Network Neutrality and the Walled Garden

Let me make a few final points about Steve Schultze’s network neutrality post. Steve writes:

The last-mile carrier “D” need not block site “A” or start charging everyone extra to access it, it need only degrade (or maintain current) quality of service to nascent A (read: Skype, YouTube, BitTorrent) to the point that it is less useable. This is neither a new limitation (from the consumers perspective) nor an explicit fee. If one a user suddenly lost all access to 90% of the internet, the last-mile carrier could not keep their business (or at least price). But, discrimination won’t look like that. It will come in the form of improving video services for providers who pay. It will come in the form of slightly lower quality Skyping which feels ever worse as compared to CarrierCrystalClearIP. It will come in the form of [Insert New Application] that I never find out about because it couldn’t function on the non-toll internet and the innovators couldn’t pay up or were seen as competitors.

I think there are several problems with this line of argument. First, notice that the kind of discrimination he’s describing here is much more modest than the scenarios commonly described by network neutrality activists. Under the scenario he’s describing, all current Internet applications will continue to work for the foreseeable future, and any new Internet applications that can work with current levels of bandwidth will work just fine. If this is how things are going to play out, we’ll have plenty of time to debate what to do about it after the fact.

But this isn’t how things have been playing out. If Steve’s story were true, we would expect the major network providers to be holding broadband speeds constant. But there’s no sign that they’re doing that. To the contrary, Verizon is pouring billions of dollars into its FiOS service, and Comcast has responded by upgrading to DOCSIS 3.0. Maybe we’ll begin to see major providers shift away from offering faster Internet access toward offering proprietary network services instead, but I don’t see any evidence of that.

Also, it’s worth remembering that many broadband providers already have a proprietary high-bandwidth video service. It’s called cable television and it’s explicitly exempted from network neutrality rules by Snowe-Dorgan. If the worry is that Comcast will choose to devote its bandwidth to a proprietary digital video service rather than providing customers with enough bandwidth to download high-def videos from the providers of their choice, that ship sailed a long time ago, and no one is seriously advocating legislation to change it. Note also that Comcast’s 250 GB bandwidth cap would not have been illegal under Snowe-Dorgan. Network neutrality legislation just doesn’t address this particular concern.

The reason broadband providers are likely to continue offering fast, unfettered access to the Internet is that consumers are going to continue demanding it. Providers may offer various proprietary digital services, but those services just aren’t going to be a viable replacement for unfettered Internet access, any more than AOL and Compuserve were viable replacements for the Internet of the 1990s. Broadband providers are ultimately in business to make money, and refusing to offer high-speed, unfettered Internet access means leaving money on the table.

Finally, this paragraph seems to misunderstand the concept of settlement-free peering:

Lee makes the argument that the current norm of “settlement-free” peering in the backbone of the internet will restrict last-mile providers’ ability to discriminate and to create a two-tiered internet because they will be bound by the equal treatment terms of the agreements. This is not supported by practical evidence, given the fact that none of the push-back against existing discriminatory practices has come from network peers. It is also not supported by sound economic reasoning. It is certainly not in backbone-provider E’s business interest to raise prices for all of its customers (an inevitable result). But, assuming E does negotiate for equal terms, the best-case scenario is that E becomes a more expensive “premium” backbone provider by paying monopoly rents to last-mile provider D, while F becomes a “budget” backbone provider by opting out (and hence attracts the “budget” customers).

“Settlement-free” means that no money exchanges hands. If D and E are peers [this example assumes that D is a “last mile” backbone provider like Verizon and E and F are competitive “tier 1” providers such as Level 3 or Global Crossing], that by definition means that E pays D nothing to carry its traffic, and vice versa. So I don’t understand what Steve means by “negotiate for equal terms.” If D had the ability to charge E for interconnection, it would be doing so already. The fact that they are peering suggests that D does not believe it has enough leverage to get any money out of E. If E is interconnecting with D for free, it’s hard to see how F could undercut that.

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