A Real Marketplace
Alfred Kahn, the architect of airline regulation argues against heavy handed network neutrality legislation. While I agree that additional regulation is unwise the solution is not status quo but a real marketplace which is self-regulated. Transport and content are distinct industries yet the FCC and its Regulatorium seem desperate to maintain the fiction that they one and the same. What we need is a dose of reality.01-Nov-2006

I’m writing this in response to http://www.pff.org/issues-pubs/ps/2006/ps2.24voiceofcautiononnetneutrality.html .

I agree that you can’t solve a fundamental misalignment with more rules as long as the premises are false. This doesn’t mean we should react passively. There is a self-regulating marketplace buried beneath the artifice of the FCC’s attempts to maintain the illusion that it is still 1934 even with tweaks as in 1996.

The problem is that we are asking the wrong question. The regulation were created in response to a dysfunctional marketplace and but were based on a fundamental misunderstanding. The assumption is that communications is fundamental. It is not, we communicate using a shared transport. The world has changed since 1927 (the FRC) and 1934 (the FCC) – we now have ample capacity to use essentially any transport for any message. In the 1930’s we had to match each industry to the accidental properties of each kind of wire or radio.

Once we recognize that the transport and content are unrelated we can apply antitrust laws. If we compare today’s situation with Standard Oil of NJ, it would be as if SO only sold rides and didn’t even allow us to drive our own cars. The Internet demonstrates that we need transport and can create our own services. We can then fund our information transport without having to capture the value of the services created. Perhaps this seems too simple but this is not the airline industry – bits are not the same at $100,000,000 aircraft and a $10 router is far less expensive than an airport.

As long we fund our transport by selling services and as long as the more transport we have the more we can create the services ourselves we have a basic conflict – the more capacity we have the less funding there is. This is indeed madness. The carriers themselves are as much a victim of this process as the rest of us. They must do what they can to capture all the service value and to do so they must limit our ability to make full use of the transport. They will fail but in the meantime are doing considerable damage both economically and by preventing us from being able to respond to crises. They are very public about this as I point out in http://www.frankston.com/?Name=AssuringScarcity. Their presentation focuses on 3G. IMS is the attempt to impose this same control on the rest of the transport.

The value of the infrastructure comes from the system as a whole but unlike the airline industry there is value in the parts and we can all contribute to the system rather than relying on large providers. We can do incremental investments as long as we invest in transport rather than services. As much value as there is in the individual elements the value of the system as a whole is far greater – it doesn’t make sense to charge by the bits which have no value out of context.

The key is to align the incentives so we are funding transport directly and thus there is no conflict between our need for more transport capacity and our need to create services outside the transport provider’s domain. We are used to funding shared transport as infrastructure – roads, electric distribution, sewers etc.

There is ample precedent. Edison original sold light but we now buy electricity and create our own lighting. We share a single electric distribution system because additional systems create costs without adding value. We can see this in the carriers’ own funding models – their costs are based on houses passed but their revenue is based on families that subscribe. If you have two distribution systems you have 2x the cost and no increase in value.

For those worried about competition it would be hard to do worse than a system in which there is a fundamental conflict of interest. Today’s transport provider has a very strong incentive, even a requirement, to maintain scarcity – especially when burdened with costs that do not increase the value of their product. Direct and transparent funding is vital but unlike the current regulated system we do not have to grant the transport providers any exclusive rights – we can all add capacity.

To the extent competition works, and today my slowest speed provider is Verizon’s with their 15mbps FiOS, it is exacerbates the carriers’ plight – they should be at the forefront of wanting change and volunteering to divest their costly infrastructure. Speed in itself is not the issue – ubiquity is far more important but that too runs afoul of a system that requires billing relationships for every connected device and entity.

We’ve done a remarkable job in extending the current Internet protocols to meet our needs but today’s network architecture is transitional and gives rise to the misunderstanding that there is an “Internet Inc” that is similar to Ma Bell. Even though it was modems not broadband that gave us today’s Internet we’ve confused carrier-provided broadband with the basic connectivity that represents the true value of the emergent system we call The Internet.

The broadband model is in keeping with the carrier model. I’ve compared this with asking the railroads to provide us with transport rather than building roads. Thus the Internet is relegated to a marginal role alongside the television and it is not pervasive infrastructure upon which we can create new value. You cannot assume Internet connectivity today. To do so would be in conflict with the ability to maintain redundant and distinct distribution systems whose purpose is to maintain billing relationships with providers (of what?).

All this tsuris is unnecessary – it stems from a dysfunctional marketplace based on a false premise. The good news is that simply allowing a real marketplace to emerge is far simpler than maintain the lie that is today’s telecommunications “industry”. It is nothing more than a regulatory chimera.

Perhaps the fundamental problem is classic marketing 101 – if you ask people what they want they will ask for more of the same. Once we understand that the value is in the transport and not the services perhaps we can relax and allow a native transport industry to emerge rather than running in circles with increasingly dysfunctional funding models such as “triple-play”. It’s as tragic as passing a law saying pi is 3.

The Internet has demonstrated the power of aligned incentives. Why are we working so hard to pretend it doesn’t really exist?