Roadblocks to the “Fast Lane”

by on June 22, 2006

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.

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