Weekly Standard: Give Me Bandwidth...No one to root for in the net neutrality debate.

June 26, 2006 issue of The Weekly Standard

Finding it hard to understand the "net neutrality" debate? On one side are the hip, cool, billionaire web service companies like Google, eBay, Yahoo, and even Microsoft. Net neutrality is their rallying cry. Despite the fact that they are basically schlocky ad salesmen on a grand scale, they're pushing this quaint, self-serving '60s notion that the Internet is a town square--all for one and one for them, or something like that. Everyone should be allowed to hang out in the town square and use it as they please, one low price, eat all you want at the buffet.

As Dean Wormer might put it: Fat, drunk (on telco profits), and stupid is no way to go through life, son. Bam-Bam, not Barney Rubble is the future. Take the telcos and cable companies out at the knees.

On the other side are the monopolist plumbers like Verizon and AT&T and Comcast. These are the folks who laid the pipe that delivers the Internet--the blogs and pirated movies and photos of Shiloh Brangelina--to your house or office. They think the Internet is more like a giant shopping mall, and they're the mall owners. You the customer can walk around as if you were in the town square, but the tenants (see billionaire web service companies above) are going to have to pay for the upkeep of the premises. If they're one of the anchor stores, they might pay a lot.

In an effort to skim their own fees off the Google crowd, lobbyists and Congress have also taken up the fight. So far, the telcos are winning--a bid to add net neutrality language to a telecommunications bill was shot down 269-152 by the House on June 8--but this is one of those bizarre issues where both sides are off their rocker.

If Congress doesn't act, does this mean Apple might pay 10 cents per iTunes download to Bellsouth? Will Google have to pay 5 percent of ad revenue to AT&T for speedy delivery of your search results? Will we pay $1 per video played in your browser to Comcast? Silly, right? Well, not so fast, and that's the problem.

Telcos and cable companies have no choice but to lobby for legislation that bars neutrality. Because without the ability to extract money from the webbies for the use of their not-so-fast Alexander Graham Bell-era wires (forget that you and I already overpay for this), AT&T or Verizon might not have any business model going forward. With no real competition, they'd rather keep U.S. telecommunications in the Flintstone era and overcharge for calls to Grandma than upgrade their networks. Since 1998, telecommunications companies have outspent computer and Internet firms on politicians $231 million to $71 million, just to keep the status quo.

Hate to break the news, but your "fast" DSL Internet access is no longer considered high speed. In parts of the world, cell phones are faster. Have you wondered why Internet video doesn't fill your computer monitor and look like a DVD, but instead is pixelated dreck in a tiny one or two inch square? Well, Comcast is dragging its heels, too. With better video over the Internet, who would want E!, let alone the Style Network? Because of this Fred and Wilma thinking, the United States is 16th in the world in broadband use (behind Liechtenstein!) with East Timor catching up fast. The French may burn Citroëns, but they get 10 megabits for 10 euros--50 times your "fast" Internet access for half the price. That's just not right.

We'll  never get 10 megabits to our homes, let alone the multiples of that speed that are possible and affordable today if these telco Goliaths keep covering up their crown jewels. As Dean Wormer might put it: Fat, drunk (on profits), and stupid is no way to go through life, son.

But the answer is not regulations imposing net neutrality. You can already smell the mandates and the loopholes once Congress gets involved. Think special, high-speed priority for campaign commercials or educational videos about global warming. Or roadblocks--like requiring emergency 911 service--to try to kill off free Internet telephone services such as Skype. And who knows what else? Network neutrality won't be the laissez-faire sandbox its supporters think, but more like used kitty litter. We all know that regulations beget more lobbyists. I'd rather let the market sort these things out.

But what market? Phone lines, cable, and cellular--i.e., the means of Internet access--are all regulated; their operators are quasi-monopolies. Even if you end the monopolies, the incumbents have the advantage of a huge head start. Broadcasters own valuable spectrum and feed us cretinous shows like Wife Swap and The Bachelor. Cable has a lock on our homes via local franchise bribes, er, fees, so we get Lifetime and Animal Planet that no one watches. Satellite TV is content to charge just a hair under cable's pricing umbrella. For phone companies, too much Internet bandwidth would threaten their bread and butter--overpriced $25 per month (it's worth no more than $1) phone service and hot innovations like call waiting.

So how do we fix this? Are we stuck in telco hell? Silicon Valley can ignite a political arms race and spend more on lobbyists, but why play an old man's game? Instead, these webbies should get creative, change the rules. Bam-Bam, not Barney Rubble is the future. Take the telcos and cable companies out at the knees.

Here's an idea: Start screaming like a madman and using four letter words--like K-E-L-O. And fancier words like "eminent domain." I know, I know. This sounds wrong. These are privately owned wires hanging on poles. But so what? The government-mandated owners have been neglecting them for years--we are left with slums in need of redevelopment. Horse-drawn trolleys ruled cities, too, but had to be destroyed to make way for progress. How do we rip the telco's trolley tracks out and enable something modern and real competition?

Forget the argument that telcos need to be guaranteed a return on investment or they won't upgrade our bandwidth. No one guarantees Intel a return before they spend billions in R&D on their next Pentium chip to beat their competitors at AMD. No one guarantees Cisco a return on their investment before they deploy their next router to beat Juniper. In real, competitive markets, the market provides access to capital.

Without even being paid by the hour, I read through the Supreme Court's Kelo v. City of New London eminent domain rulings. Surely there exists some clever Silicon Valley counsel to twist the wording of the precedent. The telcos may want to treat the Internet like a shopping mall that they own, but the premises are looking awfully sketchy. So start with this line: "Economic underdevelopment and stagnation are also threats to the public sufficient to make their removal cognizable as a public purpose."

Sure, property rights are important, but that doesn't mean we can't shake a cattle prod at our stagnant monopolists and say "update or get out of the way." The mantra should be "megabits to phones and gigabits to homes." We'll only get there via competition. Regulations--even regulations that look friendly to the Googles and Yahoos and hostile to the telcos--will just freeze us where we are today.

IN THE LONG RUN, technology doesn't sleep. You can't keep competitive King Kong in chains. But why wait a decade while lobbyists run interference? If Congress does nothing, we will probably end up paying more for a fast network optimized for Internet phone calls and video and shopping. But this may not be the only possible outcome. Maybe the incumbent network providers--the Verizons, Comcasts, AT&Ts--can be made to compete; threatening to seize their stagnating networks via eminent domain is just one creative idea to get them to do this. A truly competitive, non-neutral network could work, but only if we know its real economic value. If telcos or cable charge too much, someone should be in a position to steal the customer. Maybe then we'd see useful services and a better Internet. Sounds like capitalism.

What new things? It's not just more bandwidth and better Internet video--how about no more phone numbers, just a name and the service finds you? How about subscribing to a channel and being able to watch it when and where you want, on your TV, iPod, or laptop? How about a baby monitor you can view through your cell phone? Something worth paying for. And that's just the easy stuff.

We don't even know what new things are possible. Bandwidth is like putty in the hands of entrepreneurs--new regulations are cement. We don't want a town square or a dilapidated mall--we want a vibrant metropolis. Net neutrality is already the boring old status quo. But don't give in to the cable/telco status quo either. Far better to have competition, as long as it's real, than let Congress shape the coming communications chaos and creativity.

 

Andy Kessler is a former hedge fund manager turned author. His next book, The End of Medicine: How Silicon Valley (and Naked Mice) Will Reboot Your Doctor, is out in July.

Comments

[Henry Miller]

I think this is just another one of those things where in the end the average citizen gets screwed. The internet is a blessing for us lions who refuse to be sheep and believe what the media barons are feeding us.

15 years ago I would have never second guessed what my doctor was telling me. I would have taken his poison pill and never had thought differently. Now, you can basically get on the Internet and discover not only that your doctor quite frankly is a sheep himself, but, also find things that might make your life healthier and happier. Things that FOX or ABC would never say because they don't want to piss off their sponsors.

Turning the Internet into cable TV is exactly the WRONG way to go. Letting corporations decide what we can and cannot search is just a dangerous--maybe even more--and just as "un-American" as letting the government tell us.

For some, the Internet provides the "soap box" for the average person that America has obviously lost. Hopefully these fools in Washington will understand this and choose the most democratic way possible to deal with this situation. But to be quite honest, money talks and freedom walks so my hope is bleak at best....

[Marc Mayor]

My approach:

1. Stop feeding those who bite your hand, e.g. use Voice over IP instead of a regular phone line, Skype rather than VoIP etc. until the money you send these companies goes to almost zero.

2. Stop financing bad companies, i.e. don't own such stocks on the long side.

3. Short the stocks of the most overbloated pigs. How do you find a good short candidate? It squeals like a pig to defend its monopoly, it spends more money on lobbying than on marketing etc. You get the idea. Short selling being risky, hedge your shorts by going long companies who profit from the trend, e.g. companies in the VoIP business, so you're kind of market neutral. With the profits, you'll have enough money to pay your cable and/or telco bill, and then some. Happy investing!

With the plumbers, it's not quite like a shopping mall. I, as customer, am not required to pay just to enter the mall.

More over, the tenants already pay to be in the mall.

With the tiered internet, it's more like for tenants who pay more, the customers can use the escalators and elevators to go to their shops while customers going to others shops can only use the stairs.

[David Davison]

Probably one of the best things, action wise, I have read on this topic.

Unfortunately, I dont think any of it will go any place in practice.

As a semi-aside, it is getting old having the telcos keep talking about
how they are not getting paid, and people are using their wires for free.
Either they are getting paid directly, or they have a peering arrangement,
the whole argument is a lie, but the honest truth looks like extortion,
so they cant say that.

[nathanh]

"[Google, Yahoo, Microsoft are pushing the notion that] Everyone should be allowed to hang out in the town square and use it as they please, one low price, eat all you want at the buffet."

Except that's not true at all. Google pays much more for their Internet connection than I do. The article attempts to caricaturize the debate by implying that Google pays $19.95/month for terabits of bandwidth, when in reality Google would be paying 100s of 1000s of dollars for their Internet connection.

The reality of the debate is that the ISPs have arranged lopsided contracts with each other called "peering agreements". These agreements are beneficial to ISPs with lots of customers like Google and harmful to ISPs with lots of downloaders. But rather than fix the poorly written peering agreements the ISPs want to charge companies like Google for bandwidth even though that ISP doesn't provide Google with an Internet connection! A company like Google would be paying for their Internet connection twice.

This is like the telephone company charging both the person making the call and the person receiving the call. Of course, the telcos are salivating at the thought of doubling their income. But it's a sham and no article should trivialise the debate by claiming it's as if companies like Google are after a "buffet" at "one low price".

[catprog]

This is like the telephone company charging both the person making the call and the person receiving the call.

No thats how it is at the momment. More accuratly they charge the person making the call, the person getting the call and the person making the call to EVERY exchange the call goes through

[Bob]

You have it all wrong. ISPs like Verizon and ATT want to deploy new broadband technologies like 3+ Mbps DSL and 10 Mbps fibre. There's nothing wrong with that. Except that it will cost billions of dollars. Where should that money come from? Should the ISP swallow the cost of these upgrades while Yahoo and Google turn around and exploit the fat pipes to make billions in profit? All we're talking about here is to allow the ISP to charge accordingly for the companies that soak up most of the bandwidth. If the ISPs are not allowed to charge extra for the new bandwidth, the fibre will never get rolled out because nobody is going to do it at a loss. I agree the internet itself should be neutral. But it's rediculous to allow advertising companies a free ride. At that rate, we'll never see FTTH in this country.

[Christopher Davis]

Bob: where should that money come from? Oh, I don't know, maybe from the people who buy that service?

"At that rate, we'll never see FTTH in this country."

We won't, anyway. We were told that the RBOCs would be installing FTTH in return for removing restrictions on their ability to sell other products. Those restrictions were removed. Then we were told they'd be installing FTTH as long as they didn't have to share their lines with CLECs at mandated rates. They don't, any more. Where's FTTH? Waiting for them to be allowed to discriminate over traffic.

I'm sure they'll find another thing they "must have" in order to roll out FTTH as soon as the net neutrality issue has been taken care of in their favor. Probably antitrust exemptions so that they can finally merge Verizon, Qwest, and the current holder of the ATT name and return us to the good old days of Ma Bell.

[Xski]

catprog, before you accuse Google, MS, Yahoo & others as being 'free-riders' you should ask them how much they pay (yes pay) for bandwidth. Its huge. Telcos are absolutely profitting from every one of those so-called free-riders. Not one of them can deny it. Go ahead, ask them.

So much for the "swallowing the costs" argument.

I've been using Verizon FIOS (thats fiber to the home) for about year now and they're continuing to roll it out across their service areas as are other telcos. You see, big nationwide network upgrades take a long long long time to plan and then when you've completed your plans the tech has changed, so you have to take MORE time to update the plans to current technology and capabilities and this continues through deployment (the equipment installed torwards the end of the deployment will not be the same stuff they're deploying now). It takes a long time to rewire that much of the country. Its coming. Be patient. And if you live in a Quest service area (at least in Oregon), I suggest you move to another providers service area as fast as is feasible.

So much for the "we'll never see ftth in this country' argument. (assuming you're in the US)

If they really wanted to charge accordingly for the companies that soak up most of the bandwidth, they'd be going after the spammers. But honestly, theres not much of a pay off for them to do that and its a heck of a lot more difficult than sending checks to lobbyists, so not much incentive there. Kill off the spammers and what have you done? Well, you've freed up bandwidth certainly but thats not really the point now is it? No, they WANT bandwidth to be used.

Strike three. You're out.

Its not about bandwidth costs. Its not even about the connection between bandwidth use and money. Its just about money. Plumbers see the big profits of the 'free-riders', they want a cut and they know they're not going to be able to squeeze too much more out of John Q. Citizen without risking a backlash and the potential of nasty legislation written as a knee-jerk reaction by legislators too lazy to do the Righ Thing in the first place. So, you go after the other 'big bad bandwidth-hogging, no-paying free-riders' like google, yahoo, ms, etc, coz they have the deep pockets to pay and (the telco industry hopes, so far correctly) lack the 'Washington DC' experience necessary to fight it off. In a nutshell: My Lobbyist can beat up your Lobbyist.

Care to play again?

BTW, this isn't defending the 'free-riders' so much as calling BS on the plumbers. If something needs to be done, fine, just be honest about it or don't expect a great deal of support or respect from me. And if its just about the $$$, perhaps the telcos could go find a business model that can adapt as the world changes instead of using legal and legislative fiction to force the country to accomodate them as-is.

-jmr

[MDS]

Give Me Bandwidth ... too bad you've been suckered into believing this attempt at changing the law has to do with net neutrality. that's a secondary, perhaps third on the priority list. its simply about access to public property. in addition, not having to pay market rent for use of that property. you know, the one you refer to as "...via local franchise bribes, er, fees, so we get..."
current law requires video service providers to build out an entire community. not "redline", oh don't get offended, read the bill not the press. the telco's don't want to compete directly with each other, in fact, in their own public testimony they only want to gain access to the most affluent, and most populated sections of a town where they have an existing footprint to offer service. like many other changes in our current age of fast info, sound bites, and agressive spin doctors, no one wants to read the fine print, we just like going along with slogans, and ideals, without considering reality.

[EAN]

I'm buying into "The Internet" which means a transparent network between end nodes - anything less is consumer fraud. Go ahead and get the Nuvo-AOL, just don't sell it as "The Internet" because it isn't anymore. Besides this is nothing new, the carriers (ITU/CCITT) have been trying to steal the Internet since they noticed it was worth anything. Time to break up the monopoly again, and keep it busted this time. Why do I not have a choice among service providers? My experience of service providers is that of a monopoly, and I know that it has been arranged to be just that way - ask John McCain. A vote for John McCain is a vote to screw your Internet - don't do it!

[Phillip]

Andy,

I have read your first two books. They are very entertaining. You are clearly a smart guy, although it is always easy to make money in a bull market, especially that bull market, the real wheat gets separated from the chaff with investment managers is in a bear market. It is great you got out of the market when you did, but that is really not managing money.

A few comments on your net neutrality article.

1) I think one of the things that the RBOCs want is the ability to charge for a tiered service. i.e. Internet companies have the option to pay more for a higher bandwidth service to the customer. There is some logic to this. It is not necessarily charging Google 5% of its advertising revenue.

2) What about their massive loss of telephony revenues? What if telephony pricing goes to zero? How will they offset these revenues and at the same time continue to push fiber closer to the home? As you know there is a great investor debate as to whether Verizon's investment in FiOS will actually earn an appropriate ROI. The jury is still out.

3) Great, France has lower cost Internet access... but, as you know it is completely different regulatory and market environment. Average telephone bills in France are not low, the incumbent still generates a very high all in revenue per each household.

4) I think your focus on the monopoly power of incumbents, although still true, is precisely coming apart at the seems, which is the reason for this debate about network neutrality came about in the first place and the reason that Whitacre made the comments he did... he is feeling the pressure. In one instant you are talking about Skype and the next you are saying "what market?".... yes they control the pipes, but they also have to pay to upgrade them..

5) Come on.... your argument saying that the telecos are asking for a guarantee on their investments by bringing in all this stuff up about Intel and chips.... this has nothing to do with the argument. No one restricted the chip manufactures on how they could price or charge for their products, as network neutrality is attempting to do...

In the end there probably has to be some kind of new economic or commerical agreement between the network providers and the Internet companies, or it will become interesting in a couple of years when the networks reach capacity if HDTV streaming becomes big...

A concept that your readers may also want to look into is the concept of "viral networks" and the possiblity that this will provide new competing networks...

[Andy Freeman]

> ) I think one of the things that the RBOCs want is the ability to charge for a tiered service. i.e. Internet companies have the option to pay more for a higher bandwidth service to the customer. There is some logic to this.

And they already charge more for more bandwidth. They don't need any changes to continue to do so.

> It is not necessarily charging Google 5% of its advertising revenue.

Since charging Google a cut of its revenue is the example that the telcos use, that statement lacks a crucial connection to reality.