The other side of Net Neutrality

10 years ago, when home internet access was limited to dial-up modems, many discussions in the industry centered on the last mile problem. Completing the last leg of the high speed internet to residences was going to cost far more and be a much bigger technical problem than the commercial backbone. At the time I didn't own a computer because the access I had at home was dwarfed by what we had at the office. In college I had a glimpse of the future when 10meg Ethernet was run through campus, but it would be some time before we had high speed access at home.

But then the industry seemed to change overnight. After the dot com boom had gone bust, cable modems got cheap and fast and wifi was everywhere. Almost as if by magic the technical hurdles had been leapt. I remember when I hooked my 1meg cable modem, logged on, and thought: the future is now! Today I have three or more high speed options to my home, all for a relatively inexpensive price. I think few of us in the technology industry take a step back to consider how good we have it. It hasn't been the smoothest ride, but we've witnessed unprecedented growth with few regulatory road blocks and deep amounts of capital to fund the industry's expansion. The internet and internet access has represented the best of what capitalism can provide. We got a massive infrastructure build out at almost no cost to the public.

And that's why I'm concerned to see the industry almost uniformly get behind regulating the backbone of our industry: bandwidth usage.

There seems to be an ongoing effort to portray certain players in an industry as the bad guys. In the health care industry the doctors are the good guys, and the drug companies are the bad guys. In the case of the internet, the web sites and service providers are the good guys, and the network providers are the bad guys. But running a network is business with extremely tight margins, requiring massive capital expenditures and debt loads. Completing the last mile took a huge amount of risk, and some folks, like Paul Allen lost a fortune in doing so. And we as consumers basically got a free ride. I've been involved with purchasing commercial grade bandwidth at wholesale prices, and to me it is unbelievable how good of a deal residential consumers get. To keep it in perspective, a T1 line which provides 1.54meg symmetric up and down typically costs ~$500+/month and my 1meg up 5meg down cable modem costs $50.

Network providers got themselves into a bind by over committing bandwidth at flat rate fees with the assumption that low bandwidth users would pay the way for high bandwidth users. The way home bandwidth is allocated is similar to the way flights are overbooked. Generally not everyone who is booked for a flight actually makes the flight, so airlines often sell more seats than are available on the flight. Most of the time this isn't a problem (ok maybe not MOST of the time these days), but sometimes there is an issue where there are more passengers than seats and passengers get bumped from the flight. Bandwidth is sold the same way.

Most of the time my modem sits idle, and occasionally I will fire up a large download that uses most of my available bandwidth. This is the usage pattern that residential providers like Comcast based their pricing on. Of course if everyone was to download a movie at the same time, the network would become overloaded and all traffic would come to a crawl. Unfortunately for the access providers, some outliers started using a majority of the bandwidth (for instance by always running file sharing applications), basically forcing the rest of the users to subsidize them. This forced network access providers to scale back on the idea of "unlimited usage" which really never existed in the first place. Secondly the network providers, looking to gain more revenue from their massive infrastructure cost (and ultimately fund more infrastructure (that's how fixed asset based businesses work (profit is reinvested to build more equity))) , wanted to de-commoditize their service and provide more bandwidth to services which generated more revenue for them. These two issues are the impetus for the net neutrality legislation.

Personally I believe there is enough competition in the market to allow providers to decide how to price their services and run their networks. When residential bandwidth was limited to dial-up modems, providing unlimited access was feasible because the last mile provided a significant bottleneck for each individual node. But even then, when the infrastructure was first being deployed and bandwidth was exceedingly expensive by today's standards, many providers charged by the minute. Again we forget how good we have it these days. Today the bottlenecks are not in any individual node, but the subnets that connect the nodes.

I could envision a system where basic service could be provided for free because some services like Google or Netflix pay to get access to more bandwidth. So for instance most of the internet could be limited to 200k down while Netflix gets 5meg down. If the user wanted uniform access to the network, they could pay a higher fee. I think a lot of consumers would go for such a service because most of their applications like gmail, twitter, facebook, don't require that much bandwidth. Also Charter, Comcast, etc. have been trying to compete against fixed line phone operators by offering VOIP services. I could also envision a system where VOIP was given more bandwidth and regular network access less. Again this could be provided at a much reduced cost than uniform network access. But net neutrality, as I understand it, prohibits such services and ultimately light users will end up paying for more bandwidth than they use, and could put basic level service out of reach for many users. Oddly enough this problem is similar to the current regulations on health insurance where a minimum level of service is regulated in and therefore basic services are not available at a less expensive price.

The reason why commercial bandwidth is more expensive is that there are level of service guarantees that ensure the amount of bandwidth and uptime that is available. In a business like Amazon, which makes their living from bandwidth, these guarantees are worth it, but I'm willing to pay a much lower fee at home to get 5meg down "most of the time". My fear is that these regulations will break the camel's back and put network providers who are already under financial stress (Charter is already in bankruptcy) from the economic crisis into bankruptcy and the government will step up to subsidize their businesses. The reason this concerns me is that it will hurt the adoption of competing technologies like wireless which long term could provide lower bandwidth costs. Secondly the internet is far too important of a communication mechanism to allow that much involvement. Once there are subsidizes on services there will be debates about what content should be allowed just as there are debates about how much a banking CEO will be paid, and this will ultimately infringe on the freedoms we now take for granted. Put another way, you may like and trust our current administration, but our system gaurentees that another administration will take its place and it might have views you don't agree with, but we will have already opened the door to regulation, and it will be difficult to take that back.

So yes freedom and neutrality sound like good things, I like freedom, but we need to call these proposals what they are, and that is regulations, and I think it is fair to say that these regulations will put more pressure on an industry that is getting by with only the thinest of margins. Plus regulation begets regulation.

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