Wednesday, January 04, 2006

Broadband Futures 1 - Who Pays?

The argument about “network neutrality” in the US is usually framed as Regulation vs. Markets, that is, it’s a fight over the value of unfettered Internet access vs. the wisdom of untrammeled markets. In fact, it’s about Who Pays.

The debate centers on the degree and kind of regulation of the next generation broadband consumer services in the US. The cable and telephone industries both offer broadband service, but have arrived at this point along different paths. Hence, they are governed by very different regulatory regimes. An attempt is under way to harmonize this regulation. Since the Internet is the driver of a great deal of new wealth, a lot is at stake.

Let’s consider the candidates in the Who Pays stakes.

First we have the customers for residential broadband Internet access. The cover a broad spectrum, from “passive” customers, who simply want to easy access entertainment, to “active” customers, who participate in a peer-to-peer web of content production.

Next, we have the network operators who provide this service; I’ll call them the ‘netops’. In fact, the service comes in two parts: the transport of packets, and applications and content these packets represent. The netops provide both.

Our third and fourth candidates provide applications and content services, but don’t transport packets. They are, respectively, the ‘establishment’ content providers, like eBay, Google, and Disney, and the ‘independent’ content providers. The independents cover a wide range from individual consumers, to new content providers like boingboing, to aggregators like digg and (independent until it was recently acquired by Yahoo), to application/content infrastructure that supports them like bittorrent and the P2P directories.

Next: What’s to be paid?

If we assume that the network needs to be upgraded to support high quality video streaming, then someone needs to bear the infrastructure build-out costs. If the current network suffices, or if the upgrade costs are small, there’s still the question of who retains the surplus value of new services, assuming that the next version of the Internet will generate abundant value which can be represented as money.

We can now get down to the nitty gritty: Who Pays?

The netops are not going to pay. They have sufficient market power, since they form a local duopoly, and even in some places a local monopoly. There are just two viable kinds high speed (ie faster than a few Mbps) Internet access in the foreseeable future, since only two industries have wire in the ground: the cable companies and the telephone companies. Wireless technology doesn’t offer enough bandwidth, and broadband over powerline doesn’t work. The netops will pass any costs on to the customers and/or the content providers, and will extract a share of revenue on new services from the content providers.

The independent content providers can’t pay. They don’t operate for profit, or they are not yet profitable. Their large numbers make the transaction costs of negotiating payments very high. The independents will rely on regulation to make either the establishment content providers, or the customers, pay. If they fail to do this, they will pay the ultimate price: the netops and/or the establishment will find ways to squeeze them into a marginal role.

The customers will pay through the fees they pay for Internet access. It’s possible but unlikely that they will be required to pay a premium to access to specific sites and services on the Internet, since this would generate a storm of protest about “Destroying The Internet As We Know It”, which would embarrass the netops. Rather, customers will pay for content indirectly. First, there will be a variety of bundles and tiers of service; customers will need to buy certain (expensive) tiers of service to get access specific types of service, eg Voice over IP, or streaming video, or P2P downloading. Second, netops will require content providers to pay to assure “enhanced” access for consumers to their sites. Depending on how competitive the market for a particular content service is, the content providers will either have to pay out of their profits, or pass the costs back to the consumers.

The establishment content providers will pay the netops in order to assure that their content gets through. The netops will require payment to ensure that content is delivered properly; whether it’s framed as a payment to “prevent degradation” or “provide better quality” is moot. It boils down to ensuring that a provider’s content is presented at least as well as that of their competitors. In some cases netops may try to block content, but this will be a delicate procedure, in terms of public relations. The notion that the Internet should be open to all comers is reasonably well established in the public mind. However, arguments about security and piracy will be used to constrain content, particularly that of the “can’t pay” independents; bittorrent streams and P2P applications in general come immediately to mind.