Network Neutrality: The "Value Added" Myth

Let's get this straight: Network Neutrality assures that no online service adds value to anybody's network.  It was surprising to see Fred's post this morning on Network Neutrality.  Fred is one of my blogging icons, but to say that Google adds value to the carrier's network is just plain wrong.  Fred says:

Google is a value added service that runs on the carrier’s networks.  It ADDS VALUE to their networks. Without it, the carriers would have a LESS VALUABLE service.  And yet they want Google to pay them for improving their service.  This is nuts.

Not nuts.  Google does not improve their service.  It improves everybody's service.  And that's the problem the telco is facing.

While strictly speaking, Fred may be right, he is dead wrong to use a common commercial idea like "value added services" as an analogy.  Gasoline adds value to cars, yet no one car manufacturer receives any competitive advantage because their cars run on gasoline.

Commercially interesting value-added services provide both differentiation and competitive advantage.  Usually, both parties benefit.  For example, luxury car manufacturers used to bundle Blaupunkt stereo equipment in cars to attact customers.  Both parties win.  If all cars came with Blaupunkt equipment, only Blaupunkt wins.  You could say that a ubiquitous Blaupunkt system in all cars of all types "adds value", but only for consumers.  Clearly it gives no one manufacturer any advantage and thus does not allow the manufacturer to charge more, or to attract more customers by using Blaupunkt as a hook.

Similarly, Google, Skype and BitTorrent, cited by Fred, give carriers neither differentiation, nor competitive advantage.  The only advantage it gives them is exactly the same as all of their competitors: it increases demand for the services in the market as a whole.

Why should any company be interested in extensive investment in new networks to further the interests of their competitors?  Improving bandwidth requires money, and the market is dictating very competitive prices.  It's a low margin business and it's almost impossible to differentiate your 12mb DSL services from anybody else's 12mb DSL service.  You offer it, they offer it, we all charge the same amount.  Google wins, but the telcos don't.  Just as Blaupunkt would win and the car manufacturers wouldn't if Blaupunkt stereos were ubiquitous in all cars.

It's even worse.  The telcos are in a no-win situation.  If they limit access to Skype in preference for their own (inferior) service, they lose because they are adding value to their competitors internet access service where Skype is available.  If they allow Skype, they lose because their service is inferior and the superior service is one they have no ability to profit from.  They can't charge their customers more for Skype if their competitors don't.  Plus, they can't share in the revenue stream.

I don't like the telcos any more than Fred does, but I try not let my dislike of them cloud the issues.  I think they're merely doing business and getting more and more desparate.    I think that their position in the internet value chain, as the access provider, is economically dysfunctional.  Sure, maybe they asked for it.  Maybe they even orchestrated it!  Maybe they act counter-productively.  Surely their regulatory advantages and monopolistic tendencies are not helping.

Unfortunately everybody loses if the economics of the internet are stifled, and that is exactly what happens one the most critical component of the value chain is dysfunctional.  And the dysfunction is systemic.  Even new entrants in the "last mile" game will suffer unless they find a way to differentate their services.

Myths like "Google adds value to Verizon's network" as some sort of "telco greed battle cry" just don't cut the mustard.  There needs to be a clearer economic benefit to telcos for "offering Google" than "they must or they shall die!"

There needs to be recognition that differentiation and competitive advantage are meaningful business concepts, even for telcos.  Is the answer "charging Google for access"?  No, I'm sure it's not.  But the answer will only be determined when real issues, not myths, are driving our conclusions.

[tags: network neutrality]

Comments

[abner]

Even if Google does not provide a unique value proposition to any individual access provider, it is erroneous to say that it does not add value to access providers generally. Google's existence marginally increases demand for the Internet as a whole, and makes selling those fat pipes that much easier, even though the access provider realizes no direct revenue from Google-inspired traffic.

Trying to selectively charge for otherwise free content, that the access provider had no part in creating, and which is carried over a pipe the subscriber has already paid for, is simply rent-seeking, the practice of erstwhile monopolists.