Net Neutrality, Two More Words You Can Never Say on Television

On Monday, Federal Communications Commission (FCC) Chairman Julius Genachowski announced the roll-out of plans to implement network neutrality rules covering internet, mobile and other data networks. Many, if not all, data networks in the U.S. engage in some form of traffic management, either by capping bandwidth, blocking ports or protocols and traffic shaping. The FCC’s proposals would essentially prohibit networks from engaging in many forms of traffic management except for capping overall use and charging per unit of data.

A number of analysts believe that the FCC’s actions will herald the end of flat-rate internet service as we know it. Massive pay-per-byte costs will make video, voice and music services unaffordable. A number of other analysts believe that net neutrality is the only way to ensure continued growth and innovation on the internet.

While either camp may be right in predicting the future, the real issue is that internet infrastructure development in the U.S. now lags behind other major developed economies. The net neutrality debate is good because it exposes this critical problem. However, net neutrality as a regulatory paradigm is a 1960s-era concept better suited to the internet’s utilitarian incarnation under ARPA than to the modern internet.

Effective regulation for the modern day internet should come with two components. One, it should balance the needs of consumers, content providers and ISPs in a fair manner. Two, it must allow competitors to provide service on an open, transparent and level playing field. Modern regulation recognizes the diversity of traffic on the internet, high and low latency, large and small bandwidth.

I. Price for the value of bytes, not the volume.

Balancing the needs of consumers, content providers and ISPs can be done through market mechanisms if we identify the correct mechanism. Charging for data by the byte makes the erroneous assumption that internet service is the same as any other utility like electricity or water. One gallon of water is essentially the same as any other gallon of water. The 1960s internet did not have to contend with high traffic diversity, so a utility concept was appropriate. On the modern internet, one byte of data can have a vastly different economic or practical value from another byte of data.

New regulations that would balance the needs of all parties should use informational pricing, not volume pricing. For instance, voice traffic that requires low latency but does not take up much bandwidth could have a higher per byte charge than buffered streaming video which can tolerate high latency, allowing for occasional shifts in the size of bandwidth. In pricing terms, costs for both voice and video would remain low under informational pricing, under volume pricing the cost for video would far exceed the cost for voice. For an ISP, the cost to provide both is roughly equal as buffered video can be delivered over unused bandwidth, when that bandwidth is needed by someone else, the video is temporarily stopped and played from the buffer on the end user’s computer.

II. Open access policy that is truly open access.

Allowing competitors to provide internet service is the second critical component to any regulation. Open competition provides a check on monopolistic price gouging and it helps spur innovation by providing new services that incumbent companies may not want to risk trying.

The problem with ISP competition in the U.S. is that building infrastructure (fiber, switches, wire, …), leasing rights of way and gaining government approval are all nearly insurmountable barriers to entry for all except a few mega-corporations. The regulatory solution to this is a trade-off with net neutrality where the FCC would require ISPs to provide wholesale leased access to their infrastructure for independent providers. While this idea failed in the 1990s, the failure was due to unclear rulemaking and lack of incentive for incumbent providers. A new open access rule would hopefully address these concerns.

Even if good regulation comes about quickly, development will not occur overnight. U.S. internet infrastructure will lag behind that of other developed nations for some time. What is critical is that the next killer app, whatever that may be, have the ability to grow and develop in an environment where economics and technology are helpful, not harmful.

Note: The title of this article is an allusion to a controversy between the late comedian George Carlin and the FCC. Many of Mr. Carlin’s specific issues remain controversial to this day. This article does not intend to address those issues nor does it advocate any position on the matter.