Net Neutrality: regulations looking for a problem that doesn't exist

Comment

Comment by Daniel Leuck on December 27, 2010 at 10:41am

Peter  - Who said anything about screwing over customers? There are many situations where you have natural monopolies. When I was growing up there was one Japanese teacher in my town. She had a monopoly and I'm pretty sure the government wasn't involved. If she decided to give me more example sentences about the LDP than the DPJ (Japanese political parties) do you think another native Japanese speaking teacher would suddenly pop up in West Des Moines, Iowa to compensate? What you are saying about free markets is true once you hit critical mass, but any economist will tell you the rules are different with small markets.

Comment by Barry Weinman on December 27, 2010 at 9:40am

Peter...we are from the government and we are always here to help. We specialize in fixing things that are not broken, that way we own what we have fixed and then we can even fix it more. Don't worry---we will not be stopping at net neutrality---there are lots of things about the net that are not broken that we will be fixing. In the words of POTUS, "elections have consequences."

Comment by Peter Kay on December 27, 2010 at 7:47am

there is no such thing as a monopoly as a function of a small market. Now if there is only a single provider in a market and no on else decides to go into it, it can only be, by definition, that this provider is delivering incredible value and amazing prices.

 

I'd like to know if anyone can find a single example where there is a "natural monopoly" provider that exists without government assistance *and* is screwing over their customers....bet you a coffee it doesn't exist.

Comment by Daniel Leuck on December 26, 2010 at 10:29pm

I was referring to monopolies that evolve naturally (e.g. as a function of a small market.) Monopolies arise for reasons other than government interference. If a small town in Iowa has only one provider should they be held to rules that don't apply to multivendor markets?

Comment by Peter Kay on December 26, 2010 at 9:59pm

Dan:

but what about, as Paul suggests, markets with only one provider? Should any special rules apply to monopoly providers?

As I mentioned previously, any market where the government has granted an exclusive monopoly should have special rules: no monopolies!

Comment by Peter Kay on December 26, 2010 at 9:57pm

Good inputs, Paul. I would be in favor of anything that minimizes monopolies or predatory monopolistic practices. I can't fairly evaluate your UK GSM example because there are so many differences in the two countries that it's hard to measure cost and innovation between the two. In the US, regulations have lead to decline, every time.

 

I don't disagree that many companies don't want a free market. They do want protected ones, and that's what government regulations give the larger ones that can invest in lobbying efforts. 

 

On your municipal network examples, by definition it's nearly impossible for a profitable opportunity to exist for a given area and NOT have that opportunity pursued by private enterprise. If that were true, I suggest you get into that business immediately. Municipalities typically get themselves involved in services which are privately unprofitable and use subsidies to change the equation. The results are usually disasterous. Our own Sandwich Isles Communication is a pretty good example: they were given millions in federal dollars to deploy a fiber network and today they are on the brink of bankruptcy.

Comment by Paul Graydon on December 24, 2010 at 9:07am

Peter: Here's a good example of an industry that has thrived after regulation, in other countries than the US.

 

In the UK all cell phone communication is handled over GSM, as a consequence of government regulation.  Almost the entirety of Europe uses GSM for the same reason, government regulation with the intention of standardisation and a more competitive market.  Fighting over CDMA and GSM was identified early on as counter-productive.

That means I can buy a cell phone in the UK, use it on any network carrier, take it abroad across the entirety of Europe and never have a problem.  The competition is then about the carrier and their services rather than what phone you want.

Europe had a large 3G network before the US had barely even started on theirs (2003), as European carriers had a more focussed and productive competition.  They needed to be offering what the other providers couldn't.  The telecoms regulation body in the UK also provided a couple of key pieces of regulation:

1) If the telecoms company was below a certain size they were allowed to provide their services at up to a certain percentage loss.

2) They regulate the selling of access to infrastructure to ensure that third parties could purchase at a reasonable price, whilst not denying the infrastructure provider profits.

3) Cell phone companies have to allow you to transfer your number to another provider.

The combination of 1 & 2 allowed companies like Three to come into existence in the UK.  They hit the UK market in 2003 and provided a real shake up to the established providers.  They had no communication towers of their own, they leased connectivity from existing infrastructure.  As the money rolled in they then poured almost every penny into rolling out their own network.  Their radically different approach from the incumbents was that they saw bits as bits, be it voice, data or text.  At a time when carriers were ramping up data costs and trying to limit VOIP, Three was releasing phones onto the market that came with Skype built in.  They grew massively, even after they broke past the barrier from point 1 and had to raise their prices.  Their business model and its popularity forced the other providers to re-evaluate theirs and start offering what the people want, rather than what they wanted the people to want.  One of the biggest surprises I found when I moved to the US was that you get charged to receive phone calls.  They haven't done that in the UK (and I believe most of Europe) in nearly 20 years, because the carriers were competing for customers who could leave them at any time.

 

Regulation isn't always bad and really isn't an anathema to a free market.  Companies have one goal in mind: To take as much money in as possible with as little outlay as they can.  They don't want a free market.  Its the worst possible thing for them, and it's one large reason why they've fought network neutrality at every corner, and fought at a state level to ensure they maintain a monopoly on the market.

 

We've all been chomping at the bit for Google's 1Gb service, hoping we'll get it in Hawaii.  The fact that we can get it means that Time Warner is letting us down.  They have no competitive reason to offer it.  If Google does make an appearance here you can flat out guarantee we'll see a huge ramping up of speed offered by Time Warner.

How can I be certain?  It's happened repeatedly across the mainland when towns have set up municipal networks.  After petitioning their broadband providers for faster speeds and being told by the provider there was "no market for it", municipalities have set up their own 100Mb+ networks that make money for the area, and they've suddenly found the broadband provider starts competing again.  In some cases the announcement of working on a municipal network has resulted in the provider rolling out fast networks in advance of the municipal infrastructure being built, a desperate attempt not to lose control of an area.  In others we've seen the providers petition the state, paying representatives nice amounts of money to ensure legislation goes through that specifically prohibits municipal networks.

 

What I want to see is one of two pieces of government regulation:

1) local loop un-bundling, with a competitive restriction on pricing (e.g. selling access at the same price as it's sold internally).  Rolling out infrastructure is expensive and companies should be encouraged to do so and be allowed to make a profit, but open access to that infrastructure is essential for competition.  It also encourages the creation of companies who's sole purpose is providing infrastructure.  A number of countries around the world have done this and seen a much healthier and competitive connectivity market as a result.

or

2) Network Neutrality

 

If we get 1, 2 might not be necessary, as you say regulation without a problem.  A competitive market should ensure 2... but it might not.  2 really shouldn't be necessary but the crux of it is companies can't be trusted (also they keep selling what they can't supply, over selling their network infrastructure)

 

An alternative to number 1 is the Australian approach.  Their telecoms infrastructure is almost entirely municipal with the focus on connectivity provision.  The infrastructure sells access at an equal price to all service providers, allowing them to compete on the total package.  I'm not so convinced that's necessarily a good thing as that provides little to no guarantee for future growth and improvements.  It did lead to an interesting thing in the last election, where both parties had very similar policies, but the winning party had an election promise the other party didn't; that of upgrading the network infrastructure to fiber optic to ensure internationally competitive access.

Comment by Daniel Leuck on December 24, 2010 at 4:57am

This is an interesting discussion. Peter - As a believer in free markets I tend to lean your direction on this, but what about, as Paul suggests, markets with only one provider? Should any special rules apply to monopoly providers?

Comment by Peter Kay on December 23, 2010 at 4:58pm

Paul we're in agreement that government-managed monopolies are a bad idea. We're also in agreement that an open market is a good idea. Neither of those are accomplished with increased government regulation.

The Comcast/Netflix situation is about how a network operator must control its network to provide adequate quality of service. Netflix was taking up the lion's share of Comcast's bandwidth and exceeded their peering agreement. While Netflix tried to make political hay out of this situation to keep its costs artificially low, the fact that they came to an agreement with Comcast supports the idea that his issue was legitimate and settled amicably. Level 3 (Netflix's carrier) and Comcast had a peering agreement. Had Comcast broken it, there would have been lawsuits and breach of contract. That simply wasn't the case.

The rest of your arguments go back to "purely theoretical" which makes my point: the FCC is trying to regulate problems that don't exist. You don't have a single legitimate or widespread example of any violations of free speech or censorship at the hands of ISPs.

We've seen this movie before. The arguments are not terribly different from the ones made against the railroad monopolies in the late 19th century. The Interstate Commerce Commission (ICC) (http://en.wikipedia.org/wiki/Interstate_Commerce_Commission) was born out of a desire to "do good" much like NN. The result was a disaster. Like any other government regulatory entity, it gets taken over by large corporations that then use their positions to eliminate competition, drive up prices, and kill the market.

The Net has been one of the greatest sources of innovation and growth in our lifetime. It is the purest expression of free market economics and it speaks for itself. There isn't a single example anyone can provide where government regulations resulted in freer markets, more wealth creation, and better innovation. Every example of government regulation, every single one, has resulted in exactly the opposite.

Let's let the Internet live long and prosper. Keep it free of government chokeholds.

Comment by Paul Graydon on December 23, 2010 at 10:27am

Here's the problem in a nutshell, for me, and why network neutrality is important.

 

Many areas of the country only have real access to a single supplier of broadband internet, primarily cable, and it's often not through lack of trying, but companies like AT&T, Comcast etc are paying good money to state and governments to ensure they maintain that monopoly.

 

Take a case that a good number of people find themselves in, which is that Comcast is their sole provider. They have no choice, it's Comcast or no broadband.  Comcast is also a media producer, and it runs a Hulu/Netflix equivalent service (for a fee).   Without enforced network neutrality they can traffic shape Netflix or Hulu traffic so that the service becomes unusable, thus promoting their own service.  It is in their best interests as a company to choose to do so.

You say they're not doing it, but I'm sorry that's just not true.  There has been a long discussion on Nanog about this recently (North America Network Operators Group, a group filled with netops from every major operator in the country, and many minor ones.)

Comcast has been deliberately routing Netflix traffic through an already congested peering connection, and were using that in their recent "negotiations" with Level 3.  Effectively Comcast were holding Netflix and other services that use Level 3 to ransom, meanwhile their own service shines for their customers.  From the comments Comcast were making at the time it was clear Netflix was the target.  So if Netflix was to move, the disagreement with a peering provider would be likely to move with them.

 

Let's take another purely theoretical situation:  Imagine the management of your broadband provider were a bunch of bearded lefties, and they decided that traffic to and from Fox News should be treated at an extremely low level of priority over their network, but traffic to Huffington Post was high priority.  With no network neutrality being enforced they have every right and ability to do such.  With people increasingly getting their news and information online, that ISP now has significant ability to influence population.

 

These examples are just scratching the surface.  Network Neutrality boils down to the right for free speech, the right to view what you want, when you want, without censorship.  It's about promoting an open market, where any service can thrive without having to pay extortion money.

 

If there was a wide open and competitive broadband market in existence in the US then it would be less of a problem.  One provider is throttling netflix, you'd just up and change.  But you often can't.

 

Here in Hawaii there are two choices I'm aware of.  1) Hawaii Telecom DSL. 2) Oceanic Time Warner.  DSL speeds are great if you're anywhere near the nearest distribution point, but drops off dramatically with distance (http://www.internode.on.net/media/images/internode-adsl2-dist07.jpg), quality of wires, age of infrastructure etc.  I don't have a map showing distribution points but there are bound to be areas in Hawaii where they only really have Oceanic Time Warner as an option.  Wireless broadband had the potential to be a great saviour, except the providers nicely negotiated a get out clause, so they're not covered either.

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