Who Pays For An Inter-Network? (part 3)

This blog continues the response, in parts one and two, to the US Department of Justice’s recent arguments that net neutrality should not be protected.

Paying so that certain kinds of traffic get a higher class of service on the internet is like paying extra to be the first passenger to get off a plane. That may save a few minutes, but as the hostess in Snakes On A Plane points out, economy customers land at the same time as the ones in first class. If you keep getting off planes and boarding new ones, then maybe those saved minutes can add up to something significant (ignoring the fact that the next plane may be delayed or leave without you… but you get the idea.) However, as soon as you change to a carrier where you have not paid for priority treatment, or to one which treats all customers the same, then you stop getting any advantage. So how much is priority treatment on a network really worth to the customer? Probably not that much. It only becomes worthwhile if the standard level of service becomes so shabby, so slow and unreliable that nobody wants to suffer it unless there is a very large price differential, and if customer’s traffic stays on the one or few networks where the customer is prepared to pay for priority treatment. If the price differential is small, or if the traffic goes elsewhere, it all becomes rather uncompelling as a sales proposition. If the differentials are small, then everyone can pay for priority treatment. Which means everybody just paid a little bit more for the same class of service they would have got if nobody paid a little bit more. Remember, the only thing worth paying for here is the right to jump ahead in the queue. If everybody has the right to jump ahead in the queue, then everyone just ends up in the same place in the queue. So the price differential has to be severe enough that some will not be prepared to pay it, and are willing to wait whilst others go first. On the other hand, the value of jumping ahead is exactly determined by how many people you jump ahead of. To be worth a lot, you need to jump ahead of a lot. Which means not many customers will be paying for premium treatment. That only begs the question of just how much extra revenue can be generated for network carriers this way.

Think of the possible class of service price differentials that networks could introduce much like the price differentials between flying first class or economy. Introducing that kind of differential to pricing and service may help the network carriers make more money, but it would be overall negative for the economy. Commerce thrives on open lines of communication, which is why the internet plays host to big business. Damaging those lines of communication through inefficient economic models for distributing resources and encouraging investment, would ultimately hurt the wealth and standard of living enjoyed by all citizens. The damage will be two-fold if it discourages new entrepreneurs to enter the market and encourages entrepreneurial businesses to establish themselves in other countries offering a high standard of undifferentiated internet service. Throughout history, relying on unfettered free markets to deliver an efficient communication and transport infrastructure, be it roads, rail, telegraph, mail, airlines, telephony or the internet, has failed as often as it has succeeded. In these sectors, even government monopolies can be more efficient than free market competitors. The lack of innovation and of a competitive spur is offset by how a comprehensive and reliable service encourages more total throughput. Not many people travel on US trains any more because they do not join up, do not run many services and do not go to many destinations. In contrast, a high quality telephone service that is always available encourages people to make many more calls than would a service which worked well only sporadically or where the quality depends on who you call. The internet is popular because it consistently works well and is consistently getting better. If, on the other hand, the internet fails customers sometimes, chances are the customers will use it less often in general, and not discriminate between which parties are poorly supported and which are well supported. So the short-term advantages enjoyed by network operators that differentiate service may well be outweighed by the reduction in long-term growth.

The relative importance placed on short-term over long-term profits is one of the reasons why free markets are sometimes poor at providing adequate investment to large infrastructure projects. This is where governments, with their overriding concern for the health of the whole economy, and not just of one business, often need to intervene. That does not mean the US government needs to start paying for network investment straight from taxpayer’s pockets. But it does mean that the FCC needs to consider the interests of its nation, the USA, and not just of some businesses, when reviewing the arguments for and against a neutral net. The FCC needs the freedom to judge that there may be no overall harm in forcing the network operators to carry the burden of investment, especially if all that means is that customers pay higher for a top-grade undifferentiated internet. That price will be worth paying if those same customers also benefit from lower prices for everything else – movies, food, accounting services, information, shoes… anything that can be sold over the internet – as a result of fostering a more efficient marketplace. The danger is that the FCC will look at the costs to telcos and to customers from a narrow perspective. If they look at internet services in isolation from the goods and services sold over the internet, then they may help to force down the cost of internet services, but force up the price of everything sold over the internet.

Whole nations suffer the cost of poor infrastructure, which slows the pace of economic growth and encourages entrepreneurs to move to more lucrative parts of the world. The US DoJ is right to focus its concern on the level of investment in the internet, as higher levels of investment should help the economy at large. However, the DoJ is wrong to assume that a hands-off approach from government automatically leads to the highest levels of investment. Part of the DoJ argument is that the lobby for net neutrality is not able to show a current need for intervention. The argument is entirely circular; as nobody currently differentiates service, the net is currently neutral. That hardly demonstrates that there is no need to intervene to keep it neutral. Net neutrality is an argument to ensure the status quo, of undifferentiated service, does not change. The DoJ is capricious when it argues a change to differentiated services would be good for the customer and for investment, whilst also arguing that there is no need to intervene because there have been no problems with the undifferentiated services so far. That is like saying the current scenario works well, so things will be better if we change it! I much prefer the argument that if it ain’t broke, don’t fix it.

Governments should be willing to intervene to ensure the best possible infrastructure, as was the case with the US Postal Service, and its founder, Benjamin Franklin. In the case of net neutrality, the best decision for the US economy would be to enforce it, irrespective of the way this distorts the market for the network carriers. Free market ideology does not always guarantee the best financial returns – just look at Enron. If the US turns its back on net neutrality, it risks making an error that will erode the economic advantage it has gained from its pre-eminence on the internet. It may further reinforce a shift in the worldwide balance of power and wealth already being driven by dwindling energy resources, off-shoring, and the flight of capital due to simultaneous over-regulation (think Sarbanes-Oxley) and under-regulation (think subprime crisis). The US can ill-afford to also lose its dominance over the 21st century marketplace for communication, media and trade that is the internet. However, narrow considerations in the debate over the neutral net pose just that threat to the economic well-being of the USA.

The next blog will be the fourth and final part of this series on the neutral net. It discusses why a healthy and neutral internet is vital not just for the US economy, but for the whole world.

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.