Thursday, August 25, 2005 - The Progress & Freedom Foundation Blog

GoogleTalk and Net Neutrality: A Cautionary Tale

Google's announcement that it would add an instant-messaging and voice service called "GoogleTalk" to its already popular search engine put a fine point at the end of PFF's Aspen Summit. As reported in the New York Times [registration required], the announcement underscored the growing market influence that has fanned flames of fear among Google's rivals. These fears -- reminiscent of allegations against Microsoft -- offer yet another compelling reason why companies that are (or hope to be) successful in the Internet space should think twice before seeking to impose mandates like "network neutrality" on their infrastructure-building competitors.

Reflecting similar discussions on Capitol Hill, communications debates at the Summit focused heavily on the down-and-dirty of deciding whether and how legacy policies should be woven into a new regulatory fabric to cover the demands of digital convergence. These talks diverted frequently, however, to policy questions that were formed only recently, including whether to impose "neutrality" mandates on broadband network providers.

At bottom, the justification for subjecting facilities-based broadband providers to network neutrality requirements resembles a familiar rationale for regulating communications generally. Specifically, so-called "economic regulation" often has been predicated on agency experts proving (or, too often, merely positing) that targeted companies possess both the incentive and the ability to frustrate competition by favoring themselves over competitors.

But convergence tends to erase historical boundaries between communications markets. This enables companies to provide broader and broader bundles of features to consumers whether or not the provider uses its own network to reach end users. This relentless expansion of service bundles arguably gives more and more companies an "incentive" to favor themselves over others providing service via the Internet, as every company begins to compete against every other. Over time, this phenomenon escalates "incentive" from a narrowing trigger that directs regulation at the unlucky few to a shotgun that fires at the broadside of the communications and information technology sectors.

Similarly, the interdependent nature of Internet technology debilitates the narrowing force of regulating companies based on whether they have an "ability" to favor themselves over rivals. Much has been made of the Internet's "layers" or "modularity," which allows companies to furnish aspects of the overall Internet experience without having to provide all of the networks, applications and content that make this experience possible. The Internet's modules, however, are highly interdependent. This, and the vast flexibility of digital technologies, suggest that at any given time, a company can manipulate whatever it provides consumers -- whether infrastructure, applications or content -- to favor itself over rivals. Google, for example, hypothetically could manipulate its widely-used search engine to steer users to GoogleTalk, as opposed to Yahoo's competing service.

Companies that depend on (but don't build) their own broadband networks counter, of course, that any ability they might have to favor themselves over competitors is nullified or at least tempered by the presence of alternative application and content providers. This rebuttal, however, is only as powerful as the competition on which it relies. Thus, to the extent application and content companies begin to enjoy significant subscriber shares, customer "lock-in" (e.g., consumers who stick with lackluster ISPs just to keep their e-mail addresses) or other indicia of market power, they undermine their own argument for why network neutrality or similar mandates should be imposed on network providers, but not on them.

To be clear, I do not interpret this latest installment in one company's meteoric rise as a justification for subjecting any company (let alone Google) to a network neutrality mandate. Neither -- despite my view that promoting neutrality involuntarily may deter investment in competing networks -- do I suggest that network competition is more important or more intense than competition to offer Internet applications or content. Rather, I offer this interpretation of the recent announcement as a cautionary tale for companies and policymakers. Those who wish "neutrality" on network providers based on some notion that, in the end, mandates like these won't implicate other Internet companies should be careful what they wish for.

posted by Kyle Dixon @ 11:39 AM | Broadband , Cable , Capitol Hill , Communications , Innovation , Internet , Net Neutrality , Supreme Court , The FCC , VoIP , Wireline