It ain't net-neutrality so

Reading much of the press coverage of the recent Google/Verizon announcement in relation to net neutrality,  I was struck first by the strength of the language used ("dead", "fetishistic"), and second, by the apparent lack of understanding of what was being said. No-one died, certainly not the idea of net neutrality. Two very big companies agreed that less regulation was a good idea (no news there). One of those companies said it wanted to charge more for certain new facilities, the other said that it would continue to use the cheaper facilities it already used. Since when did agreeing not to buy a new, more expensive product make headline news? But wait: perhaps there is a story behind the one that was printed.

Tim Berners-Lee has recently re-emphasised the importance of mutual interconnectedness of the Web and the major issue for the Web in the context of a non-neutral Internet: a small start-up (say, the next Facebook or Skype) is not in a position to negotiate with thousands of ISPs for permission to deliver its traffic. It already pays a third party (its own ISP, its transit provider) for the privilege; and that ISP pays for the traffic it cannot peer, and so on, until we get to Tier 1 (comprising the largest, most global wholesale ISPs). This system is pretty good at minimising transaction costs. Money flows up to the Tier 1 ISPs to pay for the extra geographic reach: end users (including the service providers) are paying for it all. Contrary to some beliefs, there is no 'free ride' in the system. So should we all defend net neutrality?

Non-discrimination is also built into the current beautiful, unregulated, commercial system of Internet interconnection. If you are a buyer of IP transit in London, peak traffic is priced the same, no matter what value it generates. This is unfortunate if, as a wholesaler, you would like to charge more for the high-value traffic, but is consistent with competition (in a market for a uniform product), where one should expect to recover efficient costs. Unfortunately, this might prevent the building of new (very expensive) access networks whose business case is predicated on the ability to price discriminate (i.e. charging extra for certain services). Here, mobile is in the vanguard, which is one major reason why Verizon is interested in a non-neutral mobile Internet. The value per bit for mobile TV is lower than mobile broadband, which is much lower than mobile voice, which is much lower than SMS. Reaching efficient levels of demand, in turn, requires different pricing. Down with neutrality!

In this context, professional content players like broadcasters are also interested in net neutrality as this will have strategic positioning and cost implications for them, given the recent growth of catch up and non-linear TV services.  The key point is that the cheap stuff on which our current Internet is built (i.e. what is made of ordinary IP transit – Skype, Facebook, Google and all) can remain functional enough, without impairing the access service provider's ability to offer other services at different price points. Maybe it is good to have popular services such as Google (and hence YouTube) still using the cheap stuff: that way pressure from consumers (competition in the retail market) will keep the Internet neutral enough.   

We regularly work with regulators, policy makers, operators, and content owners looking at the economics of interconnection.