Network Neutrality:
  Old Whine in New Bottlenecks
in the United States and Europe
              Kenneth R. Carter, JD, MB...
Network Neutrality: The Fear




      http://i7.tinypic.com/5z6vt4n.jpg   1
Network Neutrality: The Reality
        Next Generation Residential Broadband Access: "Fractionalized IP"
                ...
Economic Concerns
                             A bit is a bit, but a bps is not a bps
                                    ...
What are the economic implications?

• Many of the concerns that have been raised in regard to network
  neutrality relate...
Two-sided Market
                                  With a new wrinkle


                Market Maker
Viewer               ...
Network Management and Network Neutrality?




Sanctioned Filtering   Partial Blocking         Full Blocking


      Accep...
Implications for European policymakers


• Europe today enjoys a far more competitive broadband market than
  does the Uni...
What policy measures might be effective?

• Madison River consent decree
• FCC “Broadband Policy Statement” of September, ...
Shameless Advertisement


 Network Neutrality: Implications for Europe Information
   Monday, December 3 to Tuesday, Decem...
Merci Bien



Kenneth R. Carter
wik-Consult GmbH
Postfach 2000
53588 Bad Honnef
Deutschland
Tel +49 (0) 2224-9225-24
Fax +...
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  • Thanks for that introduction. What is missing from my bio is my greatest contribution to the Network Neutrality debate which was last December when I wrote the Net Neutrality Christmas Carol for the FCC Christmas Carolers. The title: couldn’t decide if it was old whine in new bottlenecks or new whine in old bottlenecks. But if you listen to the arguments carefully and objectively, they start to sound like debates we have already had. So much as been said about Network Neutrality; however, there has been little objective analysis.
  • Perhaps your have seen this, it has been making the rounds on the listservs. The possibility that an integrated ISP might offer better performance to some Internet sites than to others; The possibility that an integrated ISP might assess a surcharge where a customer wants better-than-standard performance to certain Internet sites; The fear that the integrated ISP might permit access only to affiliated sites, and block access to unaffiliated sites; The fear that the integrated ISP might assess surcharges for the use of certain applications, or of certain devices; The fear that the integrated ISP might disallow outright the use of certain applications, or of certain devices, especially where those applications or devices compete with services that the integrated ISP offers and for which it charges; and The fear that the integrated ISP might erect “tollgates” in order to collect unwarranted charges from unaffiliated content providers who need to reach the integrated ISP’s customers. The fear is that media companies can control what content viewers can access. How is this different from status quo? While an outcome like this one is possible, it is unlikely.
  • In recent years people have tended to use "broadband" and "high-speed Internet access" interchangeably. But as the broadband pipe into the home is upgraded to provide an order of magnitude more bandwidth, it's likely that providers will "fractionalize" that broader bandwidth and allocate fixed amounts among a variety of services. So any discussion of "network neutrality" or "discrimination" is now best begun with a model of a single residential broadband pipe which provides access to distinct IP-based networks, instead of a single IP pipe. e.g. , a services provider's IP video service will likely be provisioned from relatively local servers and not across the a wide-area Internet backbone. Alternatively, the user can access some amount of streaming video or video program downloads over the commodity Internet from third parties. Services aren't "prioritized" in the sense that a subscriber to 5Mbps Internet access service on a 30Mbps residential broadband link is likely to be limited to 5Mbps peak Internet access. I.e., even if none of the other services is in use, Internet access will likely be limited to that 5Mbps – and not be "burstable to, say, 30Mbps. [These bandwidth amount are just used here for purposes of discussion, and aren't taken from any real offerings.]
  • The problem underlying Network Neutrality is the heterogeneity of users and uses. A bit may be a bit, but a bit per second is certainly not a bit per second. Different applications place different demands on a network which was initially not designed to provide differentiated services. Compounding the problem is the price elasticity of demand. Based on consumer preferences, it is hard to get subscribers to pay their fare share. And it may be against public policy to institute measure to enable this.
  • Will lead to reduced economic development.
  • While a staffer at the FCC, I was expressly not permitted to discuss Network Neutrality. So when asked about it a conferences and by visitors, I would deftly change the subject to the unrelated issue to Calling Party Pays. And, quite frankly, economics of Access Duopolies, Termination Monopolies, and Two Sided Markets are at the core of this problem. Let’s consider for a second a familiar two-sided market: cable TV. The view on the left pays to subscribe. The cable provider sells the view’s “eyeballs” to advertisers and to content providers, who in turn sell ad space to other advertisers. As market maker, the cable provider has a strong incentive to get the prices right in both markets in order to balance the impact of network externalities. Too little or the wrong programming and the cable provider cannot attract subscribers. And vice-versa. So, many assert that will achieve an efficient equilibrium, if left to its own devices. Now here is the new wrinkle: imagine for a second that this is now internet service provider and these are webpages and banner ads. Here the market maker may attempt to charge a price to interconnecting network’s customer, with whom it does not have privity of contract
  • FCC “Broadband Policy Statement” “… to ensure that broadband networks are widely deployed, open, affordable, and accessible to all consumers, the Commission adopts the following principles: … consumers are entitled to access the lawful Internet content of their choice . … consumers are entitled to run applications and use services of their choice , subject to the needs of law enforcement. … consumers are entitled to connect their choice of legal devices that do not harm the network. … consumers are entitled to competition among network providers, application and service providers, and content providers.”
  • Now the reason Network Neutrality is such a thorny and mis-defined issue is that the new wrinkle in the two-sided market is not as straight forward as trying to charge for an ad insert. It can be far more insidious and difficult to detect than that. Rather, Network Neutrality represents a continuum of behaviors which at the ends most observers would conclude are acceptable or unacceptable. The difficulty comes in regulating the activity in the “yellow zone”. Many U.S. scholars view deviations from network neutrality as merely a potential threat going forward. Others experts (especially Lessig and Wu) have argued that current U.S. practices already systematically violate network neutrality: Charging extra for a static IP address. Cable access agreements that restrict the duration for which third party IPTV can be provided. Restrictions on encryption (VPN) over broadband Internet access, unless the consumer subscribes to more expensive (“business”) service.
  • which way is up in a peer-to-peer network
  • towards a solution The network Neutrality problem is far too complicated for one solution to affectively address it It would be very difficult to craft meaningful rules to enforce network neutrality. Difficult or impossible to distinguish between welfare-enhancing discrimination versus anticompetitive discrimination. Lack of sophistication on the part of decision makers would inevitably lead to subjective and imprudent decisions. ad supported content? Acceptable use policies versus four FCC policy principles Political economy problems Large firms with SMP have vastly more lobbying dollars than U.S. consumer advocates. Substantial risk of legislative/regulatory capture. Need clear statement of acceptable carrier and subscriber behavior: where no competition, need some regulatory intervention. Many cases could be solved with ratification of third party contracts. So if Comcast wants to offer Google prioritized service, subscriber can accept or reject that agreement. Once marketplace competition erodes to the point where regulation is necessary, all of the choices tend to be unattractive. The objective of the regulator should be less about divvying up rents and more about how to make the pie larger. Attracting more users and applications to the network.
  • KCarterWIKNetNeutral..

    1. 1. Network Neutrality: Old Whine in New Bottlenecks in the United States and Europe Kenneth R. Carter, JD, MBA Senior Consultant wik-Consult, GmbH Third Transatlantic Forum Montpellier, France November 14, 2007
    2. 2. Network Neutrality: The Fear http://i7.tinypic.com/5z6vt4n.jpg 1
    3. 3. Network Neutrality: The Reality Next Generation Residential Broadband Access: "Fractionalized IP" 3rd-party service "Next Generation" = c.2006-2010 Internet Access • eg, 30Mbps [fiber, VDSL,...] residential service - 5Mbps commodity Internet broadband - .5Mbps voice (using IP) connection - 20Mbps video (using RF>IP) • parallel access to distinct nets – eventually all using IP • "fractionalized IP" (reserved) – not single "prioritized" stream provider's voice • multiple LANs multiplexed on a single service trunk (VLAN technology) • user can provision third-party services over Internet service provider's • here: five IP pipes with potentially video service 2 different attributes Source: Richard Hovey
    4. 4. Economic Concerns A bit is a bit, but a bps is not a bps Bandwidth (data transfer rate) Low High High Email FTP Latency Tolerance Video IRC Streaming Audio Streaming Video VoIP Telephony Low Gaming 3
    5. 5. What are the economic implications? • Many of the concerns that have been raised in regard to network neutrality relate to behaviors that, in the absence of market power, would tend to enhance consumer welfare. - Some would appear to represent legitimate price discrimination. - Others enforce the economic property of excludability (the ability to prevent someone from using a service that he did not pay for) in support of price discrimination. - In a competitive market, these practices would be entirely appropriate. • Other violations of network neutrality, however, could imply some form of economic foreclosure (the attempt to project market power into a vertically related market segment that would otherwise be competitive), which should be viewed as being anticompetitive. 4
    6. 6. Two-sided Market With a new wrinkle Market Maker Viewer Content Producer (Internet Service Provider) (Cable Provider) $ $ Advertiser Advertiser 5
    7. 7. Network Management and Network Neutrality? Sanctioned Filtering Partial Blocking Full Blocking Acceptable Questionable Unacceptable 8
    8. 8. Implications for European policymakers • Europe today enjoys a far more competitive broadband market than does the United States. - On the average, more than half of all retail DSL lines in Europe are provided by competitive entrants. - Most consumers have access to more than two providers. - For these purposes, service-based competition is sufficient. • Trying to address network neutrality challenges through ex ante regulation is likely to prove extremely difficult. • The first line of defense for European policymakers should instead be to avoid the problem altogether by maintaining the competitiveness of the underlying markets. • Occasional or sporadic problems related to network neutrality might be addressed ex post through the exercise of competition law. 9
    9. 9. What policy measures might be effective? • Madison River consent decree • FCC “Broadband Policy Statement” of September, 2005 • Attempted legislative fixes • Subscriber right ratification of third party contracts - Transaction costs: standardized plans - Pricing of differentiated services • “Network Neutrality Squads” and class action law suits • Wireless: standardized interoperability with radio backplane - Carterfone-type connectivity to network only - Opening of full air interface impracticable • Promote true competition best fix 10
    10. 10. Shameless Advertisement Network Neutrality: Implications for Europe Information Monday, December 3 to Tuesday, December 4, 2007 Hotel Kanzler, Bonn, Germany Given the growing prominence of broadband, an intense debate concerning whether Internet service providers should be required to offer access on a non- discriminatory basis with respect to content, applications and network devices has taken place in the United States. This debate has colourfully been dubbed as Network Neutrality. With this conference, WIK will bring together leading experts from government, academia and industry from the United States , Japan and Europe to seek a deeper understanding of Network Neutrality. For more information or to register: Phone: +49(0)2224-9225-42 Email: net_neutrality_conference@wik.org http://www.wik.org/content/netneutrality_main.htm 11
    11. 11. Merci Bien Kenneth R. Carter wik-Consult GmbH Postfach 2000 53588 Bad Honnef Deutschland Tel +49 (0) 2224-9225-24 Fax +49 (0) 2224-9225-2224 eMail k.carter@wik-consult.com www. wik-consult.com 12

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