The Zone of Competition
Carriers (Verizon, Comcast etc.) are petitioning the government to allow "level of service" agreements for internet traffic. Currently, the government actively regulates media in general, through decency standards on public television, funding public radio, and enforcing a variety of community and public interest standards across media in general. The unregulated internet is an anomaly in the media world and it's not surprising that carriers want that to change.
Information travels across the internet in packets and it does not matter what that packet contains. An emailed joke is as important in the Internet's eyes as a million dollar contract. Carriers want to change this and tier the internet, so some packets will get priority over others. This would be a dramatic change from the neutral end-to-end principle that governs the Internet now.
Carriers argue that they need tiered pricing to better ration bandwidth. If bandwidth becomes scarce, and networks become jammed up, then pricing the traffic "hogs" is the best way to relieve that congestion.
Arnold Kling, though, questions the very notion of bandwidth being scarce. I'm with Arnold, I don't think bandwidth is scarce.
And Tyler Cowen argues that the beauty of the status quo is that all the surplus is captured by consumers (websites try to offer good experiences and get customers, customers go to them or a competitor).
I believe that carriers are agitating for this because they don't want to be dumb pipes competing in a commodity business. Tiered service means they can offer different things to different customers at different prices. This will allow them to differentiate themselves from each other, and maybe even specialize (with all the benefits that flow from that).
Part of me feels that tiered pricing online is reasonable, but I'm also leery of changing a system that works as well as the Internet.
janegalt.net
Should Verizon be allowed to charge Internet content providers?
I have long feared this development:
Verizon, Comcast, and their ilk have been lobbying Congress to transform the Internet into a two-tiered system. By tagging content, broadband providers would ensure that their own packets (or those from companies paying them protection money) get preferential treatment and reach subscribers faster than second-tier content. This would give companies like Verizon a tremendous advantage as they roll out their own television and VoIP telephone services.
Telco-cable companies have spent billions to lay down broadband pipe and want a return on their investment. They are tired of bandwidth hogs like Google, Amazon, and Microsoft getting a free ride. This was fine when the Internet consisted mostly of e-mail and static Web pages. With the advent of online video, Internet telephony, and IPTV, Verizon, AT&T, and BellSouth want content providers to share the cost. Their reasoning: If Google is going to introduce a video service, shouldn't it have to pay for some of the bandwidth it scarfs down?
...If the telcos and cable companies get their way, we'll have a Balkanized Web. Content providers who can afford to pay for premium service will market superior products to consumers with fast connections. Everyone else will make do with second-class companies at second-class speeds.
There is much more in this fascinating article. In purely economic terms, the idea of charging Google or other "bandwidth hogs" does not sound outrageous. (What would the incidence of such a price hike be? Would cable connections become cheaper, or do the cable companies have too much mononpoly power?) But in public choice terms, this would bring politically-influenced pricing. Don't expect porn or blogs to get a break. The net would become much more corporate. The perils of regulation aside, Verizon probably would favor its own products, and no, Harold Demsetz never disproved this tendency.
The beauty of the status quo is that web sites compete on the basis of consumer surplus alone. The bandwidth costs end up as a fixed charge on net access as a whole; I suspect this hits many inelastic demanders, a'la the Ramsey rules for optimal taxation. Admittedly it may be a bad deal for the poor who cannot afford to connect, but the overall arrangement enhances the long-run "competition of ideas" feature of the net.
One second-best solution is to charge users for bandwidth per se, while not discriminating across differing uses of that bandwidth. In essence this would tax file-sharing while leaving most content decisions unaltered. Alternatively, a tiered net could lead to more Wi-Fi networks, whether at the municipal level or constructed by Google. If that is where we are headed anyway, this apparently troubling development could rebound to our collective advantage. We might end up bearing the fixed costs of the transition sooner than is optimal, but again the dynamic benefits of the new arrangement might swamp that problem.
Comments are open...will my free market readers defend Verizon's right to charge Google bandwidth fees?
marginalrevolution.com
Pricing the Internet
Arnold Kling
Tyler Cowen steps into an old issue, of how Internet usage ought to be priced.
In purely economic terms, the idea of charging Google or other "bandwidth hogs" does not sound outrageous.
The casual assumption here is that bandwidth is a scarce resource. But if so, where is it scarce? At Google's data center? Near my house? Somewhere in between, on the Internet "backbone?"
When Hal Varian looked at this issue, he took the view that the main pricing issue regarding the Internet is congestion. In theory, somebody who wants to send bits at a time when everyone else wants to send bits should pay a premium. Otherwise, if you are willing to have your movie download take place at off-peak times, the marginal cost ought to be zero.
So, there is no such thing as a bandwidth hog. In theory, there is such a thing as someone who is willing to pay more to get the fastest response during peak times.
However, the current internet protocols do not facilitate congestion-based pricing. Think of Internet packets as envelopes with very exact formats for the address. The format does not provide for a way to designate the envelope as "high priority." Even if it did, the cost of reading the "priority bit" on every packet header would almost surely exceed the benefits of congestion pricing.
I think that this design limitation (or feature) would hamper a lot of the efforts of the telephone companies to charge differential prices for different content providers. However, I assume that the telephone companies must think that it is technically cost-effective to charge differential prices, or else they would not be lobbying for it.
Fundamentally, I think that the telephone companies over-estimate the value of what they have. The Internet backbone is critical, but the cost per user is low. The cost per user of the "last mile" is expensive, but the high-bandwidth lines into people's homes are not critical. I think that we could, and in the not-too-distant future will, have a wireless last mile, which will be embedded in communications hardware, not centrally owned the way that land lines are today.
The land line "Baby Bell" phone companies are not going to design and enforce a new Internet pricing regime. Their destiny is bankruptcy.
econlog.econlib.org
The economics of the net neutrality debate There’s a great conversation going on over at Marginal Revolution about net neutrality. As a card carrying free-marketeer I feel I’m expected to support Verizon, AT&T and the rest when they demand payment for use of their pipes. But I haven’t made up my mind yet. While net neutrality looks like forced access redux, I think it’s actually a much more complicated issue. I am skeptical of regulation or legislation to enforce neutrality; preemptive regulation hardly ever works out they way it is intended. However, as Tyler Cowen points out, tiering the internet would change the nature of online content:
The beauty of the status quo is that web sites compete on the basis of consumer surplus alone. The bandwidth costs end up as a fixed charge on net access as a whole; I suspect this hits many inelastic demanders, a’la the Ramsey rules for optimal taxation. Admittedly it may be a bad deal for the poor who cannot afford to connect, but the overall arrangement enhances the long-run “competition of ideas” feature of the net.
It seems to me that the obvious solution to this problem is to get rid of flat-rate access charges and move to variable prices based on bandwidth usage. Sadly, consumers have historically resisted per-unit access charges, even when they would have come out ahead. They like the idea of not being rushed to disconnect or feeling pressure to monitor and cap their use. What’s more, bandwidth consumption in itself is not the problem. Bandwidth consumption at peak times, causing congestion, is the real problem. But, as Arnold King points out, the internet is not suited to incorporate congestion-based pricing:
Think of Internet packets as envelopes with very exact formats for the address. The format does not provide for a way to designate the envelope as “high priority.” Even if it did, the cost of reading the “priority bit” on every packet header would almost surely exceed the benefits of congestion pricing.
Even if we did want to go the route of a two-tiered internet anyway, with one tier getting preferred delivery, it’s not clear how we can do this without breaking what makes the net unique. Ed Felten clarifies that “although the two-tier network is sometimes explained as if there were two tiers of network infrastructure, the obvious and efficient implementation in practice would be to have a single fast network, and to impose deliberate delay or bandwidth throttling on non-preferred traffic.”
So, I guess what I’m ultimately arriving at is that while I’m far from sold on net neutrality regulation, I like the neutral nature of the internet. And, given that it would be technically difficult and unpopular with consumers to tier the net, I’d like to think that a free market would preserve neutrality. What we need to ensure is robust competition so that a small number of ISPs can’t push this down consumers throats. Jeff Pulver is right that what Google, Apple, and Yahoo need to do is call the telcos’ bluff and make it clear they’re not going to consider paying the ISPs. What’s are the ISPs going to do? Tell their customers they can no longer access Google or iTunes?
jerrybrito.com |
