Misunderstanding Net Neutrality

Senator Jim DeMint (the one I worked for last summer) is proposing an amendment as a possible addition to the up and coming telecommunications legislation, S. 2686. The amendment appears to extend the language of net neutrality from the broadband ISPs to including internet search engines. As reported by Multichannel News:

Under the DeMint amendment, it would be unlawful to “prioritize or givepreferential or discriminatory treatment in the methodology used todetermine Internet-search results based on an advertising or othercommercial agreement with a third party.”

The wording would strike directly at Google's sponsored links, where companies pay to get preferred space whenever people search for terms related to their products. Sponsored links are the links placed at the side of the page, distinctly set apart from the unsponsored links that PageRank returns.

Now first, I know Senator DeMint does not believe in this amendment (not in an insider way, but in a gut feeling sort of way). He has already spoken out against Net Neutrality on principle, his justification being that he is a firm believer in the free market (making him one in a group of people whom I've already recommended should leave the net neutrality debate). This must mean that DeMint introduced the amendmentnt proposal to simply make a point. Personally, I think if he has a point to make then he should just say it. To go through the trouble of writing out an amendment you don't believe in is a waste of time and effort.

Over at the Technology Liberation Front, DeMint caught the attention of James Gattuso who felt the need to write a post about it. Gattuso also thinks the amendment is designed to simply put pressure on Google because of its "uncomfortable position in the net neutrality debate." He goes on to critique Eric Schmidt's "Note to Readers" (read it first, it's short) by turning the tables on Google:

But take out the reference to "phone and cable monopolies" and this reads like a critique of Google itself. Google'’s business model to a large degree is based on tiering—, providing preferred ad placement for those who can pay for it. Its clearly not a system where anybody "“no matter how large or small"” has equal access. Its based, like it or not, on money.

Gattuso's commentary has two glaring problems:

1. The Net Neutrality debate at its core has nothing to do with the true equality of all packets or offers or links or really anything of a technical nature. The core of the debate (that not enough people seem to want to address) is the lack of competition in the broadband space, just as myself and others smarter than me have already said. By contrast, competition is fierce in the search engine market, and contrary to what Gattuso says, being the market share leader does NOT give you monopolistic powers. If Google screwed up in a big way tomorrow by changing their policies or procedures, you can bet they would become the least used search engine within the week.
2. Gattuso repeatedly points to the ability to pay nature of Google's sponsored links program as some sort of fault. What he fails to realize is that Google is at heart and advertising company. They provide an amazing service for free (the ability to search for most anything) with the hopes that you'll click on one of their sponsors ads whose links are usually very closely related to what you were searching for to begin with. Advertising space has always been based on the ability to pay principle and price discrimination. If you want Super Bowl commercial time, then you have to pay exorbitant amounts of money. If that's your logic, then why single out Google when it's simply a more efficient online version of an already established legitimate business?

Watchful of what goes on at his own posting home grounds, Tim Lee responded to Gattuso's post. Lee's main point was that Broadband companies aren't stupid, and that they'll use whatever means necessary to make the most money. Unlike what some proponents of net neutrality believe, Lee doesn't believe the ISPs will block any specific web site or content type:

I think it'’s safe to say that Verizon, Comcast, et al want to make as much money as possible. So here's my question: If you were a telco executive trying to maximize revenue from your shiny new fiber network, how would you set your prices?

Here'’s one thing you wouldn't do: set a flat rate of $100 million for any company wanting to access your "“fast lanes,"” and consign everyone else to the slow lane. It'’s quite true, as Schmidtz says, that such a policy would screw up the Internet and stifle entrepreneurship. But it'’s also a really stupid strategy, because it forgoes a lot of
revenue from smaller companies. And although none of them individually can pay as much as Google or Microsoft, they'’re likely to make up the majority of revenue opportunities, thanks to the long tail.

I couldn't agree more, and this is highlights another problem of the net neutrality debate. The two sides aren't listening to each other in order to find a middle ground. The opponents of new regulation believe all regulation is bad by its very nature, while the proponents paint a picture of the ISPs as intrinsically evil monolithic businesses. Due to my previous post on this issue, I'm going to refer to it from here on as the comic book effect.

However, I have a problem as Lee he continues:

No, if you'’re a monopolist trying to maximize revenue, you want to charge the big guys a lot more than you charge the little guys. How do you figure out who'’s a big guy and who'’s a little guy? A straightforward metric is the amount of traffic they generate. Charge 10 cents per gigabit, say. Google pays millions. The startup with a
thousand customers pays pocket change.

Now, I can envision all sorts of variations. Maybe big guys would get some kind of bulk discount so their per-bit costs are a bit lower. Or maybe they'’ll really soak the big boys, while they let the smallest companies ride for free (after all, their tiny bills might not be worth the trouble to collect, and today's small companies are tomorrow'’s
large companies).

I have no problem with his logic, but from what I understand, this is more or less how business is already done today. Anyone reading feel free to correct me, but from what I can tell business pay for the bandwidth that flows out of their website to individuals. However, in several statements made by the telcos, they seem to think there's a part of the network that the content companies are "riding for free."

This is the argument you may have heard where pundits argue what exactly people pay for when they pay for their internet. Do they pay to get to the "internet cloud," or do they pay to get straight to what they want to see like Google and Yahoo? The ISPs subscribe to the internet cloud theory, and thus see the part of the connection that connects the customers from the cloud to the content companies as "a free ride."

I hate this argument. At its simplest level, it claims the telcos deserve more money by simply redefining how they think the internet pricing model works. If they offered some sort of service, it wouldn't be so bad... but it's simply a greedy grope for more money, and I don't think they should get away with it.

Let's look at a parallel situation where only one credit card is available in your town. You pay to use the card via fees, and the companies pay for the convenience of being able to take the credit card. Some only need a hand operated reader, while others like McDonalds need the fastest and most efficient swiping machine possible. The credit card company now decides that you haven't actually paid to use the card at any restaurants, but rather you've simply payed for credit availability, a connection to the money charging cloud. They then decide McDonalds is getting a free ride because you payed to get to the cloud, but no one payed to get your money from the cloud to McDonalds, so they demand that companies pay for that part of the connection as well. With no other credit card to switch to, the companies either pay up begrudgingly, or take the issue to Congress (just as net neutrality advocates are doing now).

The key to both the real and fictitious scenarios is that competition is virtually or actually non-existent. Because competition doesn't exist, customers have nowhere to go. The market then can't take care of itself, and is subject to monopolistic influence. Some people are already on the topic, and it has started to come up in major debates.

As we debate net neutrality in congress we have to remember there is a balance to strike. Simply charging more and abusing monopolistic power is bad, but the radical equality of packets approach isn't ideal either. Video and voice do have lower latency requirements to be viewer satisfactory, but that should simply mean that there is opportunity for investment in expansion of the network, not that any particular group of companies is getting a freebie out of something they didn't pay for. We have to stop anticompetitive practices by the ISPs as well, though current legislation should e enough to cover that. Perhaps I'll go into more detail with that another day.

I just hope we can properly flush out these issues as the telecom legislation comes closer to passing. Listening will be the most important skill we can use in the near future, because the Internet needs room to grow, but if either of these sides wins in entirety, it will lead to a fundamentally more crippled internet than the one we have now.


Note: I'm having some trouble with my blogging tool. Certain phrases were written over and none of my punctuation marks made it in the transfer. I tried to edit everything back to normal but please let me know if I missed anything glaring.

Technorati tags: Net Neutrality, internet