Roadblocks to the “Fast Lane”

by on June 22, 2006 · 18 comments

Reading Jim Gattuso’s post about Google and network neutrality, it occurred to me that Eric Schmidt’s argument here only makes sense if we assume that the broadband companies are run by morons:

Today the Internet is an information highway where anybody–no matter how large or small, how traditional or unconventional–has equal access. But the phone and cable monopolies, who control almost all Internet access, want the power to choose who gets access to high-speed lanes and whose content gets seen first and fastest. They want to build a two-tiered system and block the on-ramps for those who can’t pay.

I think it’s safe to say that Verizon, Comcast, et al want to make as much money as possible. So her’s my question: If you were a telco executive trying to maximize revenue from your shiny new fiber network, how would you set your prices?

Here’s one thing you wouldn’t do: set a flat rate of $100 million for any company wanting to access your “fast lanes,” and consign everyone else to the slow lane. It’s quite true, as Schmidtz says, that such a policy would screw up the Internet and stifle entrepreneurship. But it’s also a really stupid strategy, because it forgoes a lot of revenue from smaller companies. And although none of them individually can pay as much as Google or Microsoft, they’re likely to make up the majority of revenue opportunities, thanks to the long tail.

No, if you’re a monopolist trying to maximize revenue, you want to charge the big guys a lot more than you charge the little guys. How do you figure out who’s a big guy and who’s a little guy? A straightforward metric is the amount of traffic they generate. Charge 10 cents per gigabit, say. Google pays millions. The startup with a thousand customers pays pocket change.

Now, I can envision all sorts of variations. Maybe big guys would get some kind of bulk discount so their per-bit costs are a bit lower. Or maybe they’ll really soak the big boys, while they let the smallest companies ride for free (after all, their tiny bills might not be worth the trouble to collect, and today’s small companies are tomorrow’s large companies).

But what I think is clearly nonsense is the idea that the “fast lane” would be priced in a way that put it out of reach for small companies. The telcos are greedy, not stupid, and cutting off a lot of potential customers is leaving money on the table.

  • Ned Ulbricht

    The telcos are greedy, not stupid [...]

    That’s a nice theory, but I’m afraid history suggests that the large telcos have often acted “stupid”.

    Just for example, consider ISDN.

  • Ned Ulbricht

    The telcos are greedy, not stupid [...]

    That’s a nice theory, but I’m afraid history suggests that the large telcos have often acted “stupid”.

    Just for example, consider ISDN.

  • Anonymous

    I have to agree with Ned.

    Last year I read a delightful anecdote in a book. Two men had discovered a more efficient method of storing frozen vegetables. As a result, they were able to lower the packaging costs significantly … which magically resulted in a lower retail price for frozen vegetables that used the new technology.

    How did their competitors react?

    How do you think?

    They immediately lowered their prices. A price war followed. This continued for a while until a board member at the start up asked one of the technical wizards how much the competition was willing to lower its prices.

    What do you think the technical wizard said in response? He said, “They can’t lower them much more because it’s not rational.”

    Businesses, which are run by people, are not always rational. I think my mother taught me a valuable lesson, when she said that I would live a happier life as soon as I lost the foolish expectation that humans had a penchant for the rational. I’ve certainly made my share of mistakes. I started a business at a young age, when I had absolutely no business acumen. Rational? Nope. Did I have the common sense to seek out advice from learned professionals? Don’t bet on it. Did I fail? Of course.

    There’s another great anecdote I should relate. AT&T spent a few hundred million dollars trying to get into the computer business. So did XEROX. Did these companies have the money to get into the computer business? Yes. Did they have a brand name that meant “computers” to the market?No. Did they waste something like a combined $1 billion? Yes.

    I suppose if you had asked anyone at AT&T or XEROX if wasting a billion dollars was their stated intent, they might have said no. It’s not common sense to waste a billion dollars.

    Of course this little argument in fantasy doesn’t matter. The billion was spent and both intiatives failed.

  • Anonymous

    I have to agree with Ned.

    Last year I read a delightful anecdote in a book. Two men had discovered a more efficient method of storing frozen vegetables. As a result, they were able to lower the packaging costs significantly … which magically resulted in a lower retail price for frozen vegetables that used the new technology.

    How did their competitors react?

    How do you think?

    They immediately lowered their prices. A price war followed. This continued for a while until a board member at the start up asked one of the technical wizards how much the competition was willing to lower its prices.

    What do you think the technical wizard said in response? He said, “They can’t lower them much more because it’s not rational.”

    Businesses, which are run by people, are not always rational. I think my mother taught me a valuable lesson, when she said that I would live a happier life as soon as I lost the foolish expectation that humans had a penchant for the rational. I’ve certainly made my share of mistakes. I started a business at a young age, when I had absolutely no business acumen. Rational? Nope. Did I have the common sense to seek out advice from learned professionals? Don’t bet on it. Did I fail? Of course.

    There’s another great anecdote I should relate. AT&T; spent a few hundred million dollars trying to get into the computer business. So did XEROX. Did these companies have the money to get into the computer business? Yes. Did they have a brand name that meant “computers” to the market?No. Did they waste something like a combined $1 billion? Yes.

    I suppose if you had asked anyone at AT&T; or XEROX if wasting a billion dollars was their stated intent, they might have said no. It’s not common sense to waste a billion dollars.

    Of course this little argument in fantasy doesn’t matter. The billion was spent and both intiatives failed.

  • James Gattuso

    I agree Tim. People often forget that even (especially?) a smart monopolist wants the biggest market possible.

    Of course, as the others point out, the telcos could be stupid. Very possible. But then why all the worry? Stupid companies tend to be very easy to beat in the marketplace. That’s a basic contradiction that pops up in regulation arguments. How can the same firm be too stupid to look out for its own interests, but at the same time be a cunning predator who will escape normal market constraints? Possible I suppose, but I’d guess very rare.

  • James Gattuso

    I agree Tim. People often forget that even (especially?) a smart monopolist wants the biggest market possible.

    Of course, as the others point out, the telcos could be stupid. Very possible. But then why all the worry? Stupid companies tend to be very easy to beat in the marketplace. That’s a basic contradiction that pops up in regulation arguments. How can the same firm be too stupid to look out for its own interests, but at the same time be a cunning predator who will escape normal market constraints? Possible I suppose, but I’d guess very rare.

  • http://abstractfactory.blogspot.com/ Cog

    How can the same pundit be too stupid to see the structural anticompetitive features of the broadband Internet market, but at the same time be a cunning… oh, never mind, James, you’re not very cunning.

    As Ed Felten writes, if SBC wants to charge Google, rather than vice versa, this is ipso facto evidence that SBC has greater market power than Google. No network neutrality critic has ever rebutted Felten’s analysis on this point; they find it much more convenient to repeat that broadband markets are Smithian. Perhaps if you repeat it enough times, it will become true.

  • http://abstractfactory.blogspot.com/ Cog

    How can the same pundit be too stupid to see the structural anticompetitive features of the broadband Internet market, but at the same time be a cunning… oh, never mind, James, you’re not very cunning.

    As Ed Felten writes, if SBC wants to charge Google, rather than vice versa, this is ipso facto evidence that SBC has greater market power than Google. No network neutrality critic has ever rebutted Felten’s analysis on this point; they find it much more convenient to repeat that broadband markets are Smithian. Perhaps if you repeat it enough times, it will become true.

  • Azael

    Tim Berners-Lee has a short and to the point post up about net neutrality.

    Net neutrality is this:
    If I pay to connect to the Net with a certain quality of service, and you pay to connect with that or greater quality of service, then we can communicate at that level.

    That’s all. Its up to the ISPs to make sure they interoperate so that that happens.

    Net Neutrality is NOT asking for the internet for free.

    Net Neutrality is NOT saying that one shouldn’t pay more money for high quality of service. We always have, and we always will.

    Which is so simple one has to wonder why pundits keep on trying to frame it as something far different from what they are actually saying.

  • Azael

    Tim Berners-Lee has a short and to the point post up about net neutrality.

    Net neutrality is this:

    If I pay to connect to the Net with a certain quality of service, and you pay to connect with that or greater quality of service, then we can communicate at that level.

    That’s all. Its up to the ISPs to make sure they interoperate so that that happens.

    Net Neutrality is NOT asking for the internet for free.

    Net Neutrality is NOT saying that one shouldn’t pay more money for high quality of service. We always have, and we always will.Which is so simple one has to wonder why pundits keep on trying to frame it as something far different from what they are actually saying.

  • http://technoptimist.blogspot.com/ Duncan Frissell

    I still haven’t figured out how if I can get net connectivity from: my RBOC, AT&T (Covad), other DSL packagers, my local cable monopoly, any of the wireless phone companies (some of which aren’t RBOCs), satellite, and the power company; net connectivity is anything but highly competitive?

  • http://technoptimist.blogspot.com/ Duncan Frissell

    I still haven’t figured out how if I can get net connectivity from: my RBOC, AT&T; (Covad), other DSL packagers, my local cable monopoly, any of the wireless phone companies (some of which aren’t RBOCs), satellite, and the power company; net connectivity is anything but highly competitive?

  • xplat

    Duncan:

    You should feel very lucky to live in a place where the broadband internet market is highly competitive.

    Where I live, I cannot get DSL or powerline internet. My only choices are one cable company, wireless phone and satellite. Wireless phone and satellite are not competing in the same market as cable, however, so even if I could use these (and I can’t, really–I barely get cellular reception at all and as a renter I wouldn’t be able to install my own satellite dish with a view in the appropriate direction) they would cost over twice as much for the cheapest offerings. Therefore I am at the mercy of a cable company with a service agreement which is frankly abusive as written, and which they do not even feel constrained to follow their end of, if I want any kind of broadband service at all.

    My parents were in an even worse situation until recently–there was no provider available to them in the basic broadband tier (cable, DSL, powerline). Now they finally have at least cable available.

    When I say wireless phone and satellite are in a different market, I really mean that. Satellite providers are the providers of last resort, they have a unique form of infrasructure which is high-priced but allows them to have a very broad reach. However, it doesn’t give them remotely the capacity to compete as a major player in all of the areas they can reach. Therefore, they have to either raise prices out of the reach of most interested consumers, artificially restrict their service area, or introduce rationing or lotteries. Which would you do?

    As for cellular internet, its selling point is more-or-less ubiquitous portability, and the markup for that is immense. It’s really a different service just as broadband internet is a different service from dialup internet.

  • xplat

    Duncan:

    You should feel very lucky to live in a place where the broadband internet market is highly competitive.

    Where I live, I cannot get DSL or powerline internet. My only choices are one cable company, wireless phone and satellite. Wireless phone and satellite are not competing in the same market as cable, however, so even if I could use these (and I can’t, really–I barely get cellular reception at all and as a renter I wouldn’t be able to install my own satellite dish with a view in the appropriate direction) they would cost over twice as much for the cheapest offerings. Therefore I am at the mercy of a cable company with a service agreement which is frankly abusive as written, and which they do not even feel constrained to follow their end of, if I want any kind of broadband service at all.

    My parents were in an even worse situation until recently–there was no provider available to them in the basic broadband tier (cable, DSL, powerline). Now they finally have at least cable available.

    When I say wireless phone and satellite are in a different market, I really mean that. Satellite providers are the providers of last resort, they have a unique form of infrasructure which is high-priced but allows them to have a very broad reach. However, it doesn’t give them remotely the capacity to compete as a major player in all of the areas they can reach. Therefore, they have to either raise prices out of the reach of most interested consumers, artificially restrict their service area, or introduce rationing or lotteries. Which would you do?

    As for cellular internet, its selling point is more-or-less ubiquitous portability, and the markup for that is immense. It’s really a different service just as broadband internet is a different service from dialup internet.

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