Thursday, July 27, 2006

Understanding Net Neutrality

This is an issue that interested me even before I started work this summer, but I've certainly been immersed in it these past few months. There is a great deal of confusion over it, and many misconceptions. It's really quite simple, but I think it helps to have a little bit of narrative context. From early on in the development of the US phone network up until the late 1960's AT&T (along with the regional Bell companies (RBOCs) that they controlled) was the telecom sector. Starting in the late 1960's the FCC started giving signs that they wanted to create competition, at least in some limited areas, for AT&T. Taking the hint from the FCC, MCI was created in late '60s with the intention of entering the long distance business, and during the 70's did a remarkable job of plugging themselves into the regulatory and legislative machines in DC. AT&T was not about to take this lying down, and a mighty battle ensued. In the end, MCI won and AT&T, as we all know, was broken up. But they were broken up to break their monopoly on long distance, meaning that the key was to sever their connection with the RBOCs, so that MCI and AT&T could both contract for long distance service with them. It left in place the RBOCs' monopolies on local access to consumers. In 1996 Congress tried to eliminate that monopoly as well. The FCC, in its wisdom, savaged this legislation, leaving the local access monopoly more or less in place. As things turned out, the long distance market was really not worth that much. It's so cheap now that companies can basically give it away, and in the context of voice over IP (VOIP) the entire concept of long distance becomes obsolete.

Local phone service, likewise should not be worth much. But the monopoly on local access allows for more than just the provision local phone service, it allows for providers to tie any other service delivered on those lines to the monopoly. The economic theories now dominant in antitrust law say that this should not be important, that tying of products to an existing monopoly should not allow the provider to milk that monopoly for more money than they could get for collecting rent on the monopoly directly. The efforts of the Bell companies to protect their ability to tie services to their access networks argues to the contrary. When Congress tried to break up those monopolies in the 1996 Telecom Act, the Bell companies spent (if I recall correctly) upwards of $250 million fighting against it in court and in front of the FCC. They won that battle, and for their efforts won the right to tie DSL broadband internet service to their monopoly. The cable companies piggy-backed on their efforts and convinced the FCC to give them similar treatment, ensuring us a duopoly on broadband internet service. Consequently we have fallen far behind competing nations on price/performance in the broadband market.

That brings us to net neutrality. Having extended their monopoly to provision of broadband internet, the Bell companies now want to push their monopoly still further, into provision of services over the internet. High speed internet has the ability to deliver phone and video (the equivalent of cable TV) over IP for very low prices. This threatens the monopoly rent that the phone and cable companies have collected on these services for a long time. Once consumers are purchasing their TV and phone service over the internet, the phone and cable companies will have no competitive advantage over other providers. Consequently, they will not deliver high speed internet access until they are guaranteed the ability to block competing voice and video services over those connections to preserve their duopoly (the pathetic broadband connections they now sell lack the bandwidth to provide video service). They may also try to collect rent from other online service providers like Amazon and eBay, but I don't think that's really the objective. And I would be very surprised if they ever got into the business of restricting free speech, or any of the other nightmare scenarios that some net neutrality supporters have suggested.

I'm as big a fan of net neutrality as there is. But it really doesn't go far enough. The phone and cable companies have got us by the balls on broadband service and are threatening to hold high speed connections hostage if they don't get what they want. And they're more than capable of doing just that. Hell, they've already done just that. Many other countries have 10+ Mb/s DSL connections and are seeing rollouts of 100 Mb/s fiber connections. We're stuck with 1 Mb/s connections and we're being overcharged for them. Congress needs to go back and finish what it was trying to accomplish in 1996: open up the local access duopoly. But it needs to do it right: complete divestiture of the local access loops. The network access business should be run like a utility. If that were done, net neutrality would be a meaningless concept, there would be no need for it. Competitive pressure would prevent any service providers from trying to block access to internet services.

Unfortunately, the phone companies have the DC muscle to prevent this from ever happening. They've already spent $50 million on net neutrality and appear to have scuttled an important telecom bill because Democrats (to their credit) wouldn't let it through the Senate without net neutrality. These are some of the costs we pay for having a government for sale to the highest bidder.


Ryan said...

Great post, Joe. I appreciate the background you gave, which sheds a much better light on where we are now. It continues to amaze me just how beholden our government is to big (i.e. wealthy interests). Never mind whether it is the best thing to do for the population and economy as a whole - let's just serve the interests of a few. What ever happened to the lobbying reform in the wake of the Abramoff scandal? Seems it has passed over the American consciousness.

On a different point, what effect do you think cell companies will have on internet service? I would imagine this will be quite competetive once the technology becomes efficient and cheap enough. Furthermore, they are not limited by the last mile effect of the current duopoly.

Joe said...

Wireless internet is one the great hopes to break the broadband duopoly, and it will to some extent. Wireless will be highly competitive on basic internet connectivity, handheld devices, and VOIP. But by all reports I've heard, there is probably not enough radio spectrum for wireless providers to offer broadband at speeds capable of handling video service. As IPTV services become popular, that unfortunately will probably make wireless an also-ran in the residential broadband market. So wireless broadband will definitely help, but it likely won't entirely break the duopoly.

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