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What Vox Doesn’t Get About the “Battle for the Future of the Internet”

by on May 2, 2014 · 1 comment

My friend Tim Lee has an article at Vox that argues that interconnection is the new frontier on which the battle for the future of the Internet is being waged. I think the article doesn’t really consider how interconnection has worked in the last few years, and consequently, it makes a big deal out of something that is pretty harmless.

How the Internet used to work

The Internet is a network of networks. Your ISP is a network. It connects to the other ISPs and exchanges traffic with them. Since connections between ISPs are about equally valuable to each other, this often happens through “settlement-free peering,” in which networks exchange traffic on an unpriced basis. The arrangement is equally valuable to both partners.

Not every ISP connects directly to every other ISP. For example, a local ISP in California probably doesn’t connect directly to a local ISP in New York. If you’re an ISP that wants to be sure your customer can reach every other network on the Internet, you have to purchase “transit” services from a bigger or more specialized ISP. This would allow ISPs to transmit data along what used to be called “the backbone” of the Internet. Transit providers that exchange roughly equally valued traffic with other networks themselves have settlement-free peering arrangements with those networks.

How the Internet works now

A few things have changed in the last several years. One major change is that most major ISPs have very large, geographically-dispersed networks. For example, Comcast serves customers in 40 states, and other networks can peer with them in 18 different locations across the US. These 18 locations are connected to each other through very fast cables that Comcast owns. In other words, Comcast is not just a residential ISP anymore. They are part of what used to be called “the backbone,” although it no longer makes sense to call it that since there are so many big pipes that cross the country and so much traffic is transmitted directly through ISP interconnection.

Another thing that has changed is that content providers are increasingly delivering a lot of a) traffic-intensive and b) time-sensitive content across the Internet. This has created the incentive to use what are known as content-delivery networks (CDNs). CDNs are specialized ISPs that locate servers right on the edge of all terminating ISPs’ networks. There are a lot of CDNs—here is one list.

By locating on the edge of each consumer ISP, CDNs are able to deliver content to end users with very low latency and at very fast speeds. For this service, they charge money to their customers. However, they also have to pay consumer ISPs for access to their networks, because the traffic flow is all going in one direction and otherwise CDNs would be making money by using up resources on the consumer ISP’s network.

CDNs’ payments to consumer ISPs are also a matter of equity between the ISP’s customers. Let’s suppose that Vox hires Amazon CloudFront to serve traffic to Comcast customers (they do). If the 50 percent of Comcast customers who wanted to read Vox suddenly started using up so many network resources that Comcast and CloudFront needed to upgrade their connection, who should pay for the upgrade? The naïve answer is to say that Comcast should, because that is what customers are paying them for. But the efficient answer is that the 50 percent who want to access Vox should pay for it, and the 50 percent who don’t want to access it shouldn’t. By Comcast charging CloudFront to access the Comcast network, and CloudFront passing along those costs to Vox, and Vox passing along those costs to customers in the form of advertising, the resource costs of using the network are being paid by those who are using them and not by those who aren’t.

What happened with the Netflix/Comcast dust-up?

Netflix used multiple CDNs to serve its content to subscribers. For example, it used a CDN provided by Cogent to serve content to Comcast customers. Cogent ran out of capacity and refused to upgrade its link to Comcast. As a result, some of Comcast’s customers experienced a decline in quality of Netflix streaming. However, Comcast customers who accessed Netflix with an Apple TV, which is served by CDNs from Level 3 and Limelight, never had any problems. Cogent has had peering disputes in the past with many other networks.

To solve the congestion problem, Netflix and Comcast negotiated a direct interconnection. Instead of Netflix paying Cogent and Cogent paying Comcast, Netflix is now paying Comcast directly. They signed a multi-year deal that is reported to  reduce Netflix’s costs relative to what they would have paid through Cogent. Essentially, Netflix is vertically integrating into the CDN business. This makes sense. High-quality CDN service is essential to Netflix’s business; they can’t afford to experience the kind of incident that Cogent caused with Comcast. When a service is strategically important to your business, it’s often a good idea to vertically integrate.

It should be noted that what Comcast and Netflix negotiated was  not a “fast lane”—Comcast is prohibited from offering prioritized traffic as a condition of its merger with NBC/Universal.

What about Comcast’s market power?

I think that one of Tim’s hangups is that Comcast has a lot of local market power. There are lots of barriers to creating a competing local ISP in Comcast’s territories. Doesn’t this mean that Comcast will abuse its market power and try to gouge CDNs?

Let’s suppose that Comcast is a pure monopolist in a two-sided market. It’s already extracting the maximum amount of rent that it can on the consumer side. Now it turns to the upstream market and tries to extract rent. The problem with this is that it can only extract rents from upstream content producers insofar as it lowers the value of the rent it can collect from consumers. If customers have to pay higher Netflix bills, then they will be less willing to pay Comcast. The fact that the market is two-sided does not significantly increase the amount of monopoly rent that Comcast can collect.

Interconnection fees that are being paid to Comcast (and virtually all other major ISPs) have virtually nothing to do with Comcast’s market power and everything to do with the fact that the Internet has changed, both in structure and content. This is simply how the Internet works. I use CloudFront, the same CDN that Vox uses, to serve even a small site like my Bitcoin Volatility Index. CloudFront negotiates payments to Comcast and other ISPs on my and Vox’s behalf. There is nothing unseemly about Netflix making similar payments to Comcast, whether indirectly through Cogent or directly, nor is there anything about this arrangement that harms “the little guy” (like me!).

For more reading material on the Netflix/Comcast arrangement, I recommend Dan Rayburn’s posts here, here, and here. Interconnection is a very technical subject, and someone with very specialized expertise like Dan is invaluable in understanding this issue.

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The End of Net Neutrality and the Future of TV

by on March 26, 2014 · 0 comments

Some recent tech news provides insight into the trajectory of broadband and television markets. These stories also indicate a poor prognosis for a net neutrality. Political and ISP opposition to new rules aside (which is substantial), even net neutrality proponents point out that “neutrality” is difficult to define and even harder to implement. Now that the line between “Internet video” and “television” delivered via Internet Protocol (IP) is increasingly blurring, net neutrality goals are suffering from mission creep.

First, there was the announcement that Netflix, like many large content companies, was entering into a paid peering agreement with Comcast, prompting a complaint from Netflix CEO Reed Hastings who argued that ISPs have too much leverage in negotiating these interconnection deals.

Second, Comcast and Apple discussed a possible partnership whereby Comcast customers would receive prioritized access to Apple’s new video service. Apple’s TV offering would be a “managed service” exempt from net neutrality obligations.

Interconnection and managed services are generally not considered net neutrality issues. They are not “loopholes.” They were expressly exempted from the FCC’s 2010 (now-defunct) rules. However, net neutrality proponents are attempting to bring interconnection and managed services to the FCC’s attention as the FCC crafts new net neutrality rules. Net neutrality proponents have an uphill battle already, and the following trends won’t help. Continue reading →

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What’s Wrong with Two-Sided Markets?

by on February 24, 2014 · 0 comments

It seems to me that a lot of the angst about the Comcast-Netflix paid transit deal results from a general discomfort with two-sided markets rather than any specific harm caused by the deal. But is there any reason to be suspicious of two-sided markets per se?

Consider a (straight) singles bar. Men and women come to the singles bar to meet each other. On some nights, it’s ladies’ night, and women get in free and get a free drink. On other nights, it’s not ladies’ night, and both men and women have to pay to get in and buy drinks.

There is no a priori reason to believe that ladies’ night is more just or efficient than other nights. The owner of the bar will benefit if the bar is a good place for social congress, and she will price accordingly. If men in the area are particularly shy, she may have to institute a “mens’ night” to get them to come out. If women start demanding too many free drinks, she may have to put an end to ladies’ night (even if some men benefit from the presence of tipsy women, they may not be as willing as the women to pay the full cost of all of the drinks). Whether a market should be two-sided or one-sided is an empirical question, and the answer can change over time depending on circumstances.

Some commentators seem to be arguing that two-sided markets are fine as long as the market is competitive. Well, OK, suppose the singles bar is the only singles bar in a 100-mile radius? How does that change the analysis above? Not at all, I say.

Analysis of two-sided markets can get very complex, but we shouldn’t let that complexity turn into reflexive opposition.

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The Coming Fight Over the IP Transition

by on October 31, 2013 · 0 comments

Last week, the House held a hearing about the so-called IP Transition. The IP Transition refers to the telephone industry practice of carrying all wire-based consumer services–voice, Internet, and television–via faster, better fiber networks and not on the traditional copper wires that had fewer capabilities. Most consumers have not and will not notice the change. The completed IP Transition, however, has enormous implications for how the FCC regulates. As one telecom watcher said, “What’s at stake? Everything in telecom policy.”

For 100 years or so, phone service has had a special place in regulatory law given its importance in connecting the public. Phone service was almost exclusively over copper wires, a service affectionately called “plain old telephone service” (POTS). AT&T became the government-approved POTS national monopolist in 1913 (which ended with the AT&T antitrust breakup in the 1980s). The deal was: AT&T got to be a protected monopolist while the government got to require AT&T provide various public benefits. The most significant of these is universal service–AT&T had to serve virtually every US household and charge reasonable rates even to remote (that is, expensive) customers.

To create more phone competitors to the Baby Bells–the phone companies spun off from the AT&T break-up in the 1980s–the Congress passed the 1996 Telecom Act and the FCC put burdens on the Baby Bells to allow new phone companies to lease the Baby Bells’ AT&T-created copper wires at regulated rates. The market changed in ways never envisioned in the 1990s however. Today, phone companies face competition–not from the new phone companies leasing the old monopoly infrastructure but from entirely different technologies. You can receive voice service from your cable company (“digital voice”), your “phone” company (POTS), your wireless company, and even Internet-based providers like Vonage and Skype. Increasingly, households are leaving POTS behind in favor of voice service from cable or wireless providers. Yet POTS providers–like Verizon and AT&T (which also offer wireless service)–must abide by monopoly-era regulations that their cable and wireless competitors–Comcast, Sprint, and others–don’t have to abide by.

Understanding the significance of the IP Transition requires (unfortunately) knowing a little bit about Title I and Title II of the Communications Act. “Telecommunications services,” which are the phone companies with copper networks, are heavily regulated by the FCC under Title II. On the other hand, “information services,” which includes Internet service, are lightly regulated under Title I. This division made some sense in the 1990s. It is increasingly under stress now because burdened “telecommunications” companies like AT&T and Verizon are offering “information services” like Internet via DSL, FiOS, and U-Verse. Conversely, lightly-regulated “information services” companies like Comcast, Charter, and Time-Warner Cable are entering the regulated telephone market but face few of the regulatory burdens.

Which brings us to the IP Transition. As Title II phone companies replace their copper wires with fiber and deploy broadband networks to compete with cable companies, their customers’ phone service is being carried via IP packets. Functionally, these new networks act like a heavily-regulated Title II service since they carry voice, but they also act like the Title I broadband networks that cable providers built. So should these new fiber networks be burdened like Title II services or deregulated like Title I services? Or is it possible to achieve some middle ground using existing law? Those are the questions before the FCC and policymakers. Billions of dollars of investment will be accelerated or slowed and many firms will live or die depending on how the FCC and Congress act. Stay tuned.

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Aereo: Congress’ Rescuer?

by on August 15, 2013 · 1 comment

Aereo LogoThere are few things more likely to get constituents to call their representative than TV programming blackouts, and the increase in broadcasting disruptions arising from licensing disputes in recent years means Congress may be forced to once again fix television and copyright laws. As Jerry Brito explains at Reason, the current standoff between CBS and Time Warner Cable is the result of bad regulations, which contribute to more frequent broadcaster blackouts. While each type of TV distributor (cable, satellite, broadcasters, telcos) is both disadvantaged and advantaged through regulation, broadcasters are particularly favored. As the US Copyright Office has said, the rule at issue in CBS-TWC is “part of a thicket of communications law requirements aimed at protecting and supporting the broadcast industry.”

But as we approach a damaging tipping point of rising programming costs and blackouts, Congress’ potential rescuer–Aereo–appears on the horizon, possibly buying more time before a major regulatory rewrite. Aereo, for the uninitiated, is a small online company that sets up tiny antennas in certain cities to capture broadcast television station signals–like CBS, NBC, ABC, Fox, the CW, and Univision–and streams those signals online to paying customers, who can watch live or record the local signals captured by their own “rented” Aereo antenna. Broadcasters hate this because the service deprives them of lucrative retransmission fees and unsuccessfully sued to get Aereo to cease operations. Continue reading →

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Gina Keating on netflix

by on May 21, 2013 · 0 comments

Gina Keating, author of Netflixed: The Epic Battle for America’s Eyeballs, discusses the startup of Netflix and their competition with Blockbuster.

Keating begins with the history of the company and their innovative improvements to the movie rental experience. She discusses their use of new technology and marketing strategies in DVD rental, which inspired Blockbuster to adapt to the changing market.

Keating goes on to describe Netflix’s transition to internet streaming and Blockbuster’s attempts to retain their market share.

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Christopher Yoo on the Internet’s changing architecture

by on February 12, 2013 · 0 comments

Christopher S. Yoo, the John H. Chestnut Professor of Law, Communication, and Computer & Information Science at the University of Pennsylvania and author of the new book, The Dynamic Internet: How Technology, Users, and Businesses are Transforming the Network, explains that the Internet that we knew in its early days—one with a client-server approach, with a small number of expert users, and a limited set of applications and business cases—has radically changed, and so it may be that the architecture underlying the internet may as well.

According to Yoo, the internet we use today barely resembles the original Defense Department and academic network from which it emerged. The applications that dominated the early Internet—e-mail and web browsing—have been joined by new applications such as video and cloud computing, which place much greater demands on the network. Wireless broadband and fiber optics have emerged as important alternatives to transmission services provided via legacy telephone and cable television systems, and mobile devices are replacing personal computers as the dominant means for accessing the Internet. At the same time, the networks comprising the Internet are interconnecting through a wider variety of locations and economic terms than ever before.

These changes are placing pressure on the Internet’s architecture to evolve in response, Yoo says. The Internet is becoming less standardized, more subject to formal governance, and more reliant on intelligence located in the core of the network. At the same time, Internet pricing is becoming more complex, intermediaries are playing increasingly important roles, and the maturation of the industry is causing the nature of competition to change. Moreover, the total convergence of all forms of communications into a single network predicted by many observers may turn out to be something of a myth. Policymakers, Yoo says, should allow room for this natural evolution of the network to take place.

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Sports Channels and A La Carte Cable Pricing

by on January 26, 2013 · 4 comments

Matt Yglesias today responded with a post of his own to a NYT article about sports channels and cable pricing by Brian Stelter that Yglesias believed had “bad analysis.” I’m here to defend Stelter a little bit because I think Yglesias was too harsh and that Yglesias erred in his own post about the nature of cable bundling. Yglesias’ posts on cable bundling are good, and especially valuable because his Slate and ThinkProgress audiences are not the most receptive to economic justifications for perceived unfair corporate pricing schemes. In part due to him I suspect, you rarely hear econ and business bloggers calling for a la carte pricing of cable channels.

And Yglesias is certainly right that you can’t really complain about the price of your cable package, which includes the few channels you watch plus the sports channels you don’t watch, because you obviously value the channels more than the price you pay per month, even if the sports are a “waste.” He falters when he says

So since those channels are worth $60 to you, even if unbundling happens your cable provider is going to find a way to charge you approximately $60 for them. Because at the end of the day, you’re paying your cable provider for access to the channels you do watch—not for access to the channels you don’t watch. The channels you don’t watch are just there. If the channels you do watch are worth $60 to you, then $60 is what you’ll pay for them.

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Tears for Tiers: Wyden’s “Data Cap” Restrictions Would Hurt, not Help, Internet Users

by on December 20, 2012 · 609 comments

By Geoffrey Manne & Berin Szoka

As Democrats insist that income taxes on the 1% must go up in the name of fairness, one Democratic Senator wants to make sure that the 1% of heaviest Internet users pay the same price as the rest of us. It’s ironic how confused social justice gets when the Internet’s involved.

Senator Ron Wyden is beloved by defenders of Internet freedom, most notably for blocking the Protect IP bill—sister to the more infamous SOPA—in the Senate. He’s widely celebrated as one of the most tech-savvy members of Congress. But his latest bill, the “Data Cap Integrity Act,” is a bizarre, reverse-Robin Hood form of price control for broadband. It should offend those who defend Internet freedom just as much as SOPA did.

Wyden worries that “data caps” will discourage Internet use and allow “Internet providers to extract monopoly rents,” quoting a New York Times editorial from July that stirred up a tempest in a teapot. But his fears are straw men, based on four false premises.

First, US ISPs aren’t “capping” anyone’s broadband; they’re experimenting with usage-based pricing—service tiers. If you want more than the basic tier, your usage isn’t capped: you can always pay more for more bandwidth. But few users will actually exceed that basic tier. For example, Comcast’s basic tier, 300 GB/month, is so generous that 98.5% of users will not exceed it. That’s enough for 130 hours of HD video each month (two full-length movies a day) or between 300 and 1000 hours of standard (compressed) video streaming.

Second, Wyden sets up a false dichotomy: Caps (or tiers, more accurately) are, according to Wyden, “appropriate if they are carefully constructed to manage network congestion,” but apparently for Wyden the only alternative explanation for usage-based pricing is extraction of monopoly rents. This simply isn’t the case, and propagating that fallacy risks chilling investment in network infrastructure. In fact, usage-based pricing allows networks to charge heavy users more, thereby recovering more costs and actually reducing prices for the majority of us who don’t need more bandwidth than the basic tier permits—and whose usage is effectively subsidized by those few who do. Unfortunately, Wyden’s bill wouldn’t allow pricing structures based on cost recovery—only network congestion. So, for example, an ISP might be allowed to price usage during times of peak congestion, but couldn’t simply offer a lower price for the basic tier to light users.

That’s nuts—from the perspective of social justice as well as basic economic rationality. Even as the FCC was issuing its famous Net Neutrality regulations, the agency rejected proposals to ban usage-based pricing, explaining:

prohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks.

It is unclear why Senator Wyden thinks the FCC—no friend of broadband “monopolists”—has this wrong. Continue reading →

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What Google Fiber Says about Tech Policy: Fiber Rings Fit Deregulatory Hands

by on August 7, 2012 · 23 comments

Google’s first lesson for building affordable, one Gbps fiber networks with private capital is crystal clear: If government wants private companies to build ultra high-speed networks, it should start by waiving regulations, fees, and bureaucracy.

Executive Summary

For three years now the Obama Administration and the Federal Communications Commission (FCC) have been pushing for national broadband connectivity as a way to strengthen our economy, spur innovation, and create new jobs across the country. They know that America requires more private investment to achieve their vision. But, despite their good intentions, their policies haven’t encouraged substantial private investment in communications infrastructure. That’s why the launch of Google Fiber is so critical to policymakers who are seeking to promote investment in next generation networks.

The Google Fiber deployment offers policymakers a rare opportunity to examine policies that successfully spurred new investment in America’s broadband infrastructure. Google’s intent was to “learn how to bring faster and better broadband access to more people.” Over the two years it planned, developed, and built its ultra high-speed fiber network, Google learned a number of valuable lessons for broadband deployment – lessons that policymakers can apply across America to meet our national broadband goals.

To my surprise, however, the policy response to the Google Fiber launch has been tepid. After reviewing Google’s deployment plans, I expected to hear the usual chorus of Rage Against the ISP from Public Knowledge, Free Press, and others from the left-of-center, so-called “public interest” community (PIC) who seek regulation of the Internet as a public utility. Instead, they responded to the launch with deafening silence.

Maybe they were stunned into silence. Google’s deployment is a  real-world rejection of the public interest community’s regulatory agenda more powerful than any hypothetical. Google is building fiber in Kansas City because its officials were willing to waive regulatory barriers to entry that have discouraged broadband deployments in other cities. Google’s first lesson for building affordable, one Gbps fiber networks with private capital is crystal clear: If government wants private companies to build ultra high-speed networks, it should start by waiving regulations, fees, and bureaucracy . Continue reading →

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