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Friday, December 16, 2005

The New Unbundling: Net Neutrality
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Jeff Pulver correctly draws the new battle lines for the new regulatory issues of consequence; namely, net neutrality. Unfortunately, Jeff attributes opposition to such regulation as cartel-like attempts to create walled gardens by Internet access providers.

To begin with, it is a strange cartel that appears to be engaging in such vigorous price competition. Furthermore, the walled garden has been tried and abandoned -- remember AOL circa 1993 and that quaint integrated company, Compuserve? As a general rule, the relatively more open platforms prevails over the relatively more closed -- though the iPod and resurgence of Mac OS might be the exception that proves the rule. In the end, the relevant question of an access provider trying to create a walled garden is: so what? If there are competitive networks, then there is little policy concern with what consumers prefer.

What is net neutrality about then? There are a range of possible answers from the mistakenly benign to rapacious rentseeking. Of course, the motivations overlap, but let's run through a few of them:

On the benign side is the Lessig-ite invocation of the moral norms of the Internet. This case for net neutrality does not care about the economics of the situation, but rather asserts a normative superiority for open, equal, non-discriminary access to end-users. There is an honesty to this view, but it is not self-evidently morally superior to a system predicated on property rights and contractual relations governing relations between Internet-layer players. Indeed, it is my suspicion that the property/contract model produces greater overall output, which in turn means more broadband access and subscribership.

My colleague Adam Thierer has the definitive blog treatment of yet another motivation: price regulation. The fundamental conundrum of high fixed/low marginal- cost industries is how to recover the fixed costs. Net neutrality impeded the ability to price discriminate, the manner in which markets tend to solve this problem. Other alternatives to this problem include government ownership or regulated monopoly. The price regulation alternative tends toward this latter model, a model which has not served us well in the past.

The less-savory explanation for net neutrality regulation is rentseeking. Under this explanation, the application and content providers seek mandatory unbundling of the physical layer at a zero price, thus effectively cutting out physical access providers from the producer surplus spoils, or at least the negotiation for those spoils. A short-sighted problem with this rentseeking is that it might impede the physical providers from investing at all, thus leaving the higher layer Internet players up the creek without a paddle. Kyle has noted the irony of some of the net neutrality proponents getting what they ask for.

Net neutrality does appear to be shaping up as the next major regulatory debate. It is vertical unbundling of the Internet, thus the arguments will be familiar to telecom war veterans. However, an additional twist is the protean quality of such a mandate--it seems to mean different things to differnt people, ranging from the religious wing, doctrinaire enforcers of the end-to-end principle to the more opportunistic "give my preferred application(s)" free carriage and prohibit integration of applications to the physical layer to protect my business model from more potent competition.

The right response to proposed net neutrality regulation is "maybe." If there is a monopoly, then it is probably necessary. If there is competition, then probably not -- and only if it can be proven to be harmful to consumers, as opposed to the business plans of select companies.

posted by Ray Gifford @ 1:11 AM | Net Neutrality

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