U.S. was encouraging an unfettered free market.
  2. The smartest guys in the room, the ones running Enron, loved the free market. Kenneth Lay, CEO and Chairman of Enron, was a fervent campaigner for deregulation of the energy market, despite being employed in the 1970’s by the federal energy regulator. He was so keen on trading in free markets that Enron diversified from trading energy into trading communications bandwidth. Their free market instincts won them many accolades in the US; Fortune magazine named Enron as “America’s Most Innovative Company” for six years in a row. Only one thing was wrong: the Enron business model was based on a complete fiction. Cue blackouts in California, financial collapse and many workers who lost their pensions.
  3. The US Postal Service… whoops, no, that is a government monopoly.

How peverse, then, that the DoJ cites the US Postal Service as an example of the benefits of being unregulated:

“The U.S. Postal Service, for example, allows consumers to send packages with a variety of different delivery guarantees and speeds, from bulk mail to overnight delivery. These differentiated services respond to market demand and expand consumer choice.”

Well, for a start, this rather seems to contradict the DoJ’s own mantra that the free market is best. The US postal market is highly regulated. The US Postal Service is a monopoly for many the services it provides and is a branch of the US government. However, it is easy to understand the DoJ’s analogy. They are equating packets of data sent over a network with the physical packets sent through the post. The DoJ hence concludes that offering a variety of classes of service, at a variety of different prices, is best for the customers sending and receiving those packets, whether they be physical or data. There is only one thing wrong with the analogy. The US Postal Service is a network. It can control the quality of service from the time a letter is posted to the time it is delivered. The internet is not a network. It is an inter-network (the clue is in the name). No one network can control the quality of service experienced by a user of the internet any more than the US Postal Service can punish the Postal Corporation of Kenya for losing a letter sent from New York to Nairobi.

Crude political ideology and inappropriate argument by analogy: these are tell-tale signs that the US Department of Justice lacks the competence to understand the implications of its recommendations. But perhaps that is no surprise. Should we really expect lawyers to think hard about what works well in practice, as opposed to what words provide the best cover for legal backsides? The DoJ is probably more concerned with the fact that it lacks the competence to argue with the big network players. The strange thing here, though, is that they do not need to. All they need to do is to balance the arguments of the big network players with the arguments of the big business that favours intervention to preserve a neutral net. For some reason, those arguments, from the Googles and Amazons who also have a lot at stake, have not been held in high regard. One aspect of this is strange. If the DoJ has a political motivation, it is clearly not just erring on the side some big business interests versus other big business interests. It is also erring against the consumer. Like it or not, network carriers are not popular with customers in the way that the Googles and Amazons are. That is hardly reason to believe that the networks are automatically wrong, but it does play into the hands of cynics who accuse government agencies of serving narrow interest groups instead of society as a whole. That argument is simplistic, but in this case I think it is pretty straightforward to show how it is right.

In the next part of this multi-part blog, it is time to discuss the wider economic implications of making some internet traffic appear faster by putting the brakes on other internet traffic.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.