Wednesday, January 15, 2014

Short Netflix, Go Long Verizon?

            Reduced to its least common denominator, the network neutrality/open Internet debate involves money: who pays and who receives in the delivery of traffic.  After the Internet’s government incubation phase, where taxpayers underwrote traffic delivery, the payment issue has focused on the balance of traffic streams between two directly interconnecting Internet Service Providers.  If traffic balances roughly match, the ISPs barter equivalent access to their networks without a cash settlement.  For unequal traffic flows, the ISP generating more traffic than it receives has to pay transit fees to compensate the ISP handling more traffic.

            When we focus on the first and last mile link to and from the Internet cloud, the “retail ISP” currently has two sources of revenue: 1) Internet access subscriptions from end users and 2) transit payments from ISPs with more traffic for retail ISP delivery than for the upstream ISP to deliver farther into the Internet cloud.

            Not satisfied with this doubled-sided market and two sources of revenues, some retail ISPs want a third source: content creators and distributors farther upstream with which the retail ISP does not directly interconnect.  Ventures like Netflix and Youtube have pushed back, because they already pay to have their considerable traffic enter into the Internet cloud.   Arguably a portion of the payments made by companies like Netflix already reach retail ISPs when upstream ISPs, such as Level 3,  have to pay “surcharges” in light of the disproportionately higher downstream traffic volumes.

            So are retail ISPs such as Verizon greedy?  The marketplace will decide, but it would help consumers to know a few inconvenient truths.  First, the Internet access business already has extraordinary margins often exceeding 100%.  Two, at least some consumers consider their $30-75 monthly Internet access payments ample compensation for the retail ISP to deliver traffic without whining.  Three, ISPs will further slice and dice the broadband access market with an eye toward extracting high average revenue per subscriber.  With significant upward pressure on  retail Internet access rates,  “toll-free” data plans paid by content providers and distributors look increasingly attractive, if not essential.

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