Insights - Net neutrality: past, present and future.

Net neutrality: past, present and future.

by Dr. Thomas Papanikolaou on January 26, 2014

Net neutrality is the principle that Internet service providers and governments should treat all data on the Internet equally, not discriminating or charging differentially by user, content, site, platform, application, type of attached equipment, and modes of communication (source: Wikipedia).

Net neutrality proponents claim that telecom carriers seek to impose a tiered service model in order to control the data pipeline and thereby remove competition, create artificial scarcity, and oblige subscribers to buy their otherwise uncompetitive services (source: Wikipedia). Net neutrality opponents (the aforementioned telecom carriers) claim that the revenue earned from operating pure data pipelines (also known as bit pipes) is not sufficient to cover the investment required to build, maintain and expand their infrastructure.

Net neutrality reappeared in the news recently, when the United States Court of Appeals for the District of Columbia struck down the Federal Communications Commission’s 2010 order that imposed network neutrality regulations on wireline broadband services. The decision has been dubbed a nightmare scenario for several reasons, including that “carriers could charge different amounts for access to different tiers of the internet. The basic tier might include email and basic browsing; the next could include Facebook and Twitter; the final tier could include Netflix, YouTube, or Spotify. These tiers would be divided not by bandwidth or speed requirements, but by content type. The internet would become a club with various VIP sections, arbitrarily laid out to benefit internet providers’.

SIMPLIFYING COMPLEXITY

While figurative and vivid, extreme predictions and nightmare scenarios usually create an emotionally charged context that blurs the vision and hinders opinion forming. We will therefore focus on this article to explain net neutrality in simple terms using a real-world example that everyone can relate to: the mail parcel delivery service.

Delivering a parcel (with content) has, in a way, a lot to do with the way the Internet works and telecom carriers approach net neutrality. The metaphor provides the means to re-frame the discussion towards a less emotionally charged context and allows to objectively present the argumentation of net neutrality proponents and opponents. The following table contrasts and compares Internet access and mail parcel delivery services and provides notes on how those relate to net neutrality and telecom carriers.

COMPARISON
INTERNET ACCESS
MAIL PARCEL DELIVERY SERVICE
NOTES
CORE FUNCTIONALITY
Internet: transfers digital packets from sender A to recipient B.
Mail: transfers physical parcels from sender A to recipient B.
Notes: the core functionality is similar i.e. to handle transfer of data / content.
DIFFERENTIAL CHARGING
Internet: does not care about the monetary value of the content in the IP packets.
Mail: does care about the monetary value of the content in the parcels if the customer cares.
Notes: there is no discrimination by content value on the Internet, but there is discrimination by content value and mode of delivery in the carriers world if additional measures (equipment) are needed to implement it.
USER / SITE
Internet: does not care who A and B are, as long as they can be found.
Mail: does not care who A and B are, as long as they can be found.
Notes: No discrimination in either case.
CONTENT
Internet: does not care about the content of the IP packets.
Mail: does care about the content of the parcels (for customs / security reasons, etc.).
Notes: There are less constraints and rules on the Internet than there are in the regulated carriers world.
PLATFORM / EQUIPMENT
Internet: IP packets are delivered through a network of public nodes that route and deliver the IP packets in a best-effort manner from A to B.
Mail: parcels are delivered through a network of private logistics centres that route and deliver the parcels optimally from A to B.
Notes: Delivery through a carrier is delivery through a privately funded network, that is optimised to the carrier’s business.
MODE OF COMMUNICATION
Internet: does not guarantee delivery to B. A has to retry if delivery does not work.
Mail: can guarantee delivery to B depending on the tariff charged. It can even pay penalties for non-delivery (insurance).
Notes: Carriers have to fulfil a minimum standard today due to legal regulations (e.g. emergency calls). Carriers say that delivery to B with a higher quality than the standard is a chargeable service.
BUSINESS MODEL
Internet: fees are charged to the users based on a combination of volume, time and speed, or as a flat rate.
Mail: fees are charged to the users based on combination of volume / weight, delivery speed, delivery warranty and value of content (for insurance purposes).
Notes: Carriers say that content like video overloads their infrastructure and they have to charge for delivery of such “heavy” content in order to be able to sustain network operation and expansion. They also want to charge for guaranteed (better than standard) bandwidth to access such content. The term used for this is Quality of Service. Net neutrality proponents say that differentiating charges based on the value of IP content / application is discriminatory.

Based on the above, it seems the key issue lies in the disagreement of net neutrality opponents and proponents on who deserves to charge for content delivery. The answer to the question could define the future value chain positioning of the whole carrier industry segment. It is therefore no surprise that the approach to portray carriers as bit pipes has resulted in the strongest push back from the whole carrier industry and the recent court decision.

NAVIGATING THROUGH UNCERTAINTY

Even with net neutrality off the table (for now), carriers have a lot of work to do to secure the positioning in the value chain. For the sake of argument let’s run through the-day-after scenario:

Let’s assume that a carrier decides to charge differently based on the content delivered over its network. It is unlikely that this carrier would do so by dividing the Internet in tiers and charging users differently based on the content they access. The reason is that in the current competitive environment, the first carrier to do so would see its users migrating in masses to its competition. Content providers like Netflix have already stated that they would actively motivate users to defend the open internet in case a carrier would go down this route. Thanks to regulations against cartel-building, it is also unlikely that carriers could orchestrate such an action.

What is more likely to happen is that a carrier will start advertising differentiated business models. For example, while everyone will still be able to access Youtube, if YouTube wants its users to watch higher quality or longer videos, YouTube will most likely consider paying the carrier for delivering those videos without eating on the users data package. AT&T has recently created such a sponsored data offering.

Contrary to what is claimed, sponsored data offerings are neither anti-competitive, nor do they stifle innovation for those who cannot afford to pay. If that would be the case, then the whole advertising industry neutrality would need to be revisited as well, as those who can pay, get a disproportionate amount of eye balls, click-through visits etc. If advertising does not stifle innovation, neither do sponsored data offerings.

Summarising

  1. For now the net neutrality discussion continues.
  2. We believe net neutrality proponents were not successful because they ignored the needs of other players in the value chain and thus received the strongest push back that the survival instincts of carriers could produce.
  3. Net neutrality opponents have no reason to celebrate: In the current competitive environment, it is highly likely that the first carrier to try and charge users based on content will face an immediate backlash from users. Carriers therefore need to devise a way to demonstrate there is commercial value for a content provider in offering its users an easier and simpler route to content. Carriers need a credible first mover from the content space to validate this assumption (like ESPN in the US).
  4. If the current decision on net neutrality were to be upheld, the future without net neutrality could include subsidised Internet access for everyone. We already live in a world where everyone enjoys advertising-funded Internet content and services (YouTube, Facebook, Google Search, Gmail, ...), so the step towards subsidised internet access is smaller than many are willing to publicly acknowledge. In fact, sponsored data offerings are nothing more than another way to advertise content.

CREDITS & REFERENCES

For the avoidance of doubt, Neos Chronos are not affiliated with, and have no financial interest in any of the companies mentioned in this article. All names and trademarks mentioned herein are the property of their respective owners. Please observe the Neos Chronos Terms of Use.

  1. Wikipedia: Net neutrality.
  2. The Guardian: Appeals court rules against FCC’s right to protect ‘net neutrality’.
  3. BuzzFeed: Welcome To The Net Neutrality Nightmare Scenario.
  4. Los Angeles Times: Will Netflix be the savior of net neutrality? Or a fifth column?
  5. AT&T: AT&T Introduces Sponsored Data for Mobile Data Subscribers and Businesses.
  6. Gigaom: A mobile internet subsidized by content providers: ESPN might want it but you shouldn’t.

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