Paying for Preference. The Fallacy of Net Neutrality

Americans have long understood the ecosystem of capitalism.

Money enables people to buy things that they desire and spending greater amounts of money gives a person the opportunity to purchase a superior product.

Consider an item like a car. A car might have a basic sticker price for a base model, and also higher prices for additional features such as leather seats or a sunroof. More money yields a better product.

Such a concept is not limited to products, but to services as well.

An expensive first class airplane seat gives a passenger a better seat on a flight (a product) and also preferential boarding (a service). Similarly, people willing to spend more money at a Disney theme park could purchase a FastPass which enables visitors to bypass the long waiting lines for rides. Those unwilling to shell out for the additional pass need to remain in the slow lane while the FastPass customers pass in front of them.

Businesses also pay premiums to provide better service to their customers.

Consider supermarkets. While a customer may not think about the reason Heinz Baked Beans are at eye level while the competing Bush’s beans are towards the floor, there is a dollars-and-cents backstory. Heinz pays the supermarket extra money – known as a slotting fee – to be at eye level so that consumers see the product right away. Heinz benefits by increased visibility and sales, while the consumer benefits by not having to bend down for the item. The supermarket uses those slotting fees to help manage the costs of running the store.

The ecosystem works. For everybody.

Net Neutrality

The Obama administration pushed forward a regulation through the FCC advancing “net neutrality.” The premise was to regulate companies that provide high-speed internet access (HSIA) to ensure that they do not favor some sites over others.

For example, if a website that offers videos (like Netflix) wants to make sure that it has a smooth viewing experience for its customers, it would spend money to build an ecosystem to have its content distributed effectively. It would have its popular content housed around the country and establish “transit” and “peering relationships” to expedite the flow of content through the web.

Advocates of net neutrality fear that the Internet Service Providers (ISPs) might use their position to manage the content that people see. They fear that large companies like Netflix may be able to pay for a better experience than smaller companies, thus stifling the emergence of newer and smaller companies. In particular, they note that the ISPs that own content would prioritize their own sites in a “fast lane” while relegating everyone else to a slow lane. The net neutrality promoters warn that the ISPs could even shut down competing websites completely.

To advance their “neutrality” goals, the Obama administration’s FCC declared that the Internet would be regulated like a public utility. Damn the billions of dollars spent by ISPs like Verizon and Comcast to lay fiber around the country to access the internet (and the billions of dollars more that are due to be spent), the government sought to control their infrastructure and business model, much like an electric company or public road.

There are many flaws with the net neutrality approach.

Slotting fees: As described above, businesses have always sought a way to improve their service as well as competitive position. Product companies pay slotting fees to gain better visibility and stores accept the fees to help manage their business. The behind-the-scenes relationships are hidden from customers, but it does not mean that there is an anti-competitive conspiracy.

In many supermarkets, there are additional layers of relationships. Many supermarket freezers are owned by third parties which have their own brands of ice cream. The freezer companies likely prioritize their own products on shelves by putting them at eye level. But the freezers also include competing products, as it would undermine the company’s business to have a half full freezer.

Does a supermarket only sell its own brand of iced tea or peanut butter? Of course not. Does Disney only offer rides to those people who pay for FastPass? It couldn’t afford to keep the parks open if they took such an approach.

Similarly, an ISP that owns content would likely make sure that it is delivered on its “fast lane” if it didn’t harm its overall business. But it would certainly make all content accessible.

Not a monopoly: The federal government actively seeks to regulate businesses that are monopolies. For example, there are not a dozen electric plants in a neighborhood that compete to supply a home with electricity. As such, the government regulates the return that the utility can earn for its product (the electricity) and service (delivery of the power).

But there is no monopoly on HSIA. There are many telecom companies competing for your broadband business. There are cable companies and satellite companies that would be happy to supply your content and HSIA too. And wait until 5G – everyone will be surfing the web on their mobile devices and abandon their PCs. There is choice.

If AT&T would own CNN, would it make sure that it was great viewing experience without latency? I would imagine so. Would AT&T also scramble Fox News? Of course not, as doing so would undermine its business model of getting as many customers as possible. The ISPs are not going to divide their business on ideological lines between liberals and conservatives.

Vital service: Electricity and Disney theme parks are not equivalent in terms of their necessity. Someone can live a long fruitful life without going to Magic Mountain. No electricity or gas for heat, hot water, refrigeration… not so much.

Where does broadband sit?

During the early years of broadband, the internet was used by individuals to watch silly entertainment like dancing cats (Jake Paul is the latest incarnation of a dancing cat). But there have been significant changes in the usage of broadband over the past decade:

  • OTT. Many consumers have been dropping their television service and opting to go “over the top,” using HSIA for their television content. Broadband is eating cable TV.
  • Death of newspapers. Advertising dollars have moved out of print into digital, destroying the business model of many media companies. Broadband is controlling the news.
  • IoT. The “Internet of Things” is the movement to connect devices to the internet. Refrigerators, thermostats, cars and other items will be viewable and controlled remotely. Broadband will control all electronic devices.

That is the real story. The ISPs are well on their way to taking over the access to the news and media and they will ultimately control the access to the future of things.

And the government is unwilling to let such power remain unregulated and uncontrolled.

The “net neutrality” sponsors are campaigning about a fake issue of unfair ISP “fast lanes” and that ISPs will block content. The ISPs are as likely to do that as Disney banning Universal Studios employees from its theme Parks. Paying for Preference is ubiquitous in our capitalistic economy. #FakeIssue

This campaign is about the future. On the one hand, how does one make sure that an ISP does not use the information about your driving and shopping habits in illegal or inappropriate ways? On the other, how do we make sure that the government doesn’t read Americans’ emails and review their surfing habits? We have seemingly granted Google and Facebook carte blanche to do so – will there be no end?

Broadband will be an integral part of all our lives, and the companies that provide access to the Internet will have a unique window to all of our activities. Today, net neutrality addresses an irrelevant non-issue while the government fails to focus on the critical issue: managing privacy in an always-on IoT world.

More on that to come.


Related material from First.One.Through:

Are you trying to understand “net neutrality”?

 

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