Net Neutrality Has Long-Term Implications for Innovation

By Gary Kim September 10, 2013

As a U.S. District Court weighs a legal challenge to the Federal Communications Commission’s authority to promulgate network neutrality rules, European regulators are tussling with the same issues.

There are “near term” issues, to be sure, mostly centering on anti-competitive business behavior or creation of a “two tier” Internet.

Proponents of network neutrality continue to worry about threats to the Internet caused by traffic management and quality of service features provided to end users or business partners.

To be sure, ecosystem participants do not have completely aligned business interests. One participant’s revenue stream can be another participant’s cost.

Leading application providers correctly see that network neutrality rules force ISPs to invest in raw “best effort” capacity, since traffic shaping is barred.

Potential anti-competitive abuses by ISPs—such as favoring their own apps over those of competitors—are a legitimate concern, though some would argue there are other remedies for such potential abuses. 

image via shutterstock

The really significant long term problem, others might argue, is that network neutrality will be an impediment to sustainable innovation and value in the broader Internet ecosystem.

The reason is that it is very hard to see how continuous capital investment in next generation and highly capable networks will happen unless there is an expectation that such deployed capital can earn a market rate of return.

Network neutrality arguably depresses such returns, by “forcing” brute force bandwidth upgrades and prohibiting the development of some potential new revenue sources based on traffic shaping and quality of service.

Consider only the example of Google Fiber, offering symmetrical gigabit access for $70 a month. Few other ISPs, and none with national scale, yet can argue they can match such value and pricing. But, sooner or later, all the leading ISPs will have to learn to do so.

Still, many would argue that a better long term solution to a rapidly-breaking access provider business model must be found, or the applications people want to use, the way they want to use them, will start to encounter obstacles based on limited access infrastructure.

An economist or financial analyst might say the underlying problem for telcos is that they are currently not able to earn enough money to cover their costs of obtaining capital. And since the current revenue model is shrinking, that problem will grow worse.

So even a proponent of rapid application provider freedom and innovation must strategically consider how continual investment in faster and better access facilities can be fostered.

Today, a fixed network access offer is differentiated or characterized on about two main dimensions: speed and price. One might argue that will be insufficiently robust in the future. Access providers will have to generate more revenue by providing higher value.

New features and differentiated platforms for application experience will likely prove important in that regard. The historical precedent is provided by the 1990s “application service provider” market, which was the precursor to the “cloud computing and cloud apps” market, and which floundered because access facilities were not sufficiently robust.

One does not have to envision that the “Internet” and “managed services” businesses become indistinguishable. But as Akamai and other content delivery networks prioritize the delivery of some Internet packets, there already are models for how expedited packet delivery or differential treatment of packets can add clear value for end users and application providers.

Network neutrality blocks innovation on that score.

Edited by Ryan Sartor

Contributing Editor

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