Net Neutrality Means No More iPhones

by on February 11, 2010 · 24 comments

The Reason Foundation releases my policy brief today looking at the effect network neutrality regulation will have on wireless applications and services.

Much has been written about the deleterious effect that regulating network management would have on broadband investment and innovation, and when applied to wireless, which is what FCC Chairman Julius Genachowski proposes to do, problems would only get worse.

The non-discrimination principle that Genachowski seeks to mandate would prohibit service providers such as AT&T, Verizon Wireless, T-Mobile and Sprint from using their network resources to prioritize or partition data as it crosses their networks so as to improve the performance of specific applications, such as a movie or massive multiplayer game. Yet quality wireless service is predicated on such steps. The iPhone, for example, would not have been possible if AT&T and Apple did not work together to ensure AT&T’s wireless network could handle the increase in data traffic the iPhone would create.

The irony is that the argument for network neutrality is that it would prevent service providers from controlling the so-called bottleneck between the Internet and end-users. The worry is that carriers are in a position to pick and choose winners or block competing players by choosing to improve or impede the performance of their respective applications, although there is no pattern of this behavior to justify preventative regulation.

The iPhone story is relevant because, while Apple and AT&T collaborated, it was Apple that was calling the shots while AT&T took most of the risk. Fred Vogelstein addressed the significance of this in “The Untold Story: How the iPhone Blew Up the Wireless Industry,” which appeared in January 2008 issue of Wired, January 2008.

After a year and a half of secret meetings, [Apple Chairman Steve] Jobs had finally negotiated terms with the wireless division of the telecom giant (Cingular at the time) to be the iPhone’s carrier. In return for five years of exclusivity, roughly 10 percent of iPhone sales in AT&T stores, and a thin slice of Apple’s iTunes revenue, AT&T had granted Jobs unprecedented power. He had cajoled AT&T into spending millions of dollars and thousands of man-hours to create a new feature, so-called visual voicemail, and to reinvent the time-consuming in-store sign-up process. He’d also wrangled a unique revenue-sharing arrangement, garnering roughly $10 a month from every iPhone customer’s AT&T bill. On top of all that, Apple retained complete control over the design, manufacturing, and marketing of the iPhone. Jobs had done the unthinkable: squeezed a good deal out of one of the largest players in the entrenched wireless industry.

Further down, the article continues to elaborate on the broader significance of the iPhone deal.

But as important as the iPhone has been to the fortunes of Apple and AT&T, its real impact is on the structure of the $11 billion-a-year US mobile phone industry. For decades, wireless carriers have treated manufacturers like serfs, using access to their networks as leverage to dictate what phones will get made, how much they will cost, and what features will be available on them. Handsets were viewed largely as cheap, disposable lures, massively subsidized to snare subscribers and lock them into using the carriers’ proprietary services. But the iPhone upsets that balance of power. Carriers are learning that the right phone — even a pricey one — can win customers and bring in revenue. Now, in the pursuit of an Apple-like contract, every manufacturer is racing to create a phone that consumers will love, instead of one that the carriers approve of. “The iPhone is already changing the way carriers and manufacturers behave,” says Michael Olson, a securities analyst at Piper Jaffray (emphasis author’s).

These observations have been borne out in the two years since that article appeared. The iPhone sparked a new market in smartphones. Research in Motion rolled out new BlackBerry devices. LG, Samsung and Motorola also entered the fray. The collaborative model has since moved beyond smartphones and takes in e-book readers like Amazon’s Kindle and devices such as Apple’s new iPad.

The fundamental flaw in network neutrality policy is that it assumes that service providers are in a position to dominate Internet service and applications. This premise was questionable to begin with, but the market forces that have come into play in the past two years has been shown it to be plain wrong. Competition has always served as a check on applications blocking. Now, it’s plain to see that service providers rely on equipment and applications providers to create differentiated devices and services that attract customers in greater numbers, bucking the recession. According to research firm NPD Group, smartphones accounted for 28 percent of all handset sales in the United States in the second quarter of 2009—a 47 percent increase in the category’s share since the same period in 2008.

It has turned out that the most effective wireless broadband business model is cross-platform collaboration. This should be enough to give the FCC pause before mandating a non-discrimination rule that would prohibit it. If a non-discrimination rule had been in force two years ago, the iPhone, the Kindle and the iPad would never have happened.

In my longer network neutrality policy study published last year, I argued that the evolution of Internet access service was a movement away from the neutral conditions that existed at the Internet’s birth. Users went from text commands to graphical browsers. Web sites went from dedicated servers to multi-site caching. Video compression algorithms were refined so video could be streamed. XML was developed so different Web applications could work together smoothly. Now, greater collaboration and bundling among service providers and other companies in the information services supply chain that are as large or larger is becoming an important way not simply to compete, but to build a strong business case for greater broadband investment.

As the industry comes to understand the benefits of these collaborative business models, it has become more unified in its opposition to network neutrality. A look at some of the filings in response to the net neutrality Notice of Proposed Rulemaking finds that most of the companies that had supported it a few years ago—Google, Apple, Amazon—are now urging caution.

The FCC would be well-advised to listen. The telecommunications industry no longer fits into neat silos of service provider, applications provider and content providers. It’s all a big mash-up, to use a buzzword of our time. These regulatory efforts to create and enforce structural separation between service providers and apps providers are now running directly against strong market and technology winds. The U.S. digital economy has been one of the few bright spots in what has been an otherwise dismal two years. The FCC needs to rethink its network neutrality plan lest the commission be remembered as the regime that killed U.S. broadband growth and innovation.

  • http://twitter.com/_the_mad_hatter Wayne Borean

    Sorry Steven, but you really don't understand the situation at all. I'd suggest you do some reading at RoughlyDrafted.com, Daniel is a bit of an Apple Fan, with a strong knowledge of the technology, and he totally disagrees with your thesis. He things that if AT&T had not have been in deep trouble that the IPhone could not have happened. If Net Neutrality is in effect bringing something like the IPhone to market would be easier.

    To me you sound like you work for Verizon.

  • http://twitter.com/darkuncle Scott Francis

    dead wrong on several points. Let's begin:

    “The non-discrimination principle that Genachowski seeks to mandate would prohibit service providers such as AT&T, Verizon Wireless, T-Mobile and Sprint from using their network resources to prioritize or partition data as it crosses their networks so as to improve the performance of specific applications, such as a movie or massive multiplayer game.”

    wrong – the notice of proposed rulemaking only prohibits anti-competitive action in these areas, and explicitly allows for reasonable network management. If you're a carrier and you degrade the performance of Vudu so your own VOD service looks better, or make Vonage take a backseat to your own VoIP service (or that of “partners” who have already paid to play), or decide that entire protocols are forcing you to actually deliver on those “unlimited” connections you're selling and should be blocked (hello, Comcast) – then yeah, you're going to run afoul of the regs. /As well you should./

    “The fundamental flaw in network neutrality policy is that it assumes that service providers are in a position to dominate Internet service and applications. This premise was questionable to begin with, but the market forces that have come into play in the past two years has been shown it to be plain wrong. Competition has always served as a check on applications blocking.”

    wrong. and you don't even bother to supply any supporting evidence. As long as “competition” consists of a duopoly (for the more fortunate consumers; most have to make do with the tender mercies of a single cableco unless they're within 15K feet of a telco's CO), consumers are going to be stuck with speeds and service that's lagging far behind the rest of the industrialized world. How else do you explain the embarrassing slide towards the back of the pack that US ISPs have collectively been producing over the last 10 years? We went from being leaders in Internet access penetration and speed, to being 15th in the world (and among the worst of the top 29 countries surveyed) over the last 10 years. At the rate we've been expanding service between 2007 and 2009, it will take the US 15 years just to catch up to where South Korea is _today_.

    finally, let's not conflate the wireless phone market with the broadband Internet market – two entirely different, apples-and-oranges issues (even if the usual suspects are the source of the fail in both cases). US telcos (and cablecos after them) have been sitting on their collective rears, growing fat on a gov't-sponsored monopoly and a complete lack of any kind of effective regulatory framework for decades (even after the monopoly was supposedly broken up, we ended up with the same basic players 10 years later that we had to begin with – new names, same faces, same shenanigans).

    Regulation is rarely the answer to the problem, but lack of regulation and a blind faith that “the market will sort it out” gives us epic fails like the Universal Service Fee – which telcos blithely passed on to their customers, increased multiple times over, and did zilch to actually improve Internet access penetration and speeds. I note that you ignored completely the results of the most recent hard data on this topic, courtesy of the Berkman Center Broadband Study …

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  • http://www.reason.org/ Steven Titch

    Scott,

    The NPRM sets non-discrimination as the baseline. It calls for “a bright-line
    rule against discrimination.” The NPRM says nothing about anticompetitive considerations that would precede any action to enforce neutrality principles. The only hedge is that there's room for “reasonable network management,” but that's left undefined. That means that every instance of cross-platform integration would be subject to FCC review. “Mother may I?” becomes the order of the day.

    The evidence for ISP competition is that, with the exception of Madison River, a tiny CLEC, to date no ISP has blocked a Web site or application. True, Comcast throttled the BitTorrent protocol, but was in the interest of the 95 percent of its customers that didn't use it. And Comcast and BitTorrent worked it out quickly through market mechanisms.

    Finally, while wireless and wireline broadband once could be thought of as apples and oranges, but that is less the case now. Wireless brings a critical dimension to Web 2.0. Wireless speeds lag wired technologies, but the increasing amount of value that derives from mobility to the Web compensates. Radio being what it is, network management, bandwidth optimization and applications prioritization are necessary to make wireless broadband work. Network neutrality, with its “bright-line rule” against discrimination, would raise serious roadblocks to this.

  • http://www.facebook.com/profile.php?id=710246033 facebook-710246033

    @Scott..While I agree with your comments on what the FCC regulation is actually about, I definitely disagree with your (lack of) analysis about why the US ranks lower than other nations in some broadband speed comparisons. I'm so sick of watching people trot out South Korea as an argument for the failure of broadband in the US. It shows a fundamental misunderstanding of the economics and mechanics of actually building the network. Korea = 1,274 people /sq MI. The US averages 82. Think hard for a moment what that means. Blindly repeating someone else's meme on broadband speeds makes about as much sense as retweeting Sara Palin's death panel scare.

  • Andrew

    “had cajoled AT&T into spending millions of dollars and thousands of man-hours to create a new feature, so-called visual voicemail”
    Really!? millions of dollars for click-able audio files on a mobile device? Must be the worlds worst, most expensive developers ever! Its a wonder how a bunch of kids at xda-developers figured out how to add this to like 10 phones in their free time.

  • Nelson

    Actually AT&T DSL blocked access to 4chan in the summer of 2009. And since you mention that the lines between wireless and wired service are not like they used to be, I will mention the fact that Verizon Wireless also blocked access to 4chan recently.
    As for BitTorrent and Comcast working it out quickly through market mechanisms. First off it wasn't quickly and Comcast didn't even admit to it until they started hearing with the FCC. Hearing with the FCC? That's not a market mechanism at least not one I've ever heard of.

  • jon

    You need to change the title “Net Neutrality Means No More iPhones” should be “Net Neutrality Means No More AT&T iPhones”. If anything iPhone should be open to any provider so they can come out with better plans and prices so if you want choice you have it. Why do you think unlocked iPhone's was big news when it came out, people want choices.

  • http://srynas.blogspot.com/ Steve R.

    The theme of this post is: “Much has been written about the deleterious effect that regulating network management would have on broadband investment and innovation,…” Unfortunately the post is not much more than FUD. This post conveniently ignores the active and purposefully actions of private companies in stiffing broadband investment and innovation. The New York Times reports: Skype Fights to Be Heard on Mobile Phones”. Once again, another example of companies abusing there freedom to compete in a civilized manner.

    Really this boils down to, “Why should anyone believe the premise that regulation is unnecessary when those who have the freedom to compete in a civil manner choose instead to abuse the truth and play “dirty tricks”?” Regulation may be onerous, but after a while society gets tired of incessant unethical corporate behavior and the unwillingness of the industry to clean itself-up; regulation then begins to look down-right appropriate.

  • http://srynas.blogspot.com/ Steve R.

    Here's another one from TechDirt: “YouTube Joins Hulu In Letting Content Holders Block Access For TV-Connected Devices. Those opposed to net neutrality regulation seem to possess a mental block when it comes to the ability to content providers to block content which is an unintended and unspoken consequence of being “free” as in no regulation. Again, I ask the question, what are those who oppose net neutrality regulation offering to guarantee that they will act within net neutrality principles?

    Those opposed to net neutrality regulation talk in terms of the engineering need to manage the network, which is a legitimate concern. However, this disingenuously avoids discussing that the desire to be free from regulation is NOT really about the engineering but a management issue; the ability of management to whimsically control the distribution of content for any reason and for whatever business purpose management decides.

  • http://srynas.blogspot.com/ Steve R.

    Here's another one from TechDirt: “YouTube Joins Hulu In Letting Content Holders Block Access For TV-Connected Devices. Those opposed to net neutrality regulation seem to possess a mental block when it comes to the ability to content providers to block content which is an unintended and unspoken consequence of being “free” as in no regulation. Again, I ask the question, what are those who oppose net neutrality regulation offering to guarantee that they will act within net neutrality principles?

    Those opposed to net neutrality regulation talk in terms of the engineering need to manage the network, which is a legitimate concern. However, this disingenuously avoids discussing that the desire to be free from regulation is NOT really about the engineering but a management issue; the ability of management to whimsically control the distribution of content for any reason and for whatever business purpose management decides.

    Asok to the Rescue (Dilbert Cartoon by Scott Adams)

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  • http://www.surfmarketing.co.uk/ Web Design Kent

    “Open Internet” or “net neutrality” sounds simple – force phone and cable companies to treat every bit of information the same way – until you realize that modern networks are incredibly complex, with millions of lines of code in every router. Making sure services like VoIP, video conferencing, and telemedicine (not to mention the next great thing that hasn't been invented yet) get priority may be necessary to make the Internet work, but the government is considering regulations that will make it illegal to prioritize traffic.

  • http://www.surfmarketing.co.uk/ Web Design Kent

    “Open Internet” or “net neutrality” sounds simple – force phone and cable companies to treat every bit of information the same way – until you realize that modern networks are incredibly complex, with millions of lines of code in every router. Making sure services like VoIP, video conferencing, and telemedicine (not to mention the next great thing that hasn't been invented yet) get priority may be necessary to make the Internet work, but the government is considering regulations that will make it illegal to prioritize traffic.

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