catallaxy files

catallaxy in technical exile

Net neutrality

with 3 comments

Net neutrality is perhaps today’s hottest issue on the US wireline scene (I do not say broadband, as wireless broadband largely does not go to the home here, at least not yet).

Proponents of net neutrality are concerned that broadband providers will sabotage or otherwise prejudice the offerings of independent content providers in favour of their own content services. However, proponents are often vague about exactly what the problem is and what they want.

Outright sabotage has occurred in a few documented cases, for example, where US providers blocked ports to prevent third party voice over Internet provision. In those cases, the FCC simply said stop it.

Proponents of net neutrality also would like to forbid other forms of behaviour. One extreme, which makes little sense to me, is to require that content providers never be charged for premium levels of service delivery. This is strange, not least since content providers such as Google, who advocate net neutrality, pay companies like Inktomi to improve download speeds. Why shouldn’t the local telephone giant, Verizon, be allowed to offer services that do the same thing? Indeed, Internet traffic management routinely involves variations on prioritization, so allowing market signals for such services might well be a good thing. (For those of you with a background in telecommunications, forbidding payment from content providers is the similar to imposing a calling party only pays rule, where content seekers are the calling parties.)

Other forms of behaviour also concern net neutrality proponents, most notably the possibility that broadband providers might bias prices for improved services so that the broadband provider’s own content can be supplied more competitively than that of third parties. That is, the fear is that broadband providers, by pricing content suppliers, will be able to engage in price squeezes.

This may or may not be so, but a wait-and-see attitude might be better than precipitous regulation, and for at least two reasons.

(1) so far the unregulated US market has produced no examples of even priced prioritized service, let alone of a price squeeze. Indeed there is some question as to whether this is technically plausible. That being said, AT&T, Verizon, and the larger cable companies have indicated they would like to implement priced prioritised services.
(2) ordinary competition law may be a better instrument than ex ante regulation for dealing with anticompetitive pricing of prioritised services.

The case against regulation of net neutrality is relatively easily made. A nice example comes from Hahn and Wallsten, two AEI economists who do not indicate if they work for any interested, perhaps, cable or telco parties. The case for net neutrality is also easy to make, in the same way that most cases for preventing big businesses from doing bad things is (for an interesting example, see Geoff Huston).

While I do not think any form of regulation is necessary today, it does seem to me that the cases made both for and against net neutrality miss an important aspect of the broadband market that just might form a basis for a case for regulation. Specifically, content-seekers are almost universally single-homers. That is, they have one broadband service in their home or business. In contrast, content-providers are multi-homers, that is, they deliver content to homes and businesses who use many different broadband providers. An important result of the literature on two-sided markets is that if one side single-homes, and the other side multi-homes, then platform providers can have substantial market power over, in this case content, termination. Thus, if content providers can be effectively charged for content termination, there may be a case for regulation (here is a more detailed explanation of my views in the form of a response to Hahn and Wallsten). But not now. Nothing has happened yet, so nothing should be regulated.

Disclaimer: I have long worked for various large telcos, notably in Australia and Italy, but not in the US, and have also worked for US state public utility commissions and consumer advocates on telecommunications matters. Naturally, my views expressed here need not represent the views of anyone I have worked for.

Note: Edited by HeathG to add the “Technology & Telco” category tag to this post.


Written by Admin

October 24, 2006 at 6:14 am

Posted in Uncategorized

3 Responses

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  1. Heath,
    I would have thought that this could be dealt with easily – provided it is disclosed to the customer prior to being done, and with sufficient time for them to change over to another supplier, then there is no problem.

    Andrew Reynolds

    October 24, 2006 at 8:06 am

  2. This is a good point, to which the net neutrality advocate might reply:

    Perhaps, maybe even probably, but not obviously.

    For this to work consumers have to be well-informed and concerned about whether an efficient range of content providers, and most critically unknown & perhaps even currently non-existent content providers can reasonably reach them. If consumers are not fully able to judge the extent to which broadband provide behaviour curtails efficient access & the harm that this causes them, then there will be no competition that can erode the market power of termination.

    A similar debate has occurred in the context of mobile telecommunications, which seems to have led most observers to conclude that consumers are in fact not so wise, and carriers really do have substantial market power over call termination (an empirical question I do not comment on). Whether this ultimately is a bad thing is a another question.

    The situation is slightly different in the case of broadband-delivered content, but not in a way that a priori rules out substantial market power.

    (I am playing devil’s advocate here. I remain of the belief that until an actual problem is observed I think it best to assume one does not exist.)


    October 24, 2006 at 8:59 am

  3. Andrew,

    The original post was from Kodjo – i just revived the “Technology & Telco” tag that we previously had on Catallaxy.


    October 24, 2006 at 9:24 am

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