I suspect the ideas in this essay will be popular in the same way as herpes — exposure will be unwelcome, yet infection will be widespread.
Both Jeff Pulver and Nicklas Zennstrom in their VON conference keynotes today have made calls for Net Neutrality regulations to ensure a “level playing field”. They aren’t alone in these requests. Beware what you ask for. You might just get it — and regret it.
I’ve written previously about the “Four Freedoms” that came out of the Powell-era FCC, and tangentially about their possible negative effects. Time to elaborate.
The four freedoms could colloquially and oversimplistically be re-phrased as “nobody block IP address ranges”, “nobody blocks ports”, “you can attach anything you like to the network”, and “you know exactly what you’re paying for”. At first look, these look like laudable consumer protection aims. But only the last one is guaranteed to achieve consumer benefit.
The FCC’s four freedoms were articulated in an unusual regulatory environment. The unbundling regime in the US had essentially failed, politically and economically. This was due to many factors I won’t go into here. But the failure cannot be doubted. Almost all the new entrants died, and the survivors are small and sickly. You only need look at countries like Japan, France and the UK to see what happens when unbundling succeeds. The FCC therefore needed alternative means to protect consumer interests, and limiting price discrimination is a post hoc means of limiting the consumer loss under monopoly or duopoly supply.
However, the FCC lacked specific direction or empowerment to “keep the Internet open”. There’s no “Internet Non-Discrimination Act of 1999”. Just a long case history of common cariage rules which only applied in spirit rather than de jure, and a general mandate to ensure fair competition.
The four freedoms are therefore a stick and carrot with which to encourage “good behaviour” from network operators. Mess with these, and we might not be so kind to you on other things dear to your heart. Really mess with these, and we might kick the regulatory rule-making apparatus into operation, and see how far we can push the existing mandates we have.
Now for the big, ugly, hairy danger for Net activists.
You need to understand the context of the FCC and these “freedoms”. First, they’re nothing about freedom! That choice of wording just makes for good karma and strong rhetoric. They aren’t the result of any legislated socio-political freedom agenda. They exist solely to discourage or inhibit price discrimination and anti-competitive behavior.
Price discrimination is the practise of charging different people different amounts for the same or similar goods. Taking airlines as the canonical example, different contract terms can be used to offer the same seat at different prices. A fully-flexible ticket costs more than a non-changeable one. Versioning of the product into, say, business and economy class also separates out those wishing to travel from A to B in comfort (or at someone else’s expense) from those wishing to be more frugal.
Classical market economics doesn’t see price discrimination as either “good” or “bad”. The effect varies between competetive and uncompetetive markets. In the latter, it just serves as a transfer from consumers to producers, as nobody gets away with paying less than the full value they receive. Where substantial competition exists, some consumers will naturally pay more as a result of being caught out by price discrimination, but on average prices fall and low-end consumers benefit particularly substantially.
So it’s a good thing when some telco offers a $10/month DSL wholesale product that can authenticate the device and only works with your VoIP phone and not a PC. It enables new classes of low-end consumers participate in the market.
The first three “freedoms” are all means of price discrimination. You can restrict which service providers, services and capacilities the user can access. Yet they can also be used as anti-competitive weapons by powerful incumbents. Blocking of the Skype domain IP address range or preventing access to rival e-mail service providers. The trick is differentiating which is which.
Still this doesn’t provide a case for outlawing such practices from the outset. Device-based discrimination could only seriously be an issue in a vertically integrated industry where devices and networks came from the same people. This isn’t what we see today, even in wireless. Port blocking is a nuisance, but is little more than a hump in the road, not a roadblock. IP address range blocking is probably a better candidate for investigation.
The Net Freedoms can never be a substitute for real competition — or for a total re-alignment of network owner and user interests, such as that achieved with municipal, community or user-built networks. All you achieve instead is a whack-a-mole of price discrimination methods. Next month we’ll be declaring dynamic IP address assignment an unreasonable encroachment on your “freedom” to host a server. The following month will be full of empassioned rhetoric on the evils of Net connections with unacceptable jitter. Or asymmetry. Or early termination fees. Or rules on which TCP flags are acceptable. Or, or, or.
We’re also eliminating the possibility of finding out if the Chicago economists are right. Maybe we should allow pricing signals of monopoly profits to be sent at full volume — to encourage new entrants. Regulation merely entrenches the status quo.
Discouraging price discrimination is also dangerous from a theoretical economic standpoint. We can differentiate the “social welfare” the provider offers (the gross benefit of the product) and the net benefit (social welfare less price charged). Inhibiting price discrimination may cause the provider to lower social welfare and serve only narrow market segments to enhace profits. Is this really what you want?
Finally, Adam Thierer warns us against some further unintended consequences of Net Neutrality regulations. eBay is a big campaigner for regulation, but what’s sauce for the goose…
But let’s look at the flipside of the equation and think about the future. If the [Net Neutrality] rules could be used by eBay against various [broadband service providers], could it not be the case that others might seek to use the [Net Neutrality] regs against eBay at some point in the future? After all, the “net” in net neutrality refers to networks and eBay has two major networks now—an amazing auction service and a VoIP service.
In a networked economy the prizes are bigger, but the winners in each field of endeavour fewer. Are we in danger of outlawing big prizes in the name of egalitarian poverty? Why put up risk capital if the prize can be confiscated?
You can argue for common carriage regulations in the name of democracy and free speech; but to treat it as a right seems madness.
You can argue for them on the basis of network economics, but you the onus is on you to demonstrate that this produces a sustainable business outcome to support the network, doesn’t dissuade investment, or unfairly overcharge or undercharge classes of users.
You can argue that a priori rules are needed to prevent anti-competitive action. But then wouldn’t you need to restrict the neutrality rules to only cases where the connectivity provider actually has a competing application service? If Madison River had only offered raw, pure DSL connections, should they still have had their wrists slapped?
You can argue that we need better truth in labelling laws on Internet connectivity. That’s the fourth freedom. Go ahead! But don’t invent more “freedoms” and pretend they’re inseparable.
You can change the game. Argue for policies that truly encourage multi-modal competition. Argue for policies that re-structure the ownership model. Good luck — I wish you well.
Or you can stop complaining.
Posted by Martin Geddes at 03:56 PMTrackBack URL for this entry:
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If you're saying that regulation is becoming out of place, and based on the premise of large organisations attempting to restrict access; or that the market can decide what kind of network access freedoms there should be (assuming no unfair barriers to entry, such as licensing!), then I would agree.
Governments are too far embroiled in this industry and it's time for them to have a radical rethink of how things are Regulated and Licensed (for the latter seems to create a requirement for the former).
Basic municipal access would prevent disenfranchisement and the market can take it from there.
A business that survives only because there is some form of regulation that creates an non market based environment should fail. You are free to drive on the street, but someone has built the toll bridge and wants the money back!
In fact, the more you regulate it, the less sustainable competition and technology advance you get in the end. Shouting "give them freedom", and living from distortion of competition and a couple of PCs in the garage is no real progress.
Great post, Martin! I've tried several times to articulate these points, without much success. You did it well!
Posted by: at September 22, 2005 07:33 AMI hear what you're saying - but be careful. A lot of people have only one reasonably possible provider. Those providers can do many things to eliminate possible competition, both blatent (port/ip-blocking) and subtle (introducing jitter/loss into competing services, giving their own services priority over competing services to the point where the competition is degraded, etc).
If the local BB provider is bought or owned (or badgered) by a interest group (say religious fundamentalists) who disapproves of X (where X may be porn, women's health information, medecine in general (scientology), competing religions, critics, etc) they could block access to it. There is a public policy good in people having access to information without someone filtering it. Having the local BB supplier tell you "we offer BB, and we filter out anything we don't like, take it or leave it" is a real problem when there isn't a local alternative (or alternative for a specific person). Think of a local phone company that disallowed calls to (say) Planned Parenthood or the Christian Coalition on moral grounds. Unfortunately, you can't wave a magic wand and say "get service from someone who doesn't block".
My feeling has been that the problem and reason deregulation and telecom reform failed was because it tried to force open the market without creating any incentives for the market to be open. Telling companies "you must let competitors use your facilities and sell your lines" is a recipe for failure (which is what the telecom companies lobbied for as a backup to stopping it in the first place). They knew they could game the system. If you're not careful, you'll set up the same sort of problem for BB as telecom deregulation has had.
It would have been far more effective and in the long run good for consumers (IMHO) to split access (connection from CO to home) from service provided over that wire. Make them spin off separate companies that controlled the access lines and both the Baby Bells and competitors could pay them equally for last-mile/etc access. Those companies would be free to set prices for access - but they would apply to all users. Basically it's pushing the original Bell breakup (which was amazingly successful for consumers) down another level - break all services away from access.