Network Neutrality Counter-Point

Network neutrality is a pointless, emotionally-charged distraction from the real issues involved in monetizing Internet content.  The Internet is rapidly becoming a retail and marketing vehicle, just as shopping malls and other retail chains.  A sound distribution channel, with economic benefits and motiviations must be built which satisifes both the needs of telcos as well as those of content creators.  This adversarial relationship between the storefronts and the product makers will kill us.

Today's article by Daniel Berninger, Net Neutrality Not An Optional Feature of Internet is a fine example of the kind of emotional posturing that's leading us down a very dark path.

He super-charges his discussion with analogs about "arms dealers" and talks of telcos wanting "kickbacks" from content producers. Berninger talks of "tolls" when we need to be talking about "margins".  He talks of telcos trying to "protect their existing voice and video revenue streams from Internet enabled innovations" when he should be asking how everyone can participate in revenue-generating innovations.

While discourse like Berninger's may spur many content producers to demonize telcos and strengthen the resolve to combat these "extortionists", it is full of vacuous reasoning.   He is specifically choosing controversial examples, such theorizing what it would be like if "Intel charged a fee to enhance software performance".  Some participants in revenue chains are inappropriate, while other channel-model schemes work very well.  Choosing the Intel analogy does little to convince me that ISPs are not reasonable participants in the chain of value delivered to consumers.  I think my Walmart analogy below is far more productive.

Mistakes in Perspective

One enormous mistake is focusing too strongly on the assumption that telcos are hugely profitable companies who are looking to "extort" money from content vendors.  The implication is that their motives must clearly be greed and exploitation of their unreasonable locus of control.

It is much more important to look at the profitability of the internet service fraction of telco business to make reasonable assessments about the economic viability of Internet business models.  Telcos are too highly subsidised, regulated, and pursue a vast array of revenue schemes.  We are just looking at internet access, and the specific cost-center figures don't look so rosy.

While I agree that telcos are worthy of criticism and even do some reprehensible things, it is much more productive to look at them as businesses with typical economic motivations.  It is better to ask whether their participation in the value-chain wouldn't make the internet a better place for retail, not worse.  Why can bookstores take a portion of book revenue without falling prey to such attacks?  Why not ISPs?

Read some of the research about telecom issues such as that provided by The Yankee Group. The focus is on increasing investment in infrastructure, figuring out ways to monetize the digital supply chain, and how to implement technologies to make it feasible. These are mature businesses driven to solutions by problematic supply- and-demand relationships in Internet commerce.

My Walmart Analogy

A few days ago, I read Just Say No(thing) on Om Malik's blog.  Ed Whitacre of SBC/AT&T was making noises about charging content providers. I urged people to consider the following analogy:

Whitacre’s comments reflect commercial realities of product distribution. So, yes, he sounds confused a bit, and the the idea that content producer should start paying is not only offensive to the idea of open networks, but seems ridiculous from an economic point of view.

Or is it??

Let’s think more generally of what SBC/AT&T provides. They provide their customers access to products and services. Their customers pay them for access to the products and services.

Just like Walmart.

Imagine that Walmart allowed anybody to put products in their stores, and did not mark-up the goods, but instead charged customers to enter the store and allowed anybody to walk out with whatever they wanted. They then left it up to the customer to figure out how to get in touch with the toaster manufacturer to pay for their new toaster. This is the business model of the Internet.

The more you think about typical retail value chains, the more and more curious my analogy becomes.

Of course Whitacre wants money from the content providers. Just as Walmart wants margin on the products they sell. The whole reason value chains exist is so that everybody along the chain participates in the revenue.

What to do?

First, we need to look at the overall distribution model more wholistically and consider that the access provider may be a reasonable ally instead of an adversary.  If the access provider makes a distribution margin, they'll be motiviated to make access to the wider range of services more affordable.  The better it works, the cheaper access becomes, and I can even imagine truly free internet access paid for purely by discount margins on goods sold over the wire.

Second, build open standards that make it possible for telcos to link their access service payment systems to anybody's content services.  An open standard could make it possible for someone such as Amazon to offer a set of payment methods: Mastercard, Visa, On Your Monthly ISP Bill.  Anyone could use it, and it solves myriads of payment problems.  Go back and start re-reading the literature on micropayments from Web 1.0.  It wasn't all bad, there were just too many barriers and not enough vision.

Third, telcos must stop engaging in the negative "walled garden" thinking, and begin promoting an integrated retail distribution model where everybody benefits as revenue flows.  Resist closed thinking about particular telcos and embrace technologies and services which support this model.

In short...

Content providers and technologists better figure out how to satisfy people like Whitacre with business and revenue value chains that are more like retailing. That’s what the internet is. Content providers produce products, they ship them to an ISP, and ISP delivers them to the customer.

Where’s the margin?

Unless the value chain works, content providers should, rightly, feel very afraid. Any retailer like Whitacre will try to pick the most profitable products to sell. If they’re not getting good margin from one content provider, they’ll try to drop that “product line” in favor of another.

Berninger talks of an "end to innovation" because of the loss of network neutrality.  Instead, a constructive economic channel model for Internet distribution represents the beginning of innovation.

[tags: network neutrality]

Comments

[Ben]

The problem with your Walmart analogy is your forgetting the fact that the customer is paying for the network connection already!

So the better analogy should be; imagine a building owner charging Walmart for rent and then also asking Proctor & Gamble to pay for shelf space in the Walmart store?

[Gary Wisniewski]

I don't think the customer is paying enough for their network connection, that's the problem. Here's why:

1. Prices for connectivity have been pushed down to their limit. Consumer connectivity is subsidised by other telco products (such as mobile, commercial customers, and government). Partial evidence of this is the rapid pace at which all stand-alone ISPs have been absorbed or displaced by telcos and the hopeless attempts at profitability the smaller ISPs experienced. Consumer prices are lower than the cost of the service when examined as a separate cost center. If telcos see all of their busiess (VOIP, video) moving to the internet access cost-center, they don't see a sustainable economic model in the long run, and are forced to act.

2. Even if consumer prices are reasonable and assure profits, the general move in domestic spending is moving rapidly toward the net. As more consumers use the net and more and more services are monetized properly, telcos will be under a great burden to increase infrastructure while having no leverage whatsoever to begin to raise prices. Only by participation in the revenue models can telcos assure they can continue run their businesses profitably.

You may not like telcos. I don't. But, looking objectively at their financial performance in internet access alone, any business would be concerned about being squeezed-out of one of the most important financial markets of the next few decades.

[jimbo92107]

Remember England's "Enclosure Laws" that drove their peasant population into the cities? It was a good example of those in power siezing control of a resource that was, at its heart, part of a public commons.

What became of the peasants? Read Charles Dickens. We're headed in that direction today.

Telco companies build their infrastructure on public land. Broadcast networks use public airwaves. Yet each of them makes enormous profits using these public resources. Now they want more.

Ever see an ATT executive picking through a dumpster? You won't, because he's making a thousand times the income of his worker bees. Even if a CEO drives a company into the ground like GM's, he'll exit out the front door with his golden parachute.

And claiming that "prices for connectivity have been pushed down to their limit" is entirely bogus. The technologies that make the internet possible--servers, switches, routers, optical cables, etc.--are getting more efficient, more capable and less expensive every year. Plus, the major telcos were already paid $200 Billion Dollars to lay down a high-speed optical fiber network for the entire United States.

Where is it, ATT?

Fact is, it takes less effort and less money to push a megabyte from A to B this year than it did last year, yet the price hasn't been coming down. That means profits are going up. What a sweet deal...for corporations.

Greedy people grasping for more money. That's the wholistic picture.

"Please sir, may I have some more bandwidth?"