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Thursday, October 5, 2006

Net Neutrality and the Small ISP
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The net neutrality debate is often portrayed as a battle between huge ISPs and huge tech companies, and so on some level it is. You also have free-market scholars arguing against burdensome regulation (including PFF) and commons advocates arguing for regulations to ensure a "dumb pipe" that will provide no limits on end-users. But what about innocent parties trapped in the middle of this debate? Who are they, you ask? Well, how about a small broadband ISP? The net neutrality regulation proponents say they want more competition in broadband; one of those competitors posted an intriguing post on Dave Farber's Interesting People list this week. He didn't address net neutrality, but the points he raised are central to the debate.

Brett Glass of the ISP Lariat.net (serving Laramie, Wyoming) was responding to a post involving someone being kicked off of a Verizon Wireless network for using too much broadband bandwidth. He said networks are plagued by bandwidth hogs, often the result of viruses, etc., but sometimes it's caused by the actions of a single user. "The real problem," he said, "is that many consumers are unwilling to pay for the network capacity they use."

There's no way for an ISP to make money on a $27.99 per month connection if the customer is using the equivalent of a T1 line (which costs more than 10 times as much as that, even wholesale). Yet, when the customer IS using the connection, he or she expects Web pages -- even those which are bloated with unnecessary, bandwidth hogging graphics and ads -- to come up in a flash. He or she wants to see video instantly and do instant uploads and downloads.... Instant gratification.

Mr. Glass said oftentimes the consumption involves sites such as MySpace or ESPN, which constantly refresh graphics-laden pages, and customers park on those sites without realizing how much bandwidth they consume.

In any case, when consumers expect to get your product at retail for less than it costs wholesale, no business model will work except one that involves predatory pricing or cross-subsidization. (This is why the telcos and cable companies are so into "triple play" and "quadruple play" deals which produce monthly bills of $100 or more per customer. They can hide the true cost of the Internet component of the package, or cut corners on the other services in the bundle.) But our ISP -- being a pure play ISP -- doesn't have the option of playing those games.

What we do, instead, is something that seems to be contrary to the very nature of the large corporations with which we compete: We're open and honest. We specify a cap on sustained bandwidth that kicks in within a minute. The user's connection can go to much higher speeds in short bursts (good for Web pages), but after a minute it normalizes to the throughput we specify.

Mr. Glass said this works for casual browsers of the Web and reasonable downloaders. Others complain the service is "slow." He cites one office that couldn't work under these restrictions, so "they had no choice but to buy more bandwidth. Which was only fair; we had to buy that bandwidth at wholesale and shouldn't be expected to provide services below our cost."

And for customers who don't take that approach? "If they don't want to pay more for more capacity... well, we hate to lose a customer, but we would rather have such a user hog a competitor's network than ours."

Some net neutrality regulation advocates have said they're not opposed to tiering of prices for different bandwidth capacities (while at the same time saying an ISP shouldn't "discriminate" by having a fast lane for certain content). That's great. It's good that the large-cap tech companies and advocates that seek to dictate business models to ISPs are, to an extent, able to recognize the direct correlation between wholesale and retail cost of bandwidth. (It must be said, however, that some net neutrality regulation advocates wouldn't even accept what Lariat.net is doing, namely choking off a connection after a given period of time under the argument that it is discriminating against some of its users.)

So, let's say we want Mr. Glass to continue serving Laramie. We want others like him to compete in other markets, especially in markets that are less urban and thus less likely to be the first served by large ISPs. So we want to let him continue to do what he's currently doing. We're also going to want to let him experiment with other alternatives in the future, right? After all, as he notes, he can't take a loss on broadband by throwing it in a triple play because he's a single play. I don't know what the price elasticity of his service is, but in mentioning competitors it's clear he's not a monopoly, so he will need to adjust to changing market conditions to stay in business. He can't do that if Congress has locked him in to where he is.

Okay. So how do we write this flexibility into a statute?

Therein lies the challenge for net neutrality regulation advocates. As James Gattuso ably notes, these advocates must pass legislation in order to claim victory; the status quo doesn't match the world they want to live in. So how do you craft legislation that bans "discrimination" but allows price discrimination and bandwidth usage discrimination?

Answer: you don't. Lets let Mr. Glass and his compatriots across the country continue to experiment with business models. Let's let those experimentations lead to more choice for consumers. And let's let consumers choose what suits them, because as Lariat.net's customer base shows, not all broadband consumers have the same needs -- the light browser user is not comparable to the P2P-using MySpace addict.

If someone demonstrates market power and uses that market power to harm consumers, antitrust regulators can act. That seems far preferable to crafting legislation that could put people like Mr. Glass out of business.

posted by Patrick Ross @ 10:42 AM | Antitrust & Competition Policy , Broadband , Capitol Hill , Communications , Economics , Net Neutrality , The FTC

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