Net neutrality: Free market will self‑regulate
Tuesday, January 21, 2014
A federal appeals court has made it clear that the FCC cannot regulate the carriage of traffic on the Internet for operators which the FCC itself deems are not common carriers. Of course, there is nothing preventing the FCC from declaring that Internet service providers are common carriers. If they did so, they could presumably go on to regulate carriage, including not only policies (like "neutrality") but also pricing, bundling and other regulation.
Hopefully, the FCC and consumers will instead give the free market a chance to actually work. The Internet and Internet service providers (ISPs) have presumably been operating in a "free market," but the truth is that for most of the early history of the Internet, access was limited and controlled by telephone companies. During the era of dial-up, the phone companies were (and in many cases still are) a monopoly in the access network.
With the advent of so called "broadband" or always-on Internet access, the competitive entry of cable operators and more recently wireless service providers, some free-market mechanisms have come into play. Most notably, we've seen that competition for voice — brought on by voice over IP from cable operators — has virtually brought an end to domestic usage-based voice and continuously rising data rates driven almost exclusively by competition.
Operating a free market with wireless providers has proven more challenging. Wireless cellular operators were never threatened by policy claims for network neutrality. In practice, they are far from neutral. Testing I've done shows that they throttle (rate limit) some applications and block other applications. They do so not only on their network, but through control of the handsets or devices (cellular phones, tablets and adapters).
For example, "locked" mobile platforms were well known for blocking competitive voice applications like Skype at a time when they were (and some still are) pushing for revenue by the consumption of voice minutes. Today their most valuable applications like SMS and MMS are being end-run by over-the-top applications.
The cellular wireless operators have responded by blocking, rate limiting or otherwise obstructing some of these applications they see as competitive. Although dominated by Verizon Wireless, AT&T and Sprint, small players like T-Mobile have continued to differentiate their services not only by pricing and avoiding such blocking or throttling.
Better still, they have encouraging the open development of new services and applications. T-Mobile embraced tablets earlier than the others. Even if you've never been a T-Mobile customer, you've benefited from the competition, because Verizon and AT&T suddenly embraced tablets as the results of T-Mobile became clear.
While it's understandable that wireless operators provide both regulated (telephony) and supposedly unregulated (Internet) services, the market for wireless telecommunications services is not a free and open market.
Although we are seeing the sure and steady progress of wireless applications, the most successful Internet service companies continue to struggle in the world of wireless not because of any wireless technology, but because of the control that the cellular operators have over information such as the subscribers' location, usage patterns, current use of their device, etc. While the cellular operators continue to derive revenue from selling location-based ads and access to their subscribers on their networks, customers have little to no control — or worse yet, no realization that this is what is happening.
There are in fact, two separate ways of operating Internet services on cellular wireless networks. The first are connections that mimic dial-up using the cellular network, providing data services over the wireless network. Although one can in theory just run a browser or even a VPN through your wireless access to get to "wired" Internet resources, in practice the Web-based applications are too bandwidth-hungry or latency-sensitive to work properly and VPNs add even more latency.
The second way — less well-known and understood — is messaging-based Internet services. Although less understood, they are now more common. Most wireless “apps” use proprietary cellular operator APIs that include some functionality from 3GPP or 3GPP2's adoption of the Open Mobile Alliance (OMA) messaging standards (which use SMS/MMS infrastructure to carry data messages) along with their own gated APIs.
Far from free and open, these are not standardized across cellular operators and are gated, with fees for access to particular services such as subscriber locations. Did you know your cellular operator makes money by selling your location ? They do.
Back on the “wired” Internet, we really do not know what a truly free market will bring. To be sure, one or more companies will cleverly come up with some services that consumers will not like. But that's the beauty of the free market, if they do so consumers will be able to switch to another provider if they don’t like the options available to them.
Given the insatiable demand for bandwidth, operators and customers alike are going to need time to come up with a mix of subscription fees, ad-supported services and other partnerships to figure out one or more models that are scalable.
Although consumers have widely accepted the fact that they cannot have unlimited bandwidth for fixed price in wireless, they have not accepted that fact on their wired networks. And although the economics of the “last mile” from the customer to the network vary, the remainder of the economics are the same. Neither wireless, cable, telco, nor any other ISPs can offer unlimited bandwidth for a low-cost fixed flat rate.
There are literally no other utility services that are unlimited (natural gas, water, etc.). By definition, if a flat rate is to be offered, the rate would be determined based on the cost, which would not be based on any individual consumer's needs, but typically by an average or a worst-case consumption.
Most “all you can eat” or “unlimited” plans are modeled on the theory that consumers will think they are going to save money, but will actually spend more on the “assurance” of unlimited then the dollar value of what they would actually consume when pay for or per use.
It may have been possible for operators to bundle services (including OTT services) before now, but the fear of reprisal from an agency acting sometimes irrationally and inequitably has held back innovation. The technology available to wireline carriers allows for them to construct separate circuits for separate services.
Although there may only be one cable (such as fiber optic cable, coaxial cable or twisted pair or pairs) entering a home or business, that “cable” is capable of carrying multiple signals. Even in the case of what is called “dedicated access” or active ethernet (like Google Fiber), the cable from the customer premise connects to another place in the network where traffic is multiplexed or aggregated with other traffic.
The locations within the network (relative to the customers premise and the operator’s facilities) may vary, inside or outside, and the technology may vary, but someplace in the network, traffic is multiplexed and combined, providing the economies of scale and aggregation required to operate large scale telecommunications networks.
Operators offer more than one separate service over these cables. For example, a telephone company may offer telephone service on one frequency and DSL on some other frequencies. Or a telephone company may use their entire spectrum for VDSL, but use separate IP address space, VLANs, or VPNs to separate SIP (voice), video and other services.
Likewise, a cable operator could use any combination of separate channels (frequencies), IP address space, VPNs, VLANs, DOCSIS service flows or other mechanisms to likewise separate traffic. Today, this is already widely done. This is the reason why, when you watch television or make a phone call, these service do not interfere with each other. But we also know that if you use two competing OTT services, for example Skype and Hulu, they can (and do) interfere with each other.
The concern with network neutrality is that ISPs might, for example, block competitive OTT providers like Skype, Hulu or Netflix. The free market would certainly make sure that any operator foolish enough to block a popular service is likely to suffer the consequences.
But fear of FCC intervention has prevented many possible ideas that could improve these services for consumers. For example, Netflix could partner with ISPs by using their VOD infrastructures to get the content closer to consumers and therefore provide a higher quality service. One could imagine numerous possible partnerships for free, nominal cost, pay per view and other variations that could emerge between OTT providers and the ISPs.
As soon as one of these emerges, competitors are likely to be concerned (as they should be). But we shouldn't mistake complaints about neutral with lack of competition. For example, if Netflix develops a partnership with ISP A, then we could expect that Hulu wouldn't be pleased. That’s competition at work.
But in a free market, instead of going to the FCC to complain, Hulu could approach ISP A and ask for a similar relationship. It’s already the case that we have a free (albeit imperfect) market for various services on the Internet. But the most contentious ones are clearly the ones pushing the edge on performance.
Video is an obvious example today. In the past, the free market has encouraged solutions to technology problems. Caching, CDNs and compression technologies were all developed in a market looking to solve bandwidth limitation problems for consumers of the Internet. None of us know all of the possible technologies that could emerge from a free broadband Internet access market — because we've never had one.
This could be a great opportunity to let the market evolve. But the worst possible outcome for consumers and service providers alike would be to act preemptively to regulate something that isn't understood and has not evolved. To be sure, we all need to be watchful consumers (and businesses).
If, for example, all of the ISPs were to secretly meet and set terms and conditions, we would have sufficient cause for alarm and we would expect the FTC (not the FCC) to act. But short of our runaway imaginations, we have never given the free market for many services a real chance on the Internet.
A highly regulated telecommunications market for common carriers got us decades of plain old telephone service. If we want the Internet to “stay the same” and never change, we could consider regulating changes (preventing them). Do we really want to prevent changes?
A free market isn’t neutral, it is open. There are no regulations that guarantee that your local bookstore buys books or sells books for the same prices as Amazon. As a result, Amazon has eliminated the wasted costs of shipping, storage and floor space in bookstore, to the well-known benefit of lower prices and better availability for consumers.
Did you know that Amazon partnered with ISPs to cache content locally to improve performance for their services? Did that hurt or help consumers? I’d argue that it helped. Did it hurt other booksellers? I’m sure it did, but the free market isn’t about neutrality, it’s about the freedom of companies to integrate, partner and sell services. Any other bookstore could have done what they did, but the truth is that other bookstores didn’t want to lose their massive profit margins. The free market worked in this case.
What if one ISP partnered with health care providers to prioritize video from our doctor to save a trip and lower our own healthcare costs? Is that unfair or helpful? Of course, the other ISPs and other health care providers would complain. They will always try to use the government as a tool to compete. But what would be best for consumers would be to let them compete and see what happens.
Nearly every time a company cries "non-neutrality," consumers and journalists jump to defend the company. They are acting as pawns of the complaining party. In a free market, the media and people can (and do) say what they want. But let’s recognize that this is part of the free market game.
If we are looking at policy, what we should have our eye on is not problems that don’t exist, but problems that do. While we are all worried about the “potential” for problems from our wired ISPs, our wireless ISPs continue to be the highest cost and the least neutral. For many Americans who have unplugged or for those who don’t have wired broadband available where they live, the possibility of a separate but different “wireless Internet” isn't a fear.
It’s clear from the term that the “wireless Internet” has already become a somewhat separate experience from the “Internet” at large. The irony is that this more “regulated” industry has received less scrutiny than “residential broadband” at a time when the wireless industry is positioning itself not only as a primary (telephone) line alternative, but as a substitute or competitor for residential broadband.
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