Seth Shapiro's Business Innovation Blog

Highway Robbery

I recently drove from LA to San Diego and back twice, at night.  I took a road I’ve driven maybe six times, CA-73.

CA-73 used to have tollbooths. Weirdly, they were gone.

A few weeks later, I received the letter above. The tollbooths were gone, but the tolls were still in force.  It turns out that now, you have to log onto a site and pay them. But you have to know that you need to do it. If not (courtesy of a license plate camera) you receive a fine of $57.50. You read correctly: $57.50 on a $5 toll. Here’s an article that outlines the terms.

What if you never drove the road before? What if you’re a tourist?  What if you didn’t happen to see the signs at night?  Seems unfair, yes?

Welcome to the real debate on Net Neutrality.

What is Net Neutrality? 

Net Neutrality is one of the most important long-term issues facing American competitiveness. But almost no one knows what it means. Why?

1:  “Net Neutrality” is a bad term for a simple premise.

2:  Because of the insufficiency of 20th century thinking relative to the digital future.

So first, let’s define it: Net Neutrality is not a thing – it’s a principal. Like the Golden Rule, but for internet providers.

Net Neutrality Defined

Net Neutrality is the idea that an internet provider will treat everyone’s data neutrally, equally – whether it’s an email from your grandmother, or a transfer from Bank of America.

It’s the notion that an internet provider will not get to choose whose data gets sent more quickly, which site gets blocked, and who has to pay extra.

Who Does Net Neutrality Apply To?

Net Neutrality would apply to small group of companies that control US internet access: Comcast, Time Warner Cable, AT&T, Verizon, Cox and some smaller cable guys.

Sounds boring? It isn’t. It’s actually pretty important – but as John Oliver famously noted: “If you want to do something evilput it inside something boring.”

Here are two examples.

Net Neutrality and Banking

  1. Let’s say big banks are willing to pay extra to get their stock bids in faster. We don’t have to guess about this – as Michael Lewis illustrated so well, some hedge funds will pay hundreds of millions for a speed advantage of milliseconds.

Picture an auction where one guy is in the front row yelling, and another guy has to run up the stairs. Advantage goes to the toll payer.

So:  Is it legal for internet providers to favor one company’s data over another? Under the current law, absolutely. You can read Comcast asserting that right here.

Is that bad for small banks and investors? Most definitely. Picture a scooter competing with a Ferrari.

This is why internet providers have so much power.

Net Neutrality and Video

Now, instead of stock bids, let’s look at video, which consumes more than 50% of all US bandwidth at some hours.

Something may occur to you here.

And that is:  the cable and telephone companies that provide internet service are in the video business themselves.  They compete in video – with Netflix, YouTube, Amazon and many others.  They also control the only way their competitors can deliver video online.

There’s a lot of talk about cord cutting – that customers will increasingly dump cable TV for Netflix, Hulu and YouTube. But where would these people they get the Internet access they need for Netflix, Hulu and YouTube?

From cable and phone companies. There’s no other way. So cord cutting is actually a myth. Because you can’t cancel cable in favor of Internet video without buying bandwidth from cable or telephone.

So: will video that comes from Comcast TV get treated better than Netflix?  Even if you pay Comcast for your bandwidth, and pay Netflix for your subscription?

Yes – that’s already happened. See the chart below. The black line illustrates three moments in a public dispute.

On the left:  Comcast tells Netflix they need to pay “interconnectivity fees” – basically, tolls on their network.

In the middle of the table, Netflix hasn’t paid the toll yet. Can you guess what month that was?

On the right: Netflix capitulates and pays Comcast. And their signal improved massively.

Welcome to the Internet Tollbooth.

Now, it’s hard to weep for Netflix. They have a $23 billion market cap and are the #1 Pay TV service in the world.

But what about those little banks? And what about all those little startups whose futures depends on internet traffic? What happens to them when the tolls start kicking in – when the big guys get the fast lanes, and the little guys get throttled?

Because that’s what an Internet Fast Lane means: more bandwidth for those who pay more, and less for those who don’t (or can’t).  And by the way: Americans have some of the worst bandwidth service in the world, at some of the highest prices.

Ironically, the people who created the Internet did not work for private companies.  They worked for the US Government, and at universities like UCLA and USC. The very essence of the Net, the choices they made, and of the system they designed, is a fully distributed system in which no node is more important than any other (for a great account of this, see Walter Isaacson’s The Innovators).

Which is what made Ted Cruz’ tweet both incorrect and ironic: without government funding, there never would have been an Internet.

Priced-based tiering makes sense to cable shareholders, but it’s literally antithetical to the way the Net was designed.  You can’t blame them for working to maximize profits – that’s their job – but the way they’ve handled their increased influence in the digital age (remember Spying on the Home Front?) hasn’t encouraged confidence.

What does the Law say? 

Believe it or not, the reigning language for Internet Access is the Communications Act of 1934.  Yes, 1934.

That Act, passed in a time of railroads and AT&T monopoly, divided services into two groups: Title I (Information Services) and Title II (Common Carriers). “Common Carriers” meant industries that were essential to US commerce, and which therefore belonged under federal oversight.  So under the Act, railroads and telephone companies fell under Title II, and federal purview.

Title I was for services that are not essential – “nice to haves”.  In the early days of public Internet, that’s how services like America Online and Prodigy were rightfully perceived. People used American Online to download GIFs– not to run their business.

20 years on, this reality has changed. It’s the law that has not.

As the Net became more important during the Clinton years, changes to the law were discussed in the but not made.  After that, the money in data catapulted cable and mobile revenues by an order of magnitude. This, in turn, turned them into one of the most powerful lobbies in America. And so in the US, Internet access is not regulated. The matter of its pricing and policies are determined by the oligopoly of companies that sell it.

So when you see people like Ted Cruz react with shock or outrage to the White House joining on the side of reform – that Internet access should be moved to Title II – don’t believe it. No one is surprised that this is worthy of debate.  The side that wants the current order maintained (cable and telephone companies) is strong – but so are the many companies at their mercy (Google, Amazon, Apple and Facebook, to name a few).

The real surprise is how long this debate took to break loose.

 

 

Posted in Blog by Seth Shapiro.

  1. Great piece Seth, but without pulling Politics into it, I read and understood Cruz’s public comments as jumping ahead to a reasonably logical conclusion (let’s save the debate as to wether or not most people were even capable of getting that jump or not).

    IF:
    …Net Neutrality (which I support BTW) is enforced through moving such services to Title II, then appropriately the market-driven Providers will reduce their investments in advancing the infrastructure which you admit is a technically behind the rest of the developed world.

    THEN:
    …The Government will have to step in and regulate how money is invested in upkeep & advances through the legislation of minimum service levels, standards of service, regulated fees (“taxes”) to pay for administration of this, probable pricing controls, et cetera. This would create a centralized set of Policymakers and enforcers in Washington where none has existed to this degree before, on this are of the market. I’m sure we are all absolutely thrilled with how efficient our Federal gov’t operates, and with such adaptability to new technologies, such as this “Series of Tubes”. Case in point: the 9 figure website disaster to support the Affordable Care Act.

    The ugly downside of the historical reference to the 1934 act was that it included Government regulation of pricing & services as well. That, as we know, didn’t work out so well, now did it?

    From where I sit, the *only* way to make imposing Title II status on Internet services would work in the public’s favor is to simultaneously remove as many roadblocks to competition as possible. That means no more municipal monopolies on cable providers, et cetera. That would have the effect of re-introducing genuine market pressures to drive efficiencies, price competition.

  2. This is a terrific and timely article. As far at the toll-road extortion goes, you obviously have no recourse but to pay it because the people that profit from the toll have colluded with government to co-opt the state’s Motor Vehicle infrastructure and threaten impounding your car if you don’t. You have to pay the $230. Then you can figure out a way to destroy $23,000 of their assets as a “realignment fee”. Pointless vandalism isn’t pointless if it redresses a larger crime (and a 100X multiple feels about right.)

    Everybody knows that a rupture of the net neutrality protections will result in equally rebellious behavior on a vast scale — which the profiteers will dismiss as The Price of Doing Business or, even more worrisome, use as a means to suck more profits out of the system they injured in the first place (for an example of how this works, see Banking).

    All we need to understand about the net neutrality debate is to see who is in favor of which position. Verizon? AT&T? Comcast? Ted Cruz? The opponents of net neutrality are a rogues gallery of toxic, predatory monopolists who’ve demonstrated over and over again how dangerous and indifferent they are to the American consumer. “You can trust me. I’m Time warner Cable”.

    Seriously.

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