FCC, Net Neutrality, and the Internet as a platform

The proposed FCC rules for Net Neutrality are pretty terrible. The Verge has a pretty good write up on them, here. Is this a good or bad thing? Personally, I think this is terrible for the future of innovation as I’ve written about before in a few spots, most recently here. I also think it depends on what you think about the role of the ISP. If you think that the role of the ISP is to provide a conduit to the internet and simply pass data to you, then Net Neutrality is for you. If you believe that the ISP should actively play a role in the content you seek, then Net Neutrality is not for you. If you think that the ISP has a role in shaping the way data flows, has the right to extract as much money out of the internet ecosystem, then you probably don’t think that Net Neutrality is the right thing either.

I believe that this comes from a fundamentally different world view on how the economy should function. There are a lot of people out there that truly believe that organizations have the right to maximize profitability. I don’t really think that’s true. I think that organizations have a role to play and those that exploit platforms like the internet are drains on the economy and limit our ability to innovate.

Many of the developers of the initial internet protocols strongly believe in net neutrality. Ranging from the guys that used to run Xerox PARC to Tim Breners-Lee, there’s a lot of different push back against non-neutral positions.

I think from an evolutionary economics standpoint, technology platforms of the past have been wildly successful because they’ve been able to continually lowered in prices which increases accessibility. This drives further adoption of that technology as a platform encouraging more companies to compete to make that technology platform. Some historic platforms are roads (shocking), steel, silicon chips/processors, and now the internet.

Roads have been pretty much government sponsored and open for just about anyone to use. In Portland, the Blue Line MAX line has driven $7 Billion in new development, the largest for a new commuter line anywhere. Computer chips are near and dear to my heart as I’ve worked at a few companies that make them. I think that we can all see in our daily lives how these chips have dramatically changed the world. That the company that makes chips (Intel) is worth a lot less than a company that leverages those chips (Microsoft). The combination of these two companies has essentially driven a great deal of the modernization we’ve experienced in the last 20 years in the US.

In the last 10 years the internet has driven the worlds most valuable companies. It has more quickly shifted how companies engage with their customers and powerful retail based stores have fallen on extremely hard times (Sears/KMart,etc…). My job is only made possible because of the internet I work with people in different states every day.

The fact that it will soon be government policy to enable a company to seek as much money from every user of their platform is only going to hurt the entire ecosystem. If my service stays the same but my price continually increases, that means I can’t afford to buy services that I want online, so I’ll switch to other options or drop the options all together. This will kill competition and negatively impact consumer choice. Furthermore, if I’m paying for Netflix and Comcast and Netflix is forced to pay for access to Comcast customers, then Comcast is charging everyone. I’d expect massive quality upgrades on a continual basis or something in return for all this extra cash flow. Instead it will likely go to investors in the form of higher profits.

Data, Monopolies, and the Comcast/Netflix Deal

So, apparently, there are these groups that sell bandwidth for data transit to companies like Netflix. These companies interface with the major ISPs like Verizon and Comcast and connect the broader backbone of the internet to specific ISPs. These interfaces, like any interface can become over burdened – similarly to a congested intersection on the road. The problem is that with data information can be lost or transmitted extremely late, the lost data is called a “dropped packet.” These packets are like little packages of data that will likely provide some desired bit of image, article, or video.

These companies have typically provided “peer connections” that are free to transmit data because, well you’re paying to access the data and Netflix is paying to allow you to send the data. Win-win for both user, ISP, transit company (Cogent), and Netflix. Pretty good system right? Well it was until Verizon and other ISPs went and decided that they wanted to charge Cogent to for access to their networks so their users can access the data that Cogent is transmitting for Netflix.

Why can the ISPs do this? They are acting like monopolies in many ways. These companies are essentially islands of monopolies that do not compete with each other. With little incentive from the market to change behavior they are able to seek additional monies from their customers and providers without much risk of member defection. Furthermore, as Verizon is continually posting higher and higher Average Revenue Per User (ARPU), they are making more from the same number of people. When you have no where to go, that means raters are going up, and if they aren’t investing that additional money, that means profits are going up.

What does this all mean? It means that Netflix is getting the squeeze in a way that they weren’t expecting and with the proposed merger between Time Warner and Comcast things are only getting worse. The ISPs are able to say that they aren’t negatively hurting Netflix alone, because everyone that uses Cogent is getting hit the same way. It’s intentional according to the Cogent CEO. To get around the Cogent bottleneck, Netflix has decided to have a direct connection between Comcast and Netflix. This means that Netflix services will have less of a bottleneck to compete with other bits of data. This is a big deal for Netflix as lost data packets likely mean blocky video or video that is unwatchable.

Netflix decided to push for their members by paying for higher speed access directly to Comcast. This is great, but on the other hand terrible. It’s terrible because one of the greatest champions of Net Neutrality has bowed out of the fight giving in and paying to provide higher speed video quality to their members. It’s good because they are doing what’s right for their members, even though Comcast is at fault here by making cynical business choices to negatively impact the quality of the services provided over their pipes.

This could have interesting implications if a company decides to use this clear agreement as an obvious breach in the NBC/Comcast Net Neutral agreement.¬†This could, if pushed correctly, have serious far reach implications for the company. However, I’m not sure who would push for this law suit. Hulu won’t, as it’s partially owned by Comcast, maybe Google will as they are looking to compete head on with Comcast as an ISP, video content provider, and in other realms. Another potential is Aereo¬†that has already won a few major victories over NBC/CBS in copyright (The company streams over the air HDTV as a DVR service). So if they don’t have equal access as Comcast or Netflix, they could certainly sue over this – as it would hurt their business growth possibilities.

Update: Apparently Netflix is in negotiations with both AT&T and Verizon as well. Furthermore, Verizon believes that these agreements are clear that we don’t need more “regulation”in the form of net neutrality. Clearly, if a monopoly can extract as much money from both their members and the content that brings value to their networks, there’s no need for regulation!

I think that these practices are going to seriously impact the ability of smaller firms to compete. I also would fully expect a company like Twitch to start feeling the pressure next.