Virulent Word of Mouse

August 29, 2010

The Verizon-Google proposal

The other evening I heard a speech by Tom Tauke, the Executive Vice President, Public Affairs, Policy and Communications at Verizon. He tried to explain the Google-Verizon proposal.

Listening to Tauke has motivated me to write a couple comments. In light of all the things that have been said, what more can be said? I want to focus on the economic aspects of this issue, which get far too little emphasis in public discussion.

There are some interesting economics in this proposal, and some open economic questions. Those are the type of points this post will focus on.

Background: what is the motive?

To begin….I must confess that I have been confused by the Google-Verizon proposal, and despite Tauke’s best efforts, I still am confused by its basic motives. Tauke gave a good speech, but, frankly, I just am not clear what Google and Verizon were trying to accomplish with a public declaration.

Look, I have nothing against making proposals, especially for open issues like this one. It is the public part that confuses me.

It is well known that this proposal was issued after a series of private talks at the FCC broke down. But that does not really explain what this proposal is. Is it an agreement that Google and Verizon could not get someone else to sign on to? If so, why does revealing it in public improve things?

Here is part of the problem. Sometimes keeping quiet is better. Sometimes that helps forge agreement and build consensus.

Public discussion is more difficult to pull off. Reaction to public statements cannot be easily controlled. After all, we live in a world in which blogs and lawyers and publicists and politicians all feel free to comment about anything.

While the writers and executives behind the proposal may not have intended to speak to multiple audiences, it could not be helped. Once they released their proposal, it had to be seen and interpreted by multiple audiences.

Somewhat predictably, therefore, the proposal has been the target of lots of criticism from the blogosphere. And they did not include much additional material to anticipate those comments. Indeed, much of Tauke’s speech was about clearing up confusion.

So I am just not sure why the authors anticipated a public statement would be an improvement in the situation. Lots of the criticism is predictable.

Why predictable? Because a blogger gets traffic by being outrageous, gaining brief attention by screaming. It is the nature of the medium.

The proposal also got criticism for another and deeper reason – it touched a fervor that borders on religious belief. The blogosphere includes many net-neutrality purists (and haters) who have to scream if they find one thing out of alignment with their views. This proposal is a compromise, so it is bound to make such a purist unhappy.

I gathered from Tom Tauke’s talk that they (Google and Verizon) did not anticipate the multiple ways in which the proposal would be interpreted and misinterpreted by multiple audiences. They now feel the need to correct misinterpretations. That also sounded a bit naïve.

Anyway, I have three things to say.

Three comments

First of all, this proposal is serious and thoughtful, much more than a publicity stunt. The authors deserve credit for that. That took a lot of work.

Look, I am not saying that one proposal should resolve all tough issues. No proposal has to solve everything. Rather, it might be nice to acknowledge open questions.

As I have said in the past, the primary economic issue in broadband regulation is really a very traditional one for a communications service. Julius Genakowski can easily recognize it. Access providers with market power face mixed incentives. While the proposal does not fully address this concern head-on, it does address a lot of it. It talks about a carrier being committed to open access and the “four freedoms” that used to be the general principals guiding FCC policy. That is impressive progress.

It is ok from firms that commit to behaving in this way, as the executive team at Verizon seems to desire to do. Let’s give credit where credit is due.

Though I want to compliment the team for the effort, the proposal also seems a bit naïve. It will not – cannot – get anywhere unless it is binding. That is the thing about policy for networks – it has to bind everyone or there is not much coordination of the national network. If the carriers are not coordinated, then new programmers have to make different versions of their applications for different networks.

In that sense I see the point of the complaints of other observers. They worry that ingenious lawyers and disingenuous executives at other firms could use the same language to push things in less desirable directions.

There is not much to be done about it for now – that is something for the lawyers to work out when negotiations get real serious. But I would have hoped the proposal would acknowledge the question and discuss the tricky question of “who decides the rules” and whether (and how) the Congress has to intervene to give the FCC appropriate authority. The proposal starts to discuss these things, but it felt incomplete to me.

Let’s not go back.

My next comment is also sympathetic to the proposal at a broad level, but complains about the specifics. In short, these firms deserve credit for putting something forward. At least they are looking ahead and trying to escape the status quo.

This comment is mostly directed to some of the more childish comments coming out of the blogosphere. Please, would someone explain what is so good about going back to the status quo?

Let me put it this way: I do not know what the right proposal is, but I sure know we need something. The status quo stinks. What is the alternative to a series of proposals like this? The status quo is the United States is laughably unkind to investment from established firms and entrepreneurs.

Here is what I mean. Ever since the FCC first became involved in regulating aspects of the Internet, most of the time the process has bordered on the absurd.

Everyone knows the pattern of the last decade. The US has a system where regulators make declarations, losers appeal to courts, the courts find fault the better part of the time, the FCC redoes its decision, and somebody else appeals. I cannot imagine a setting more unfriendly to long term investment in highly uncertain technical markets (with the possible exception of wartime).

More to the point, most of my friends in other civilized places – like, say, Britain or Sweden – think the US has the craziest regulatory system on the planet because it never seems to make up its mind about anything. Occasionally Europeans will accuse US regulators of making a bad decision, but most of the time they simply accuse the US regulatory system of not making up its mind at all, vacillating between regimes, policies, and preferences.

Vacillation is just terrible for the economics. A stable policy is better than dramatic changes in policy every few years. No matter what one’s political views, the lack of stability serves nobody’s goals.

As I explained on a previous blog post, we got to the present situation because Michael Powell was too clever by half in 2003. Powell never meant to jettison the entire system; only to build a new less knotty regulatory one. He built it on Title I as legal foundation.

Even someone sympathetic to Powell’s deregulatory goals would have to regret the use of Title I. It has not survived severe testing.  Comcast and the FCC had a fight that took the legal foundation for the entire system apart. Title I is simply a poor legal foundation for basing any regulatory system for broadband.

Needless to say, if you are not sympathetic to Powell’s goals, then things look even worse.

Surely we need an alternative to the status quo – both in the short run and the long run. Title I is dead, and another seven years of regulatory uncertainty would be bad too.

A question

Finally, I have one question. Reading the proposal closely, I really cannot tell what economic system  the firms are proposing when they depart from neutrality. I really could not figure out how money was supposed to change hands and for what.

The proposal talks about eliminating net neutrality in certain applications in the wireless space. A number of commentators have focused on whether the default should be on neutrality or not, and who has to bear the “burden of proof” for a departure. I get the point of those comments, but, honestly, this is what a lawyer would say. It misses the key economics.

In his speech Tom Tauke talked about special applications, such as wireless monitoring of pacemakers, where the routing would have to give priority to signals in some circumstances.

I get the technical point of that specific example. That is a good example of an application where non-discriminatory routing might be a technical problem. And the example has its own transparent rhetorical question: Does our society really want the data for some kids downloading of a movie to get the same priority as the data which signals whether a pacemaker is ticking properly?

That is a serious economic question, and deserves some attention. Yet, I am not fully convinced. While I can see how the proposal makes room for that type of application, it also seems to be too vague in the proposal. The authors appear to want to give themselves some flexibility, and make room for additional innovation. They could have saved themselves a lot of criticism by giving examples and limiting the scope of the exceptions to non-discriminatory networking practice. By using general language, the proposal for a non-neutral set of applications looks like a major loop-hole in the making, at least in the hands of a disingenuous lawyer.

One part of this makes me especially uncomfortable. There has been something worthwhile about the economic system we have now, where carriers push the costs of prioritizing packets onto content providers who buy cache services. It preserves freedom for experimentation, while allowing firms with big audiences to have a better service.

That seems to work better than the alternative, having the carrier decide which packets get priorities based on deals with content providers. That alternative would introduce many mixed incentive problems. Indeed, that alternative is one step away from having carriers with mixed incentives all over the Internet.

In short, whether by design, luck or good policy, we have had a system that saves the country from adjudicating many mixed incentive regulatory issues. I think that is a good feature.

Yet, here it gets introduced in the proposal without much comment. There is no discussion about how money would change hands and how mixed incentives might arise. It seems like the authors have to grapple with those issues. When will a new application need regulatory approval — only when it involves a carrier in a business relationship — before or after a deal? What principles will govern those approvals?

Looking forward

I do not think we are done. Change has to come. The status quo cannot hold.

This is a thoughtful proposal, albeit incomplete. It has the potential to introduce many problems. I look forward to more discussion.

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