The Net Neutrality Debacle: A Submission To The FCC
The Market Ticker - Commentary on The Capital Markets
2014-05-17 08:44 by Karl Denninger
in Editorial , 1061 references Ignore this thread
The Net Neutrality Debacle: A Submission To The FCC*
 

An open letter to the FCC, transmitted to openinternet@fcc.gov, the FCC's comment address for their "Open Internet" rulemaking process.

Dear Mr. Wheeler;

The recent debate on Open Internet has been entered by stakeholders on all sides.  Unfortunately, in my opinion, many of those presenting positions are failing to disclose their true intentions and bias, and in fact are attempting to use the government to force cost-shifting from their firms to others.

I am a former CEO of an Internet concern, MCSNet, which operated in the greater Chicago area during the early days of the public Internet (1993 - 1998.)  The company was sold to Winstar Communications in 1998.

The issues being discussed today are not new.  As the Internet transitioned from a government-funded (primarily National Science Foundation) interconnection for research and education into a privately-funded network accessible to the public, technological change brought many points of friction that served to place competing interests into conflict.

Internet providers, then and now, sell service to consumers and business interests.  These providers either purchase the service they resell or they build private networks and interconnect them at public "meet points" operated by various entities.  Many have a hybrid structure where both private network construction and the purchase of transport takes place.

All providers of Internet service, for cost reasons, oversell.  That is, a service provider who has 100 Mbps of aggregate capacity in and out of his or her network will sell far more than 100 1Mbps connections to the public.  This is very similar to how roads, water, telephone and electrical systems work.  There were approximately 7 million people in the Chicago metropolitan area in the 1990s when I was operating my ISP, but all 7 million of them could not possibly travel on the freeways in the area at one time.  My home has 200 amp electrical service but there is not sufficient electrical power available from my power company for myself and all of the other people in my neighborhood to each consume all 200 amps of electrical power at once.  I have a connection to the water main at the street and nominally there is 40psi of pressure at my tap, but if myself and all of my neighbors open all of our taps at once the pressure will drop to nearly zero, because the main cannot serve every house in my neighborhood using its full capacity to deliver water at one time. And while we all have cell phones in our pocket these days, and used to have a phone on the wall or a desk in our homes, if everyone tried to make a call at the same time the majority of them would not go through as there is insufficient capacity for everyone to make a phone call at once.

The same is true for the gas station on the corner.  The owner has purchased enough storage to hold a reasonable amount of gasoline, but if I and everyone in my neighborhood tries to buy gas all at once not only will we wait for hours in line to get to a pump he will run out and be unable to serve all of us.

Please take note a few points in the above examples, however.  My electrical use, water use and purchase of gasoline are usage sensitive.  That is, there is a natural process by which I am disabused from consuming an unlimited amount of water -- the size of my water bill.  Likewise, I do not waste electrical power, because I am charged by the kilowatt-hour for it.

Most Internet access at the consumer level, with the exception today of cellular phone delivery, is unmetered.  That is, I pay a flat price no matter how much I use.  This model, with minor changes (e.g. a cap on use) is what has evolved in the marketplace as the pricing model preferred by consumers.  MCSNet sold service we called "PackRAT" during the era of dial-up modems which was nominally unmetered but had a 200 hour per month cap on it, with a fee per-hour beyond that.  This amounted to about 6.6 hours/day of actual use.  Since you must eat, sleep and do things other than stare at a computer the cap was not intended to prevent you from using the Internet as you choose but rather to prevent you from abusing the service by locking up a limited (and expensive) resource on our end (in this case, the line and modem you were connected to) when you were not actively using the connection.

As the Internet has developed there have been people who have sought to try to shift their cost of innovation and content delivery to others.  These people often couch their "innovation" in lofty terms, as if they are somehow providing a public service.  What they are actually doing is attempting to run a business at a profit.  Today's pet example is Netflix (Nasdaq: NFLX) but they are hardly the first.  Youtube, back in its early days, created somewhat-similar if less-severe issues of the same character we face today.

Let's take the Internet "neutrality" position out of cyber-space and into the physical world.  We'll assume that I develop a really innovative movie theater that immerses the viewer in some new way in the film they are seeing.  We'll also assume that this theater only works financially if I can manage to get 10,000 people into it for each showing; the cost of building and operating it is large enough that unless I can amortize those costs over that many people I will lose money and eventually go bankrupt.

Whose responsibility should it be to construct the roads, infrastructure and parking lots so as to be able to fill that theater every two hours during the business day, efficiently directing traffic into and out of the complex so that I can attempt to make a profit?  Should that cost fall on the persons who watch the movies (whether directly via fees on their use of the infrastructure or indirectly via my ticket prices, with the city assessing me for the necessary improvements) or should I be able to force everyone in the Chicago area to pay those expenses, whether they want to watch movies in my theater or not, by convincing the City Government to increase property and gasoline taxes?

This is the essence of the problem we face today with the Internet.  Netflix has developed what many view as a "disruptive technology" through on-demand delivery of movies to the consumer.  In order to perform that function they must deliver a multi-megabit/second uninterrupted stream of data to your computer that meets certain specifications.  Any failure to deliver this stream, even momentarily, results in your display "stuttering" or stopping entirely.

But this requirement is dramatically more-stringent than it is for you to watch short video clips on Youtube or to view a web page.  There a short interruption in transmission or slowing of the transport results in you waiting a few tenths of a second before your page refreshes or is displayed in full.  The same delay while watching Netflix makes their service unusable.

There are other firms that would like to develop and deliver other services over the Internet with similarly-stringent requirements.  Most of these attempts will fail commercially, but some will not -- and eventually another "great new thing" will burst onto the scene.

The problem Netflix and similar services produce is that the technical requirement to deliver their service on an acceptable performance basis to the end customer is dramatically more-stringent than existing requirements for other Internet services.  Netflix purports to sell their service to the end customer for $8 per month.

But this premise, and thus the entire business model Netflix is promoting, is a chimera and unfortunately the common law of business balance (which states that you cannot get something for nothing) has caught up with them.

When Netflix was first starting the available margin between the engineering for a typical customer connection and what the customer actually used had some slop in it.  This is good engineering practice, and what most ISPs do.  That is, the ISP models all of their user behavior and says "We sell 20 Mbps service" while knowing full well that the customer bursts to 20Mbps of performance but on average uses a tiny fraction of that -- typically less than 10%.  The reason is simple: You browse to a web page -- even a very graphically-intensive web page -- and then read it; during the time you're reading the usage is zero.

Enter two new paradigms that break this model: Embedded audio/video advertising and streaming video content.

Let's assume that I am a site such as Facebook, and I want to sell video ads to companies.  Now when you browse to a Facebook page Facebook "pushes", without user request, video advertising content to the user's screen.  This dramatically increases the amount of data that the consumer is using and requires that the data be delivered on a highly-stringent technical basis, lest the video "stutter" or fail to play at all.  Note carefully that the consumer did not request or benefit from this "video advertising" yet they paid an ISP for the connection to deliver it.  Facebook sold the advertising and benefited from it but did not compensate the consumer or their ISP for the higher load on his connection despite imposing that load on him or her.

The question becomes this: If Facebook delivers a sufficiently-large number of video ads such that it begins to impact network performance and thus forces upgrades of the ISP's infrastructure who should get the bill for that upgrade?

If the bill falls only on those who use Facebook and thus view their ads consumers may (rightfully) reject Facebook since the additional cost imposed on them is not present so they can look at a picture of their friend's cat, but so companies can advertise to them!  It is thus strongly in the interest of Facebook to hide this cost from those users by trying to impose it on everyone across the Internet so it cannot be traced specifically to their commercial, for-profit activity.

The same applies to Netflix.  If a sufficient number of people subscribe to Netflix the stringent demands for delivery of Netflix bits to the consumer will force the ISP to upgrade their infrastructure.  Who should get the bill for that upgrade?  

If the bill falls only on Netflix customers then their bill will likely more than double; suddenly that "$8/month all you can eat" video streaming service might cost $25 or even $50.

What is before the FCC today is the fact that the cost increment to deliver what Netflix and Facebook are pushing to the consumer is real; the only point of debate is who pays for it and how.

Those arguing for "strict" Net Neutrality argue that the ISP should be barred as a matter of law from telling Netflix or Facebook that if they wish to have this level of performance available to them, since it is outside of the engineered and normal realm for all customers, that they should pay for that enhanced delivery -- and if they refuse, there is no guarantee their content will display as desired.

If the "Net Neutrality" argument wins the day it will force ISPs to bill all customers at a higher rate to provision that level of service to them whether they want it or not.

Why should a customer who has no interest in having high-bandwidth advertising shoved down his throat pay a higher bill because Facebook has decided to force him to watch those ads in order to use their service?

Why should a customer who doesn't want to watch Netflix pay a higher connection charge to an ISP because 20 of his neighbors do want to watch Netflix?

This is the question before the FCC, in short.

When you boil this down the question before the FCC is whether it is about to implement Communism when it comes to the Internet.  Does the FCC, in short, use the government's ability to forcibly compel the purchase of a service by a customer who doesn't want it and won't use it, leaving the consumer with only one option to evade a forced and undesired purchase: Buying no Internet service at all!

There is a legitimate issue with the Internet today when it comes to "last mile" services.  Unlike ISPs who typically can purchase long-haul services from many different providers and enjoy a competitive marketplace for those services consumers do not typically have free and open choice between multiple providers. When I ran MCSNet there were roughly one hundred dial-up and several dozen ISDN provides selling service in the greater Chicago area.  We all competed on price and service, and some of us were more successful than others.   For business leased-line services in the Chicago Loop we had three competitors available to us; MFS Datanet, TCG and Ameritech.  This competition kept prices low and service levels high; during a five year period I enjoyed a roughly 60% decrease in the cost of leased line services to customers where multiple options were available.  This resulted in "all-in" monthly recurring cost for T-1 service to business customers falling from approximately $2,000 a month to about $850 over the space of a few years.

Sadly, that same competition was not available to the average consumer; they had exactly one choice, Ameritech, for their "last-mile" phone service.  Thier phone bill over the same time period did not decrease.

But even in the "business service" area we had occasional problems; the only "neutral" meet point available in the area was the Chicago NAP, run by Ameritech.  To get to the NAP since it was on Ameritech's property you had to buy a circuit from them.  I was able to buy circuits of the same speed and character that spanned much larger distances from competitors going to other places at a dramatically lower price, yet I could not use those competitors to reach the NAP.  It was Ameritech's government-granted monopoly position along with its effective monopoly on the so-called "public meet point" that enabled this distortion to exist in the market.  Attempts to appeal to the State Regulatory apparatus in this regard (the ICC) were unsuccessful.

Today the promise of competition for high-speed Internet access is essentially non-existent for most consumers.  Most households can only obtain like kind and character high-speed Internet access from one, or perhaps two, companies.  In my local area we have a cable company and a phone company but they are not equivalent -- DSL service is not of "like kind and quality" to Cable Internet with the disparity being as much as 10:1 in terms of available speed.  Virtually all Americans today have an insufficient set of options available to promote effective competition, and as a result we have relatively high costs and relatively poor service compared against other developed nations.

We should not, however, and indeed must not conflate these two distinct issues.  The problem with last-mile access and discriminatory conduct is real, as are the issues with previously-granted monopoly access to rights-of-way that exist across our nation.  Not only do those effective monopolies exist but many states and localities have passed ordinances and laws prohibiting municipally-funded or other third-party alternatives from being established, with carrier lobbying groups typically spending large amounts of money to influence that process.  That activity facially appears to be a rank violation of The Sherman and Clayton Acts and should be met with investigation and, where appropriate, prosecution.

Resolving the last-mile monopoly issue is separate and distinct from creating a government mandate that effectively allows established businesses to shift their cost onto others who do not wish to consume their service.

At the end of the day what those arguing for "Net Neutrality" in the context of today's submissions are demanding is the ability to use government force to compel the subsidization of a private, for-profit business service.

The FCC not only has the right, it has the obligation under the Constitution's demand for Equal Protection as found in the 14th Amendment to reject such entreaties and expose them as a sham argument and blatantly improper attempt to force consumer subsidization of their businesses interests.

PS: On 5/21 I got back a letter from Chairman Wheeler (presumably a form letter) thanking me for my submission -- and including what appears to be a unique response number.  I presume this means it was "accepted" into the public record.  Good.

Go to responses (registration required to post)
 
Main Navigation
MUST-READ Selection:
You MUST Change Your Attitude

Full-Text Search & Archives
Archive Access
Legal Disclaimer

The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.

NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.

The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.

The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.

Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.

 
Comments.......
User: Not logged on
Login Register Top Blog Top Blog Topics FAQ
User Info The Net Neutrality Debacle: A Submission To The FCC in forum [Market-Ticker]
Login Register Top Blog Top Blog Topics FAQ