Friday, May 16, 2014

Can the FCC Turn a Network Neutrality Triple Play?

        Despite the remarkably large amount of coverage and analysis of the network neutrality debate, not everyone appreciates the wants, needs and desires of the major stakeholders.  Let’s step back and consider their motivations and incentives of the three primary stakeholders: consumers, retail ISPs and upstream carriers and sources of content.

            Consumers
 
            Consumers expect their monthly broadband subscription payments to guarantee a predictable level of service in terms of bit transmission speed and amount of downloadable (and uploadable) content allowed per month.  This expectation is not contingent on their service provider’s ability to demand and receive surcharge payments from upstream carriers and content providers.

            When common carrier phone companies provided dial up Internet access, consumers typically paid for unmetered service.  With the conversion to broadband, service terms increasingly have bitrate delivery commitments and generous, but metered caps on data downloading.  Retail ISPs complained about having to increase bandwidth without sharing in the windfall generated by their carriage of increasingly valuable and plentiful content.  Nevertheless these carriers upgraded their networks with only minor rate increases and without major episodes of congestion.

            Now consumers face rate increases, tiering of bit transmission speeds and efforts by their ISPs to make reliable service contingent on surcharge payments and/or bit prioritization offers.  Consumers now confront the prospect of greater cost of service and increased risk of degraded service, particularly for bandwidth intensive service like Netflix.  Consumers are not happy about this and may become more vocal advocates for network neutrality simply on grounds that the status quo of best efforts routing used to work fine, until ISPs got greedy.

            But aren’t some consumers becoming greedy themselves?  With the onset of full motion video services like Netflix and YouTube, Internet demand increases significantly.  Consumers want a medium capable of handling “mission critical” video bits representing “must see” television.  Real congestion can occur, not because retail ISPs play games with how many ports and bandwidth they allocate for Netflix traffic, but perhaps primarily because Netflix releases an entire season of must see programming and bandwidth hogs gorge themselves with possibly hundreds of gigabytes.
 
            Consumers want their Netflix video streams to arrive on time and seamless at the same time as they long for the kinder, gentler and less bandwidth intensive days when best efforts routing always worked fine. 

            Retail ISPs

            Retail ISPs provide the essential last mile delivery of content to relatively captive eyeballs.  While retail broadband subscribers can choose between various wireline and wireless providers, one and only one carrier typically provides all carriage.  Churning from one carrier to another can occur, but not without some consumer inconvenience and motivation.

            Having regularly upgraded their networks and enhanced the value proposition of service, retail ISPs predictably seek to recoup this sizeable investment and earn a generous return.  They have evidenced a growing interest in increasing revenues and profits not just by raising retail subscription rates, but also by demanding new or increased compensation from upstream carriers and even content providers directly.

            Retail ISPs like to frame their compensation rights in terms of a two-sided market: 1) downstream to end users paying monthly broadband subscriptions and 2) upstream to other carriers who either barter transmission capacity through peering agreements, or pay transiting fees when downstream and upstream traffic is not equal.

            Retail ISPs do not have a legal or guaranteed right to a double source of revenue.  In a possibly analogous situation, cable television operators benefit from some instances of a double-sided market, but not always.  Cable operators combine end user subscriptions with a share of the premium subscriptions paid for access to premium content such as HBO.  But cable operators also pay upstream sources of content, e.g., in copyright fees for the privilege of delivering content to subscribers. 

            Arguably retail ISP subscription rates should cover both the network cost of content delivery plus at least some of the value represented by the upstream content the Internet cloud access subscription provides.  In this scenario, retail ISPs do not operate like a credit card company that can capture payments from both credit card users and vendors, but instead have to rely solely on subscriptions and advertising.

            Of course retail ISPs do not see any need to compensate content providers for the value of what broadband subscribers seek.  Retail ISPs do not share in the advertising revenues flowing to upstream content providers and readily embrace a telephone company view that terminating carriers deserve payments from upstream carriers or content sources, particularly when traffic balances become disproportionately one sided.

            Retail ISPs cannot press the telephone service model too far, because of the concept of “cost causation” favors upstream payments.  Arguably ISPs and their subscribers trigger the cost of content carriage: a demand pull, instead of supply push rationale.

            Content Providers

            Content providers want downstream carriers to deliver increasingly robust volumes of content using the existing interconnection and compensation models that primarily rely on end user subscription payments.  When facing pushback primary content sources note that consumers agree to pay fees that have generated triple digit rates of return for carriers.  Alternatively content sources design ways to distribute their product at possibly lower costs by co-locating equipment on ISP premises.  In what they would consider the worst case scenario, content providers agree to new, more generous compensation agreements with retail ISPs as occurred in the Netflix-Comcast paid peering arrangement.

            Content providers do not share their subscription fees with downstream carriers, as HBO does.  On the other hand, retail broadband subscribers expect their Internet cloud access to include access to any source of content without regard to how much of the total bandwidth any single source requires.  Certainly the Netflix business model assumes low and unmetered broadband delivery charges ironically not like the physical delivery of disks model that has both higher total costs and is metered.
 
The FCC’s Dilemma
 
            The FCC faces an extraordinary quandary in trying to forge a compromises that satisfices these three constituencies.  No one can achieve total satisfaction here. Consumers will have to pay more for broadband.  Retail ISPs will not have unlimited opportunities to raise rates, particularly for content sources that can get by without prioritization of traffic absent deliberate strategies by retail ISPs to degrade basic service.  Content providers—particularly the major causes for ever increasing bandwidth demand—will have to pay more as well.

            The FCC has to forge a compromise where consumers can secure “better than best efforts” delivery of video at a price, but without making it possible for retail ISPs to demand a surcharge from every source of content.  I continue to believe that the FCC does not have to reclassify broadband access to achieve this compromise. 
 
            In large part marketplace negotiations can resolve the most pressing problems.  However network neutrality advocates make a convincing argument that non-charities like Comcast will have little self-restraint in their quest for new profit centers.  The FCC has to stand ready to discipline and sanction ISPs when they resort to strategies and tactics that degrade service as a nudge or a push to force the payment of unnecessary surcharges.

2 comments:

Kelly Cameron said...

Rob - I have to say, this is deja vu all over again. I started working at the FCC in 1983, and the Title II common carriage model had achieved universal service at affordable prices while providing very comfortable returns for the telcos. AT&T, in a business that then had very little risk, was allowed to earn 11.25% on its investment. Now, no rate or return is good enough to satisfy the ISPs. And why is that? Because they are, in effect, an unregulated monopoly. But, some will say, if you regulate the ISPs, they will have no incentive to innovate and upgrade their networks. Well, they already lag far behind ISPs in other developed countries in speed yet get away with charging much higher prices. This is almost as outrageous an economic model as the health insurance industry. These guys need to be regulated, and Title II is the way to do it.

InfoStack said...

Rob, you've been brainwashed with all the rest and are not thinking out of the box.

Let's look at history. Few if any saw the voice/app boom in 1983 when we applied equal access. Few saw the data boom in 1990 when the FR/SMDS wars began and nobody talked about IP, let alone knew what www or html were. But Computer II kept the Bells from interfering. And few if any foresaw the rapid boom in wireless voice and dislocation of wired voice when 10 cent digital wireless hit in 1996 as a result of extending mandated A/B interconnect to PCS in 1993. The same issues existed for cable with pole attachment and must carry that led to the video boom. Then there was Part 15 leading to wifi and gave Steve Jobs the opportunity to breakdown the AT&T silo in 2007.

Common theme? No one accurately foresaw the incredible demand stimulation that resulted from significantly greater choice at lower cost than had previously existed. Yet all I read in your column is higher costs. Why is that?

As we look at the current situation, we are talking about open access or interconnect in the last mile. The questions are where and how? A strong financial and economic case can be made for the incumbents to embrace open, horizontal models to rapidly scale investment and solve pressing supply/demand and performance issues in the face of enormous demand waves for 4K VoD, 2-way HD collaboration, seamless mobile BB, and IoT. All these trends can occur rapidly, ubiquitously and at low relative and absolute cost based on factual past experience. Why is no one at the FCC looking at these blueprints of history?