April 25, 2014

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Net Neutrality and Competition

No sooner do I start writing about net neutrality than Ed Whitacre, the CEO of baby bell company SBC, energizes the debate with a juicy interview:

Q: How concerned are you about Internet upstarts like Google, MSN, Vonage, and others?

A: How do you think they’re going to get to customers? Through a broadband pipe. Cable companies have them. We have them. Now what they would like to do is use my pipes free, but I ain’t going to let them do that because we have spent this capital and we have to have a return on it. So there’s going to have to be some mechanism for these people who use these pipes to pay for the portion they’re using. Why should they be allowed to use my pipes?

The Internet can’t be free in that sense, because we and the cable companies have made an investment and for a Google or Yahoo or Vonage or anybody to expect to use these pipes [for] free is nuts!

This is a pretty dumb thing for him to say, for several reasons. First, it shows amazing disrespect for his home broadband customers, who are paying $40 or so every month to use SBC’s pipes. If I were an SBC broadband customer, I’d be dying to ask Mr. Whitacre exactly what my monthly payment is buying, if it isn’t buying access to Google, Yahoo, Vonage, and any other $%&^* Internet service I want to use. Didn’t SBC’s advertising say I was buying access to the Internet?

Second, if somebody is going to pay somebody in this situation, it’s not clear who should be doing the paying. There is some set of customers who want to use SBC broadband service to access Google. Why should Google pay SBC for this? Why shouldn’t SBC pay Google instead?

Sure, SBC would like its customers to have free access to Google, Yahoo, and Vonage. But as Mr. Whitacre would put it, the Internet can’t be free in that sense, because Google, Yahoo, and Vonage have made an investment and for SBC or anybody to expect to use those services for free is nuts!

My point is not that SBC should necessarily pay, but that there is no rule of nature saying that one layer of the protocol stack should pay another layer. If SBC gets paid by Google, it’s because SBC faces less competition and hence has more market power. As Susan Crawford observes, Mr. Whitacre speaks with “the voice of someone who doesn’t think he has any competitors.”

At this point, economists will object that it’s sometimes efficient to let ISPs levy these kinds of charges, and so requiring net neutrality from SBC may lead to an inefficient outcome. I appreciate this point, and will be writing more about it in the future.

For now, though, notice that Mr. Whitacre isn’t speaking the language of efficiency. He wants to extract payments because he can. There’s a whiff here of the CEO-tournament syndrome that infected the media world in the 1990s, as documented in Ken Auletta’s “mogul” stories. Can Mr. Whitacre make the CEOs of Google, Yahoo, and Vonage genuflect to him? Is he really the man with the biggest … market power? If there are to be side payments, will they reflect business calculation, or just ego?

It’s one thing to argue that a policy can lead to efficient results. It’s another thing entirely to show that itwill lead to efficient results, in the hands of real human beings.

Comments

  1. Tom Poe says:

    I missed the source for the CEO’s quote. Could you point me to it? Thanks.

    I think net neutrality lies with mesh networking. It would seem that if everyone had the capability to connect to everyone else without using telecom lines or cable fiber, and the only infrastructure was provided by the airwaves that are owned by the general public, we’d change things to suit the public interest in a big way. Aside from the logistics of outfitting every computer with wireless capability, what other obstacles stand in the way of such a revolution?

  2. Edward W. Felten says:

    Tom,

    It’s at http://www.businessweek.com/@@n34h*IUQu7KtOwgA/magazine/content/05_45/b3958092.htm

    I also added a link to the first paragraph of the original post.

  3. Randy Zagar says:

    Whitacre’s comments about Google trying to use SBC’s “pipes” for free is about as credible as Turner Broadcasting CEO Jamie Kellner’s comments back on 2002 that skipping commercials by going to the bathroom constituted theft and violated the consumer’s “contract” with the broadcaster…

    Whitacre should be more concerned that deep inspection of their customers’ legitimate use of telecommunications service could cause them to lose their common-carrier status. Common carriers aren’t supposed to monitor and filter based on the content of their customers’ communications. That’s what publishers do.

  4. PJ says:

    It’s unclear to me what the interviewer was asking when referring to ‘internet upstarts’… does he mean broadband ISPs run by/associated with those companies? or the sites themselves? He’s got to know that turning off his customers’ access to any part of the net is shooting the company in the head.

  5. eas says:

    It’s no wonder that Google is investing in WiFi. They don’t have to reach everyone or provide lots of bandwidth, they just need to do it well enough to remove the pricing power of wanna-be feudal lords like Whitacre who see their paying customers as serfs to be exploited.

    Whitacre and his ilk need to be decisively routed. Anything less is likely to lead to a world where the big guys divvy up the pot and they little guys, the people with the passion and the innovative ideas, can’t get in.

  6. Arik says:

    This is an empty threat.

    I wonder how many customers would SBC have if, as a retaliatory step, Google, MSN and/or Yahoo! would block SBC’s address space.

    – Arik

  7. Valdez says:

    They wouldn’t… one of them would strike a deal with SBC to be the ONLY service available to SBC customers… in addition to everything else they already had. Imagine Google and Yahoo users having the rug ripped out from under them, then force fed into MSN as an only option.

    While some of us see the injustice and would go elsewhere… my mom wouldn’t know nor care, she’d sign up for SBC, see the fresh icon installed on her desktop labeled “email” or “search” or what have you and click away in blissful ignorance. The “my mom”‘s of the world vastly outnumber the idealists… and SBC + partner would laugh all the way to the bank.

  8. Eszter Hargittai says:

    As I note over on Crooked Timber, in addition to the commercial implications of all this, how about the political ones?

  9. Greyhound says:

    I am still waiting for simple broadband access. I have been waiting for
    it for over 15 years. All I get is slow DSL service. I could go cable, if
    I dont mind dumping money into Adelphia. Yet I am told that I live in
    a market where I have choices.

    We need to get on Congress and the FCC so that Whitacre can be
    educated out of the way, consumers can get access to the high quality of service that many in the rest of the world enjoy and we can get rid
    of the monopoly to internet access that consumers currently enjoy.

  10. paul says:

    It’s not just the supposedly ignorant customers who would be deterred from switching if their last-mile carrier started (even more overt) content-based controls on connections.

    There are the people who’ve signed longterm contracts, the people whose apartment buildings ditto, the ones who live in an area where other broadband options don’t exist or are prohibitively expensive. Then there are the people who would have to figure out how to tell every one of their present, former and potential future correspondents that the email address they’ve established over the years is about to go away, with no forwarding. (Obviously there are services you can use to avoid this last problem, but you have to start using them long before the problem rears its head.)

    There are probably a bunch of other transition costs as well that I haven’t considered (including the possibility that any new provider will come with the same or a different set of content restrictions). But the bottom line is that for huge swathes of people finding an alternate broadband source simply isn’t going to be worth the cost. De facto, it’s a permanent monopoly.

  11. Paul McKee says:

    Q: How concerned are you about telephone upstarts like Domino’s, Papa John’s, Ticketmaster, and others?

    A: How do you think they’re going to get to customers? Through a phone line. Cable companies have them. We have them. Now what they would like to do is use my phone lines free, but I ain’t going to let them do that because we have spent this capital and we have to have a return on it. So there’s going to have to be some mechanism for these people who use these phone lines to pay for the portion they’re using. Why should they be allowed to use my phone lines?

    The telephone network can’t be free in that sense, because we and the cable companies have made an investment and for a Domino’s or Papa John’s or Ticketmaster or anybody to expect to use these phone lines [for] free is nuts!

  12. Matt says:

    Paul, well put. However, the upstarts you refer to in your reductio ad absurdum are customers themselves, where Google, MSN, Yahoo!, etc… are service providers that customers pay to reach over his “pipes”, the exception being Vonage, which is a competitor. Whitacre is treating this as though it were the AT&T or MCI proposals to royalty-free access to SBC infrastructure. It is the same reply, which proves that he doesn’t understand the difference in methodology between the two sets of opponents. Or does he?

    Vonage customers need some form of internet service, running over someone’s infrastructure, just as AT&T and MCI need telephone access over someone’s infrastructure. The difference is that telephone access is simply a matter of having a pair hooked up end to end. Internet access is a protocol layer over the physical connection, and then Vonage service runs atop that protocol stack. Vonage is therefore, to Mr. Whitacre and his ilk, doubly vulnerable. Not only does VoIP need a wire hooked up, it also needs server access across the wire. Any ISP will get you the server connection for a price, but you always have to pay the owner of whatever copper (or fiber) you connect to. In the case of SBC, they can limit Vonage by making phone service the price of internet access.

    Liberation of infrastructure? You’ve got to be kidding me. Are you running your own copper/fiber everywhere? Are you fixing it when it breaks? Why do you think Google bought that dark fiber? Haven’t any of you read Ayn Rand? Heinlein? TANSTAAFL. You people who live at the bottom of the well think that free air is a right, and everything else should follow in like fashion.

    Aside from lacking tact, how is he wrong? Users accessing Google or Yahoo over internet services are customers of their own service providers, and are paying SBC or someone like them for the privilege. It is when you understand Google, Yahoo, MSN, Vonage, EBay, et al. to be proposing that the playing field be “levelled” such that users can bypass the infrastructure owners to use the infrastructure for services that Whitacre makes sense, because it is the AT&T/MCI argument all over again. This is actual, tangible property we’re discussing the use of, and our dependence upon proprietary systems is no less our problem than if we were talking Microsoft proprietary operating systems.

  13. Albany Attorney Warren Redlich says:

    Thank you for an excellent comment. Phone companies and cable companies are so used to having monopoly power that they have a terribly inflated sense of themselves.

  14. Silona says:

    I am looking to forward a petition about net neutrality to several member organizations.

    Do you happen to have some prepared wording in regards to net neutrality. As this isn’t my strong point :-)

    Thanks,
    Silona

  15. David Luft says:

    These service providers that are going to charge Google, Ebay, MySpace, Amazon, YouTube, etc, are only trying to help the consumers get better service. Google should not be able to make money by using comcast’s service to get to customers. Comcast is acting as a middle man and should be paid for what they do. Also, if the providers aren’t doing what they say they will do, then you can just switch to another provider. It’s really simple to see that the providers aren’t doing this to make money, but to improve customer service. And why should Amazon, and other websites that make millions per year, get to use the middle man for free?

  16. Rob Kasey says:

    First of all, Internet Service Providers are doing this to make money. I have never heard of a company spending over $100 million just trying to persuade congress, if they didn’t expect to make millions of dollars in return.
    Second of all, this is not going to help the consumer, it is going to hurt them. These fees that are charged to sites like Google and YouTube are most likely going to be passed onto the consumer.
    For example: WordPress.com says, “For sites like YouTube, you can expect to open your wallet. ISPs will likely charge YouTube a hefty fee to keep using their pipes, and one way or another, that fee will be passed onto the customer. Whether this means paying to view videos, paying for a membership allowing you to upload, or just paying for premium features, I couldn’t guess, but you will be paying.”
    If the customer is not picking up these fees, who will? I can’t guarantee anything but you can’t possibly think that they will just absorb the costs of being on a company’s “fast lane.” Eventually, if many of these websites pass the costs onto the consumers, the consumers will begin to try the free sites and will struggle to find ones that load in a reasonable amount of time or load at all. This will limit the consumer’s number of available resources.
    Finally, small companies will not survive in an online environment in which you have to pay to be successful. These companies thrive on the fact that they can post whatever they want on the internet, and they have an equal opportunity to serve and reach customers. One of the biggest reasons the internet has thrived is due to the fact that someone can start with very little, put it on the internet, and turn it into the next Google or Ebay. Without Net Neutrality, these providers will choose the winners and losers on the internet.

  17. David Luft says:

    If the providers do begin to charge for their services, this will guarantee them the revenue lost while trying to convince congress. (This is why they are spending so much money on it.) The other money that they will make, after paying back all the money they spent on convincing congress, will go towards new innovations and ideas that their company can begin to incorporate in order to improve customer service and IMPROVE the amount of available resources. The fact that smaller companies won’t be able to compete is how it has always, and should always be. Survival of the fittest has been the way the market has always been. If the providers charge for better service, it will be the same as a cell phone or cable company charging more for premium channels or text messages. Once again, it is nothing new to consumers; you get what you pay for!

  18. Rob Kasey says:

    Once again David, I’m going to have to disagree. Without net neutrality, resources will most definitely diminish. The reason there are so many resources available today is because the internet was neutral and there are millions of websites about millions of topics. Without net neutrality, these small, but useful, resources wouldn’t exist. In your argument, you said the companies are going to spend the money they make on improving the internet and coming up with new ideas. Where do you think they get these ideas? They come from the company hiring more people and spending money on these extra employees. So you are saying that the people the company hires are going to come up with more ideas than the ideas the entire country is capable of coming up with. This is basically what it will come down to. The new innovators and privately owned businesses won’t be able to put in new ideas it will rely totally on the company itself. Also you stated it will eventually be the same as the cell phone company, which is another reason to support net neutrality.
    For example: The cellular carriers, (who control which handsets consumers can buy, what software can run on those handsets, and how data gets to them) are so protective of their networks, and impose so many arbitrary requirements on outside developers trying to make their software available to cellular subscribers, that many innovators walk away in frustration.
    Basically, without net neutrality, the internet will lose a great deal of its innovation and expansion, muscling out the small businesses and making it almost impossible for new ideas to enter the high-priced, high-speed world of the “fast lane.”

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