A few more people have weighed in on my new paper. I tend to think that if I’m angering both sides of a given debate, I must be doing something right, so I’m going to take the fact that fervent neutrality opponent Richard Bennett hated the study as a good sign.

Others have been more positive. Mike Masnick has an extremely generous write-up over at Techdirt. And at Ars Technica, my friend Julian has the most extensive critique so far.

I thought most of it was spot on, but this seemed worth commenting on:

Lee thinks that the history of services like America Online shows that “walled garden” approaches tend to fail because consumers demand the full range of content available on the “unfettered Internet.” But most service providers already offer “tiered” service, in that subscribers can choose from a variety of packages that provide different download speeds at different prices. Many of these include temporary speed “boosts” for large downloads.

If many subscribers are demonstrably willing to accept slower pipes than the network can provide, companies providing streaming services that require faster connections may well find it worth their while to subsidize a more targeted “boost” for those users in order to make their offerings more attractive. In print and TV, we see a range of models for divvying up the cost of getting content to the audience—from paid infomercials to ad-supported programming to premium channels—and it’s never quite clear why the same shouldn’t pertain to online.

The key point here is the relative transaction costs of managing a proprietary network versus an open one. As we’ve learned from the repeated failure of micropayments, financial transactions are surprisingly expensive. The infrastructure required to negotiate, meter, and bill for connectivity, content, or other services means that overly-complicated billing schemes tend to collapse under their own weight. Likewise, proprietary content and services have managerial overhead that open networks don’t. You have to pay a lot of middle managers, salesmen, engineers, lawyers, and the like to do the sorts of things that happen automatically on an open network.

Now, in the older media Julian mentions, this overhead was simply unavoidable. Newspaper distribution cost a significant amount of money, and so newspapers had no choice but to charge their customers, pay their writers, sign complex deals with their advertisers, etc. Similarly, television stations had extremely scarce bandwidth, and so it made sense to expend resources to make sure that only the best content went on the air.

The Internet is the first medium where content can go from a producer to many consumers with no human beings intermediating the process. And because there are no human beings in between, the process is radically more efficient. When I visit the New York Times website, I’m not paying the Times for the content and they’re not paying my ISP for connectivity. That means that the Times‘s web operation can be much smaller than its subscription and distribution departments.

In a world where these transaction costs didn’t exist, you’d probably see the emergence of the kinds of complex financial transactions Julian envisions here. But given the existence of these transaction costs, the vast majority of Internet content creators will settle for free, best-effort connectivity rather than going to the trouble of negotiating separate agreements with dozens of different ISPs. Which means that if ISPs only offer high-speed connectivity to providers who pay to be a part of their “walled garden,” the service will wind up being vastly inferior (and as a consequence much less lucrative) than it would be if they offered full-speed access to the whole Internet.

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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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On Wednesday I responded to the first half of Steve Schultze’s critique of my network neutrality paper, which focused on my historical argument about the dangers of unintended consequences. Let me now turn to the second half of his post, which I regard as closer to the core of my paper’s argument.

One of the frustrating things about the network neutrality debate is that every proponent of network neutrality regulation seems to have a different story about the types of regulation he or she is concerned about. Some are worried about ISPs targeting particular applications to be degraded or blocked. Others are worried that ISPs will use the threat of blockage to force website operators to pay for access to their customers. Still others believe that ISPs will use subtle traffic shaping schemes to advantage their own content. Still others believe that ISPs will construct a “fast lane” and relegate the rest of the web to a pipe that never gets much faster than today’s Internet connections. Still others are worried about the potential for ISP censorship.

I’ve found that any time I take one of these ISP strategies seriously and put forth an argument about why it’s unlikely to be feasible or profitable, the response from supporters of regulation is often to concede that the particular scenario I’ve chosen is not realistic (terms like “straw man” sometimes come up), but that I haven’t accounted for some other scenario that’s much more likely to occur. Now, the Internet is a big, complicated place, and so it’s not possible to enumerate every conceivable way that an ISP could screw around with traffic and prove that none of them could ever be profitable. In my paper, I tried to pick the scenarios that are most commonly discussed and describe why I think they are likely to be poor business strategies for network providers, but I didn’t—and can’t—analyze the favorite scenario of every single network neutrality activist.

But here’s a pattern that I think is revealing: supporters of regulation tend to describe things in apocalyptic terms. We’re told that if regulations aren’t enacted soon, online innovation, competition, and maybe even freedom of speech are in jeopardy. It’s claimed that the stakes are too high to wait and see if actual problems develop. Yet I’ve found that when you get down to specifics, the savvier advocates of regulation concede that in fact the stakes aren’t really that high. For example, I have yet to find anyone willing to seriously defend Yochai Benkler’s claim that we should be worried about network owners censoring online speech.

Rather, the response is invariably to shift the focus to more plausible but far less significant infringements of network neutrality: isolated incidents like the Comcast/BitTorrent controversy rather than comprehensive plans to transform the Internet into AOL 2.0.

Yet advocates of regulation tend to get sloppy about these distinctions. They seem to believe that if an ISP has the power to block a single website or application, then it necessarily has the power to undertake much more ambitious discriminatory schemes. If Comcast can block BitTorrent today, it can censor liberal blogs or charge websites outrageous fees tomorrow.

So for example, take this passage from Steve’s post:
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