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“Net neutrality is a dead man walking,” Marvin Ammori stated in Wired last week, citing the probable demise of the FCC’s Open Internet rules in court. I’d agree for a different reason. Net neutrality has been dead ever since the FCC released its net neutrality order in December 2010. (This is not to say the damaging rules should be upheld by the DC Circuit. For many reasons, the Order should be struck down.) I agree with Ammori because we already have the Internet “fast lane” many net neutrality proponents wanted to prevent. Since that goal is precluded, all the rules do is hang Damocles’ Sword over ISPs regarding traffic management.

The 2010 rules managed to make both sides unhappy. The ISPs face severe penalties if three FCC commissioners believe ISP network management practices “unreasonably discriminate” against certain traffic. Public interest groups, on the other hand, were dissatisfied because they wanted ISPs reclassified as common carriers to prevent deep-pocketed content creators from allying with ISPs to create an Internet “fast lane” for some companies, relegating most other websites to the so-called “winding dirt road” of the public Internet.

Proponents emphasize different goals of net neutrality (to the point–many argue–it’s hard to discern what the term means). But if preventing the creation of a fast lane is the main goal of net neutrality, it’s dead already. Consider two popularly-cited net neutrality “violations” that do not violate the Open Internet Order: Netflix’ Open Connect program and Comcast not counting its Xfinity video-on-demand (VOD) service against customers’ data limits

Both cases involve the creation of a fast lane for certain content and activists rail against them. Both cases also involve network practices expressly exempted from net neutrality regulations. The FCC exempted these sorts of services because they are important, benefit the public, and should be encouraged. With Open Connect, Netflix scatters its many servers across the country closer to households, which allows its content to stream at a higher quality than most other video sites. Comcast gives its Xfinity VOD fast-lane treatment as well, which is completely legal since VOD from a cable company is a “specialized service” exempt from the rules.

“Specialized service” needs some explanation since it’s a novel concept from the FCC order. The net neutrality rules distinguish between “broadband Internet access service” (BIAS)–to which the regulations apply–and specialized (or managed) services–to which they don’t apply. The exemption of specialized services opens up a dangerous loophole in the view of proponents.

BIAS is what most consider “the Internet.” It’s the everyday websites we access on our computers and smartphones. What are specialized services? In the sleepy month of August the FCC’s Open Internet Advisory Committee released its report on what criteria specialized service needs to meet to be exempt from net neutrality scrutiny (these are influential and advisory, but not binding):

1. The service doesn’t reach large parts of the Internet, and
2. The service is an “application level” service.

The Advisory Committee also thought that “capacity isolation” is a good indicator that a service should be exempt. With capacity isolation, the ISP has one broadband connection going to the home but is separating the service’s data stream from the conventional Internet stream consumers use to visit Facebook, YouTube, and the like. This is how Comcast’s streaming of Xfinity to Xboxes is exempt–it is a proprietary network going into the home. As long as carriers don’t divert BIAS capacity for the application, the FCC will likely turn a blind eye.

What are some examples? Specialized service is marked by higher-quality streams that typically don’t suffer from jitter and latency. If you have “digital voice” from Comcast, for example, you are receiving a specialized service–proprietary VoIP. Specialized service can also include data streams like VOD, e-reader downloads, heart monitor data, and gaming services. The FCC exempted these because some are important enough that they shouldn’t compete with BIAS Internet. It would be obviously damaging to have digital phone service or health monitors getting disrupted because others are checking up on their fantasy football team. The FCC also wanted to spur investment in specialized services and video companies like Netflix are considering pairing up with ISPs to deliver a better experience to customers.

That is to say, the net neutrality effort has failed even worse than most realize. The FCC essentially prohibited innovative business models in BIAS, freezing that service into common-carrier-like status. Further, we have an Internet fast lane (which I consider a significant public benefit, though net neutrality proponents often do not). As business models evolve and the costs of server networks fall, our two-tier system will become more apparent.

Over on Forbes today, I have a very long post inspired by Monday’s oral arguments in Verizon’s challenge of the FCC’s Open Internet rules, passed in 2010

I say “inspired” because the post has nothing to say about the oral arguments which, in any case, I did not attend.  Mainstream journalists can’t resist the temptation to try to read into the questions asked or the mood of the judges some indication of how the decision will come out

But as anyone who has ever worked in a court or followed appellate practice  well knows, the tone of oral arguments signals nothing about a judge’s point-of-view.  Often, the harshest questioning is reserved for the side a judge is leaning towards supporting, perhaps because the briefs filed were inadequate.  Bad briefs create more work for the judge and her clerks.

I use the occasion of the hearing to take a fresh look at the net neutrality “debate,” which has been on-going since at least 2005, when I first started paying attention to it.  In particular, I try to disentangle the political term “net neutrality” (undefined and, indeed, not even used in the 2010 Open Internet order) from the engineering principles of packet routing. Continue reading →

The Progressive Policy Institute has released a new and remarkable broadband report. In it, PPI explicitly distances itself from the Crawford/Wu wing of the left-of-center telecommunications conversation. A money quote from the introduction:

What should the progressive agenda be? Are our choices either to embrace this aggressive regulatory agenda or to accede to conservative laissez-faire? This essay argues that there is a third, and far more promising, option for such a progressive broadband policy agenda. It balances respect for the private investment that has built the nation’s broadband infrastructure with the need to realize the Internet’s full promise as a form of social infrastructure and a tool for individual empowerment. It turns away from problems we may reasonably fear but that simply do not exist—most importantly, the idea that the provision of broadband services is dominated by an anti-competitive “duopoly” that stifles the broad dissemination of content.

On “cage match” competition in the telecom sector:

So perhaps the greatest paradox inherent in “cage match” competition is that, while advocates champion more intrusive regulation, the signal providers are in the fight of their business lives. The benefits of their innovation and investment are being appropriated by the devices and services that use the signal; their stock values and capitalizations are listless compared to the companies that make devices and applications; they have made commitments in the tens of billions to build infrastructure that cannot be reversed. And they are trapped in a vicious circle: they innovate to improve signal quality and availability, these innovations make possible new devices, applications, and services that capture consumer allegiance, these other aspects of the broadband experience appropriate value and make signal more commodity-like in the eyes of consumers, which forces the providers to further improve their product, perpetuating the cycle. They are the economy’s front line for investing in and innovating for our broadband infrastructure, and perhaps they benefit from that investment and innovation the least.

From the section entitled “Neutrality,” “Unbundling,” and other progressive policy failures:

The weight of the evidence, therefore, suggests the activist agenda leads progressives to a dead end. It addresses a problem that doesn’t exist—the absence of competition in broadband—and compromises another and more important objective—investment in broadband leading to ubiquitous broadband access. In reality, access providers have made massive investments in high-fixed cost broadband wired and wireless capacity that they can only justify by competing for market share and that are continually improving. The case that they are suppressing or might suppress content—either editorially or competitively—is virtually nonexistent.

This analysis is spot on. While I don’t agree with every policy proposal in the report (though I do agree with some, such as liberating spectrum from the broadcasters and DoD), PPI deserves a lot of credit for its excellent study of the state of telecommunications competition.

Adam Thierer, Senior Research Fellow at the Mercatus Center discusses his recent working paper with coauthor Brent Skorup, A History of Cronyism and Capture in the Information Technology Sector. Thierer takes a look at how cronyism has manifested itself in technology and media markets — whether it be in the form of regulatory favoritism or tax privileges. Which tech companies are the worst offenders? What are the consequences for consumers? And, how does cronyism affect entrepreneurship over the long term?


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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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The Information Economy Project at the George Mason University School of Law is hosting a conference tomorrow, Friday, April 19. The conference title is From Monopoly to Competition or Competition to Monopoly? U.S. Broadband Markets in 2013. There will be two morning panels featuring discussion of competition in the broadband marketplace and the social value of “ultra-fast” broadband speeds.

We have a great lineup, including keynote addresses from Commissioner Joshua Wright, Federal Trade Commission and from Dr. Robert Crandall, Brookings Institution.

The panelists include:

Eli Noam, Columbia Business School

Marius Schwartz, Georgetown University, former FCC Chief Economist

Babette Boliek, Pepperdine University School of Law

Robert Kenny, Communications Chambers (U.K.)

Scott Wallsten, Technology Policy Institute

The panels will be moderated by Kenneth Heyer, Federal Trade Commission and Gus Hurwitz, University of Pennsylvania, respectively. A continental breakfast will be served at 8:00 am and a buffet lunch is provided. We expect to adjourn at 1:30 pm. You can find an agenda here and can RSVP here. Space is limited and we expect a full house, so those interested are encouraged to register as soon as possible.

Why did the government impose a completely different funding mechanism on the Internet than on the Interstate Highway System? There is no substantive distinction between the shared use of local infrastructure by commercial “edge” providers on the Internet and shared use of the local infrastructure by commercial “edge” providers (e.g., FedEx) on the highways.

In Part 1 of this post, I described the history of government intervention in the funding of the Internet, which has been used to exempt commercial users from paying for the use of local Internet infrastructure. The most recent intervention, known as “net neutrality”, was ostensibly intended to protect consumers, but in practice, requires that consumers bear all the costs of maintaining and upgrading local Internet infrastructure while content and application providers pay nothing. This consumer-funded commercial subsidy model is the opposite of the approach the government took when funding the Interstate Highway System: The federal government makes commercial users pay more for their use of the highways than consumers. This fundamental difference in approach is why net neutrality advocates abandoned the “information superhighway” analogy promoted by the Clinton Administration during the 1990s. Continue reading →

Many net neutrality advocates would prefer that the FCC return to the regulatory regime that existed during the dial-up era of the Internet. They have fond memories of the artificially low prices charged by the dial-up ISPs of that era, but have forgotten that those artificially low prices were funded by consumers through implied subsidies embedded in their monthly telephone bills.

Remember when the Internet was the “information superhighway”? As recently as 2009, the Federal Communications Commission (FCC) still referred to the broadband Internet as, “the interstate highway of the 21st century.” Highways remain a close analogy to the Internet, yet by 2010, net neutrality advocates had replaced Internet highway analogies with analogies to waterworks and the electrical grid. They stopped analogizing the Internet to highways when they realized their approach to Internet regulation is inconsistent with government management of the National Highway System, which has always required commercial users of the highways to pay more for their use than ordinary consumers. In contrast, net neutrality is only the latest in a series of government interventions that have exempted commercial users from paying for the use of local Internet infrastructure. Continue reading →

Free Press is holding its National Conference for Media Reform next week. The conference agenda describes the Internet as “central” to freedom of expression, which is how all mass media technologies have been described since the invention of the printing press ushered in the mass communications era. Despite recognizing that the Internet is a mass media technology, Free Press does not believe the Internet should be accorded the same constitutional protections as other mass media technologies. Like so many others, Free Press has forgotten that the dangers posed by government control of the Internet are similar to those posed by earlier mass media technologies. In a stunning reversal of the concepts embodied in the Bill of Rights, Free Press believes the executive and legislative branches of government are the source of protection for the freedom of expression. In their view, “Internet freedom means net neutrality.Continue reading →

I hope that you’ve all been watching the terrific videos on “Economics of the Media” that Tyler Cowen and Alex Tabarrok have put together as part of their Marginal Revolution University online courses.  They divide their media economics lessons into four groupings: (1) Basic economics of media; (2) Media bias; (3) Media and government; and (4) Media and economic development.  Tyler and Alex asked Jerry Brito and me to contribute two videos on Net neutrality for the project. Jerry’s course offers an overview of Net neutrality as a general engineering principle. My video explores Net neutrality as a regulatory proposal and couches it in a broader discussion of network economics. Each video lasts approximately 6-7 minutes. Here they are: