Thursday, March 1, 2007 - The Progress & Freedom Foundation Blog

Net neutrality, pricing, and 2-sided markets

As many economists have pointed out, the Internet is a multi-sided market. In such markets, optimal pricing for the various sides is not obvious. Under current Internet pricing arrangements, consumers generally pay the full cost of the "last mile" connection and other infrastructure built by retail broadband providers. Likewise, content providers generally pay the costs of their connections. But because demand and supply of content and infrastructure are interlinked and each requires the other in order to succeed, this simple arrangement may not provide the best incentives from society's point of view.

One concern of those in favor of net neutrality is that without some sort of law or regulation the broadband providers will start charging content providers. That's possible and, in some cases, possibly even desirable.

It's also possible that content providers would charge broadband providers.

In fact, that already happens. ESPN offers a service called ESPN360. Any broadband provider that wishes to carry it must pay ESPN a fixed fee for each subscriber. Unless your ISP pays ESPN, you won't be able to use ESPN360. (There has been a lot of discussion about this over the past year or so). In other words, the content provider blocks the ISP, not the other way around.

By itself ESPN's arrangement is not evidence for or against net neutrality. Those in favor of net neutrality might argue that such a structure highlights the need for a net neutrality law that bans content providers from charging ISPs as well as the other way around. Those opposed to mandatory net neutrality might point out that a service like ESPN360 may not exist at all if ESPN were not allowed to experiment with a new pricing model.

The key point here is that a content provider charging an ISP highlights the fact that in a complicated multi-sided market nobody really knows how services *should* be priced in order to best encourage investment and innovation in both content and infrastructure. Allowing firms on both sides of the market to experiment with pricing is likely to be an important component in ensuring continued innovation in content and infrastructure.

posted by Scott Wallsten @ 10:43 AM | Broadband , Internet , Net Neutrality