The Fault Lines Along Fast Lanes

Until recently, a fast lane from a broadband ISP was a remote possibility in the US. ISPs had to give data equal treatment, regardless of the source, and could not offer faster delivery for a higher price while giving slower service as a default.

Although fast lanes were allowed by regulators a few years ago in the wireless networks, the carriers hesitated to offer them. In December 2013, AT&T Wireless broke with the norm and announced just such a program. FCC regulations forbidding fast lanes at landline broadband ISPs had also prevented them, but a January 2014 US appeals courts struck down those regulations.

Is that a good or bad trend? The answer depends on who’s talking. Critics of government regulation despise the rules forbidding fast lanes, whereas net neutrality supporters view the presence of fast lanes as a nightmare come to life.

Legal and political aspects of this topic typically get most of the attention, as do the implications for the variety of speech online. Most reporters find these aspects interesting, and understand them. However, the economics of fast lanes receives less attention. That is a surprise, because the economics is not very difficult, and it’s worth understanding. It illuminates the fault lines between many different points of view.

Mirrors and servers

The public Internet has evolved considerably since the days when the design for packet networks presumed that the message did not have to arrive at an inbox immediately. Users today prefer and expect speedier services. That goes for more than just IP telephony and video chat, where users notice the smallest delay. It also holds true for video, such as YouTube and many online games. Many providers believe it also affects the bottom line—namely, that users switch services if they do not get fast delivery of data.

Long before fast lanes became a real possibility, many participants in the Internet made investments aimed at reducing delays. For example, for some time now, Akamai has sold a well-known approach to improving speed. Their service also defines the first fault line, so this is a good place to start the discussion. Opponents to net neutrality ask why Akamai can operate a business to speed up data delivery but a carrier cannot.

Akamai’s service supports servers inside ISPs, closer to households. Any seriously large Internet content firm must buy these services, and it is considered a cost of doing business online. Many ISPs like working with Akamai, because their customers experience better service without much investment from the ISP.

That is not the only method for speeding up data. For example, Google has bypassed Akamai’s charges in many locations by building its own data network to ISPs. Netflix has recently sought to do the same, though it is not quite done (because it has not successfully negotiated a presence with every US ISP). Any gathering of more than three Internet engineers will generate discussion of even more potential solutions in the cloud. Amazon built a content delivery network with enormous geographic range. Microsoft has similar investments and aspirations, as does IBM. The list goes on.

That leads to the deeper question. The last few years have witnessed robust experimentation among distinct approaches to functional improvement, and these might be either complements to, or substitutes for, each other. Accordingly, carriers have had two roles. They act as a firm whose users benefit from faster delivery, and they act as a supplier that could choose to cooperate—or refuse to cooperate—with solutions offered by others.

When a carrier had no investments in fast lanes, it had every reason to cooperate with solutions offered by others. Will that change if the carrier has its own fast lane?

The answer defines a fault line between points of view. Some observers label this a possibility that might never arise. They want a regulatory response only when a problem emerges, and otherwise they anticipate that a regulator will err. Net neutrality supporters think regulators have an obligation to protect the Internet. Advocates worry that introducing fast lanes messes with a system that already works well. They do not trust carriers to cooperate with solutions that might substitute for a fast lane business or threaten an investment in some way.

Competition and monopoly

The next fault line has to do with the role of money. Defenders of fast lanes expect them to become a cost of doing business for content firms, and forecast that fast lanes will be profitable and generate more investment. Opponents have the same forecast about profitability, but a different interpretation. They worry that fast lanes will lead to an Internet where only rich firms can deliver their content effectively.

This concern tends to get plenty of press, and a few rhetorical questions illuminate the fault line. Will the default speeds offered by ISPs be good enough for startups or for small specialty websites? One side believes that the defaults will be good enough, whereas the other believes that fast lanes will lead ISPs to neglect investing in their slow services.

One’s point of view about the state of competition for ISPs has a big role in interpreting the role of money. Some believe a competitive ISP market would melt away most problems. Others argue that belief about competitive ISP markets is a fantasy and masks many dangers.

The belief in competition is not a belief in magic, so it is worth examining. Rather, this side views competition as a painful process. In competitive markets, customers substitute into alternatives if they do not like what a supplier does. Suppliers hesitate to do things that make their users angry. In other words, ISPs would compete for customers by offering better fast lanes. In this view, users would get angry if they perceived that carriers were slowing down content from firms they cared about, and angry users would find another carrier.

Where is the fault line? Recognize the two key factors that make ideal competitive markets operate well—namely, transparency and the availability of many user options.

Just about everybody is in favor of transparency, but not necessarily more of it if rules require it. Those with faith in competitive processes tend to see the merits in nothing more than a few light-handed requirements, such as programs to facilitate measuring the speed of different ISPs. The other side asks for much more, such as the publication of all fast lane contracts (more on that later).

As for the second concern about options, consider the key open question: Do users have many options available to them, or do they face de facto monopoly ISP markets? Once again, there are different beliefs about the preponderance of competition and monopoly found throughout locales of the US. Those who presume that competition is inadequate lack sympathy for leaving ISPs alone (versus those who presume it is adequate).

That also leads to different interpretation about how lucrative fast lanes will be. Supporters of fast lanes say that ISPs should charge whatever the market will bear, and competition will discipline pricing. Opponents say that the monopolies emerged from granting public franchises and use of public rights of way, and characterize high prices as misuse of utility franchises.

A classic debate about government merger policy also arises. Net neutrality supporters argue that fast lanes give ISPs artificial incentives to consolidate in order to increase their bargaining leverage with content providers, thus concentrating economic power in ISPs. Net neutrality opponents do not see anything wrong with large ISPs. In a competitive market, size is irrelevant.

Mixed incentives

The foregoing leads into the last fault line in discussions about fast lanes—namely, views about mixed incentives at carriers. A mixed incentive arises when a carrier distributes a service that substitutes for one available on the public Internet.

Many broadband ISPs have a thriving broadband service and provide video on demand, and make a pretty good margin on both services. Will most cable firms want to sell a fast lane service to Netflix at a low price? If the carrier did not make money on video on demand, then a carrier’s price for a fast lane for Netflix would be lower, and the same goes for entrepreneurial firms offering video services. That also begins to suggest the intuition behind the concern that cable firms will tilt their other actions against online video to protect their existing businesses.

Mixed incentives also come up in discussions about scrutinizing carrier contracting practices. To put this fault line in perspective, consider a hypothetical scenario: What would happen after a carrier sells a fast lane to, say, ESPN? Can anyone else expect the same terms, even Netflix? Yet again, one side argues that competition will solve these issues, and the other sees a need for regulatory intervention to make terms of fast lane contracts public.

A mixed incentive also can emerge when a carrier has an economic incentive to protect its partner’s business in which it gets a cut. In other words, is it okay if ESPN gets a better deal than Fox Sports because an ISP made a deal with the local team who competes with something done by Fox Sports? The same fault line as just mentioned: should competition solve this question, or should governments intervene to publish fast lane contracts? Should ISPs be required to give the same terms to all takers?

To summarize, the fault lines between perspectives hinge crucially on several beliefs about the economics. Forecasts depend on whether the observer sees a preponderance of competitive or monopoly markets for ISP services. They also depend on whether transparency resolves potential problems.

 

Copyright held by IEEE. To view the original, see here.

The Open Internet Advisory Committee at year one

Today I would like to make a little shout-out for recent work at the FCC to improve policy making for the Internet. To do that I need to put my preferences front and center.

There are policy debates, and then there is actual policy making. The former grabs headlines on occasion, while the latter rarely does. Both need to take place in order to make progress, albeit, it is a rare person who has the patience and taste for both.

I have little patience for the grandstanding that goes with policy debates, and I do not take much pleasure from the staging and entertainment behind political posturing. I prefer policy making, especially the quieter and more challenging parts of it, and I love being engaged in challenging policy conversations that do not get much publicity.

Just so we are clear, this post will discuss policy making. Policy debate will largely remain in the background. That is unusual for most public discussions about policy for the open Internet, but it seems appropriate for today’s post.

It is the one year anniversary of the Open Internet Advisory Committee. In approximately two weeks the committee will release its first big report, a kind of year-in-review. I am not a neutral observer of this committee. I am a member. I am especially impressed by what the committee did in its first year.

If you think I am biased, then you are right. That is the point of this blog post.

I have been happy to be part of this committee, and contribute to public policy discussions through participation. And whatever else the posturing political world says, I want to be the first to say loudly that this committee has done wonderful work to support policy making, and, until two weeks from now, largely out of the public’s eye.

Does Google get a good ROI in KC?

What in the world is Google doing with its high speed network in Kansas City? Does Goggle expect the revenue to exceed the costs of building the network? Dave Burstein has some numbers to illuminate the question.

Dave Burstein is a communications junky for the major communications junky. He covers many topics in communications markets, and he obsesses over finding the true facts, not merely the sound bites. Last week he provided an outline of the basic economic parameters behind Google’s investment in high speed broadband in Kansas City, and his notes make for interesting reading about the project.

I would guess that most readers of this space are not junkies. I know how to read what Burstein writes. The purpose of this post is to provide a translation.

One gig broadband in Chattanooga

For those of you with an interest in frontier infrastructure, check out this article from Stacey Higginbotham at Gigaom. She wanted to see what *really* high speed fiber looks like in practice, so she went to Chattanooga, which has been running an experiment at the frontier. This quote will give you a feel for the article:

“For the last two years, Chattanooga, Tenn.’s public utility (EPB) has offered customers a gigabit fiber-to-the-home connection costing roughly $300 a month, so I touched base with a group of investors and entrepreneurs who have built a program to try to see what people can do with that fast a connection. So far, the limits of equipment, the lack of other gigabit networks (much of the Internet is reciprocal so it’s no fun if you have the speeds to send a holographic image of yourself but no one on the other end can receive it) and the small number of experiments on the network have left the founders of the Lamp Post Group underwhelmed.”

It is a pretty interesting article. Read the comments too, as some of them disagree with her negative conclusion and offer concrete counter-examples.

Tiered Broadband Pricing

Kellogg Insight’s Editor, Tim De Chant, and I sat down to discuss tiered pricing for broadband. It was a pretty interesting conversation, and Tim distilled it into a blog post. If you are curious to see the original post and other posts by Tim, see his blog, Expertly Wrapped. With Tim’s permission, here is a reposting:

**************************************************************************

Consumers and startups to be affected by metered broadband, By Tim De Chant

As more people are looking forward to a future overflowing with data—Facebook, Twitter, Netflix, YouTube, a seemingly limitless number of websites, and more—broadband providers are looking to limit the amount of data they provide. And with those limits will come new—and most likely higher—prices.

Data caps aren’t new—they have been widely implemented by wireless providers—but they haven’t been widely implemented among traditional broadband providers. Now, that seems to be changing. Many providers complain that their network is overloaded, and that the costs of upgrading it to handle the added traffic are prohibitive. To maintain a quality service for their customers, providers say they have to raise prices.

Unfortunately, it’s not that clear cut, said Shane Greenstein, a professor of management and strategy and expert on internet economics. There are a number of issues clouding the matter, one of which is time of day. Overuse “usually does not matter most of the day. It generally only matters between 7 PM and 10 PM, when use is highest,” he said. “The usual justification for usage based pricing (or caps, for that matter) appear quite weak outside the 7 to 10 PM window.”

Limits to broadband diffusion?

The National Telecommunications Information Administration just published the findings from its latest survey about Internet use within US households. In case you missed it, here is a summary: broadband adoption among US households went up, but not by much.

Actually, that is not entirely fair. Viewed at short intervals, broadband adoption will appear to be a slow moving process. However, a little stepping back from the short run headlines reveals good news and bad news in this report. That is the point of this post.

US Broadband in Maps, Graphs, and some Bars

To be sure, most of us do not use government statistical reports as anything more than bedtime reading for inducing soporific reactions. It is cheaper than a sleeping pill.

But those expectations would be too harsh for the most recent broadband report from the FCC. It contains a great deal of data, and it is really quite informative. I would go even further. It is a useful vehicle for learning about the basic economics of broadband. For that purpose, however, it has one drawback: it is a wee bit too long, as in 88 pages.

This post will save you some time. Much of the key insights can be summarized in three pictures — a map, a graph and some bars. The post  will start with the map, then go to the graph, then end with the bars. (For those keeping score at home these pictures are taken from pages 62, 78 and 79 of the report.)

The Direction of Broadband Spillovers

Revenue for US Internet access more than doubled during the first decade of the millennium owing to some simple arithmetic: the number of households using the Internet increased, and prices for broadband access averaged twice those of dial-up. More concretely, in the summer of 2000, while 37.1 percent of US households connected with dial-up, only 4.4 percent had broadband. By October 2009, 63.5 percent of US households connected with broadband.

The upgrade to broadband initially led most US households to spend more time online. At first, much of that new time went into the same activity found in dial-up (for example, checking e-mail, reading news, and shopping). Only gradually did users add activities that dial-up couldn’t handle (such as watching YouTube video, downloading music, or reading many blogs). By now, the transformation is rather apparent: broadband has created more online users and, moreover, these users are more valuable users of electronic commerce and advertising-supported media.

The relationship between broadband’s growth and other online markets is what economists call a growth spillover—that is, growth in one market spilled into another. Spillovers can be negative or positive. For example, broadband’s diffusion produced negative spillovers for the printed magazine and newspaper business, and it produced a positive spillover for online video sharing, such as YouTube.

Spillovers don’t need to be confined to a geographically local area, so they’re often challenging to observe and trace. This column focuses on understanding the geographic direction of the positive spillovers from broadband to online retailers and advertising-supported media, about which we know very little. To whom did the positive gains flow, and where?

The Internet and Innovation: My Testimony to Congress

A couple days ago I had the privilege and pleasure to testify before the House Sub-committee on Communications, Technology and the Internet, which is part of the Committee on Energy and Commerce in the House of Representatives.

Broadly speaking, the topic was net neutrality. That is what the newspapers said.

Frankly, I hesitated to testify. I am always happy to talk with any government analyst who calls, irrespective of party affiliation. Congressional testimony is different, however, especially in this topic, which tends to yield more heat than light. Moreover, I am neither advocate nor opponent for net neutrality — at least as that phrase commonly gets used in US political debate. Why should I be a neutral voice in someone else’s political fight?

Ah, but I could not say no. Even with reservations, there still exists a professional obligation to show up. It is the right thing to do. Also, and I will admit to this, I was excited.

One other thing made it easy. The hearing did not concern the entire net neutrality debate. It concerned a rather specific question, something called House Resolution 37, which disapproves of the Open Internet Access Order issued by the FCC last December. If passed, the entire order would not take effect — not its provisions for transparency, blocking and discriminatory traffic.

I had testified at the FCC hearings leading up to to the order, and  had testified in favor of transparency provisions, for example. That made it easy. Such a blanket resolution — getting rid of everything — looked like throwing out the baby with the bath water. To me this resolution did not make sense.

One other broad motive shaped my views. I believe there actually is a big economic question on the table, and it gets lost in the popular debate. I hoped to bring attention to that. In a nutshell, if there is anything a government might be able to do, it might be able to foster economic growth by nurturing entrepreneurship on the Internet.

Those expectations were naive (of course), but we will get to that below. Anyway, that is why I agreed to come.

This post will share what I learned about how the existing political debate filters this topic.  Below is a copy of my oral testimony, and a link to my written testimony. After that comes many  observations about what sort of questions arose at the hearing. I hope others find this insightful and useful.

Building Broadband ahead of Digital Demand

Many governments today, especially outside the US, are considering making large subsidies for broadband. Some governments, such as South Korea’s, have already done so, making next-generation broadband widely available.

In the US, debates about subsidizing broadband touch two sets of overlapping issues. One set considers the benefits and costs of an expensive action: building wire-line broadband in low-density areas. A second set considers stretching the frontier for broadband far beyond its present capabilities to enable next-generation Internet applications (typically video).

In the US today, those favoring building ahead of demand are the most dissatisfied, as are those who want to subsidize rural broadband. This column considers the economic origins behind that dissatisfaction.