In a backhanded way, we free-marketers should tip our hat to Google. By coming out against demands from telephone and cable companies that content and applications providers pay a fee for a guarantee of greater quality and expedited delivery of proprietary applications that hog bandwidth, Google clarified the network neutrality issue as one of pure economics.
At first, net neutrality proponents fretted that such arrangements would hurt the proverbial little guy. But with Google and Vonage involved, the “David vs. Goliath” spin will fast give way to a more accurate “Goliath vs. Goliath” picture that reflects how much of a commercial beast the Internet has become.
Network neutrality proponents love platitudes like “information wants to be free,” the headline of a Jan. 15, 2006 article in the The New York Times. Such notions sound quaint, but aren’t true. Microsoft, Vonage, Google and their ilk are all part of the broadband value chain and openly seek to profit from the Internet. Yet, as seen in recent Congressional hearings on network neutrality, they are asking the government to deny the same right to another group of corporations, AT&T, Verizon, Comcast and other common carriers, who are as much a part of the same value chain.
The debate hinges entirely on perception and emotion. Google and Vonage are just more charismatic than the Baby Bells and cable companies. Indeed, they move faster, spot trends quicker and are more innovative. Yet, they also benefit from being on the cheap side of the Internet. The bandwidth and storage these companies use is much cheaper than the physical fiber, switches and routers the carriers must deploy. Capital costs are lower, product cycles are faster and barriers to entry are lower. Therefore players are more numerous and the segment appears more competitive.
Phone and cable companies, however, are capital- and labor-intensive businesses. Their assets have longer payback periods. Although small in number, and concentrated, they are not, despite what network neutrality proponents say, a cartel of comfortable monopolies. For the phone companies, core single-line businesses have eroded to the point to where they need broadband to be revenue-rich and profitable. They don’t want to deprive consumers of broadband. They want to wrestle away as much market share from the cable companies as they can (as the cable companies tenaciously fight back). But unlike plain old telephone service of old, in broadband one size does not fit all, and therein lies the dilemma.
Although activists use it as benchmark, Internet access at $20 a month will not pay for ubiquitous fiber to the home. The premium high-end TV and Web-based entertainment sold to a small percentage of wealthy consumers will fund the expansion of broadband to all segments of the market. Even if legislators don’t like the phone and cable companies, they must appreciate that depriving carriers of the ability to monetize their networks for what are essentially high-end, bandwidth-rich applications, aside from being inherently unfair, will impede broadband build out because it chokes off the revenues needed to fund it.
Monetization, of course, is a dirty word for the “information-is-free” set, but it’s only the carriers who are vilified for doing it. The last time I looked, Americans prefer to let the market allocate resources according to the law of supply and demand. Even at 100 megabits-per-second, broadband becomes a limited resource if you try to cram enough information into it.
The only way to deal with this is to allow for a “two-tier” Internet. Without it, applications providers who want to send multiple streams of King Kong in HDTV down a local bandwidth pipe will simply degrade the quality of everyone’s online experience, including their own. Given what Google and Microsoft, not to mention Disney and Electronic Arts, want to do with on-line entertainment, software and interactive gaming, today’s “best effort” Internet is not good enough.
All bits are not created equal. We are willing to pay for music, movies and games, and just as willing to pay for software that stops spam and spyware. Even as Congress was hearing about the necessity for network neutrality, Yahoo and AOL announced they were going to charge — to 1 cent “e-postage” per email for guaranteed delivery to their customers.
Enforced network neutrality will lock us into a mediocre Internet, and is more likely to slow broadband adoption than speed it. On the other hand, allowing carriers the right to create quality tiers will make the Internet better for everyone. If some applications providers have the choice to pay a little more to give customers a better experience, broadband services as a whole will have that much more of a lure.
Steven Titch is a policy analyst at Reason Foundation.