Thursday, August 5, 2010

About Those “Mission Critical” Bits

News that Google and Verizon are negotiating “better than best efforts” Internet routing probably comes across as a betrayal of sorts to network neutrality advocates. See Bear in mind that Information Service Providers (“ISPs”) do not file public contracts known as tariffs and have the freedom to negotiate deals with individual clients. On the other hand ISPs, regardless of their FCC regulatory classification, cannot engage in unfair trade practices that achieve anticompetitive goals such a tilting the competitive playing field in favor of a corporate affiliate, or special third party.

In my work on network neutrality I have considered what ISPs can do to provide upstream content providers service enhancements. When March Madness arrives with the college basketball tournaments I want content providers to have the option of securing priority treatment of their video bits. Streaming video has greater bandwidth and bit rate requirements and ISPs should have the option of providing greater assurances that the bits will arrive on time. IPTV consumers will not tolerate a slide show presentation of video streams coupled with frozen frames, artifacts and other service glitches.

So what’s fair and what’s not?

It should be a foregone conclusion by now that ISPs have the option of diversifying service away from a plain vanilla, “one size fits all” business model. Better than best efforts traffic routing can represent a legitimate response to consumer requirements. Put another way many forms of price and quality of service differentiation seem reasonable if ISPs operate in a transparent and nondiscriminatory manner. This means that ISPs should have the option of offering better than best efforts, but not solely to one “most favored” venture, and in a way that guarantees increasingly inferior service to everyone else. ISPs should not deliberately drop packets to discipline or punish specific content providers who have opted not to pay more for superior service. ISPs should not partition their bandwidth so that the plain vanilla users face certain congestion.

I do not recall reading or hearing any network neutrality advocate condemning the services of Akamai and other ventures that enhance Internet traffic routing. Perhaps all these companies limit their enhancement to reducing router numbers and distributing content closer to end users so that the final leg or two, still routed via best efforts, will not degrade performance. So if Akamai offers permissible enhancements what is wrong with ISPs themselves providing similar enhancements? Perhaps it is ISPs’ ability and incentive to engage in harmful meddling of traffic coupled with opportunities to do so in a stealth mode not easily detected, or remedied by regulatory agencies. So distrust and at least some instances to corroborate it drive some of the network neutrality advocacy.

ISPs cannot simply provide reassurances voiced by CEOs, that they would never block or degrade service, particularly now that the FCC lacks jurisdiction and the FTC apparently lacks interest in enforcing such commitments. Similarly I am not keen on the FCC brokering some grand deal negotiated by select stakeholders. Ideally Congress should enact a specific and narrow mandate for the FCC to enforce ISP transparency and non-discrimination, not as Title II regulated common carriers, but as information service providers subject to specific, straightforward and reasonable expectations.

If the Google-Verizon deal results in legislation, or specific and enforceable ISP commitments, then the outcome won’t be all bad.

Monday, August 2, 2010

Political and Economic Lessons from a Spent Water Heater

If you have the privilege of owning a home for more than a few years, you probably have encountered a water heater that has reached “end of life.” More times than not, water leaks (flows!) from the unit. As with downed trees from a thunderstorm—another of my homeownership travails—one needs to act quickly.
Lucky for me my eight year old water heater had a nine year warranty providing for a replacement of like quality. A manager of the big box store where I bought the unit first attempted to “honor” the warranty by applying the cost of the old water heater against the higher cost of the replacement. Unlike tire warranties, the manufacturer warranted a specific longevity and guaranteed a replacement “free of charge.” The replacement water heater cost twice as much as the original unit.

Here’s where the water heater replacement becomes instructive: the store manager finally agreed to replace the water heater, but offered insights on why the price had doubled. The federal government “took over” and now “controls” the water heater marketplace with its efficiency mandates and more demanding criteria to qualify units for the Energy Star rating.

My big box store manager friend shows how issue framing works. Government regulation, which he readily acknowledged will ensure less electricity use by the water heater, has forced his employer to double the price of the unit. Worst yet consumers might not realize any out of pocket saving from the lower electricity use, because the replacement heater cost $200 more than the original one. The store manager and consumers buying into the government control frame ignore long term benefits like marginally less demand for fossil fuels, slightly less need for more electricity generators, and a small offset to global warming—if such a thing exists.

The regulatory frame considers efficiency requirements as helping society. The government takeover frame shows government subverting the marketplace. Bear in mind that an unregulated marketplace for water heaters does not guarantee choice of units based on efficiency, particularly if no government regulation mandates disclosure of an efficiency rating and estimated annual cost of operation. And at least in my small central Pennsylvania town, the market does not guarantee competitive prices: the two major big box stores across the street from each other remarkably had nearly identical prices, just like those “robustly competitive” wireless carriers.

The unfettered marketplace probably would offer consumers choices based on length of warranty and herein lies a lesson that supports either frame one buys. While I ultimately got the free replacement (plus $200 if I wanted installation), the new water heater warranty has three new conditions should the replacement unit fail: 1) consumers can only apply the original price they paid against whatever the price is when a replacement is needed; 2) the warranty only applies if the consumer stays in the house where the water heater is installed; and 3) consumers can only qualify for one warranty replacement.

So are these warranty restrictions necessary safeguards manufacturers must impose to guard against government regulations that are guaranteed to trigger a doubling of costs? Or might water heater manufacturers become more clever about finding ways to market warranties without having to honor them, like rebates that companies don’t have to honor because a buyer failed to comply with some bogus condition?

I now better understand the importance of how regulatory and policy issues are framed by stakeholders and the media. Opponents to regulation can frame it as government controlling yet another sector of the economy. Proponents of an unregulated marketplace can readily ignore the fact that if regulation had controlled or taken over the water heater business, the government would not permit manufacturers complete freedom to limit and further limit their warranties to appoint where they come close to a “bait and switch” tactic, necessitating additional “buyer protection” payments.