Net Neutrality

Originally, this article was a thread on Twitter in 2021.  In fact, around that time, I commented about Net Neutrality there often. The original posts have been updated and edited here for readability. I have also added a bit more on what I think Net Neutrality should be about.

I would like to thank Erik Fair for engaging and debating me, and for refining my thinking on this topic.

With news that Jessica Rosenworcel will be [finishing her term as] chair of the FCC, it's time to begin questioning her quest to restore Net Neutrality (NN) regulation. The issue I have with net neutrality is that it's a solution looking for a problem. It's not a viable solution to some of the things it purports to solve, but is a good slogan that the technically illiterate (especially on one side of the political spectrum) can glom onto. The problems are real, though. Let's look at why this is so, and some real potential solutions to problems.

Broadly, we can consider two areas of telecom - distribution (esp. residential) and back-end interconnect. It's a lot more complicated than that, but that's sufficient for the analysis here.

Distribution

Telecom distribution - the "loop plant" - has odd economics that were recognized almost immediately in the wires-on-poles era. In short, these are:

1) With high fixed cost and little marginal cost, there's a "natural monopoly" for the first mover.

2) Costs vary with population density, so providing services to rural customers is prohibitively expensive on its own.

Let's look at how this was solved before, say, 1990 when data services and the Internet changed everything.  

For Plain Old Telephone Service (POTS), the natural monopoly was countered by heavy regulation, including price controls. It would have been great if competition made that unnecessary, but "natural monopoly." A reduction in innovation was the trade-off for universal telephone service and the massive investment required to make it happen. [The monopoly and regulation also made it possible to fund Bell Laboratories which, among other things, brought us the transistor, the laser, and the discovery of Cosmic Background Radiation.] Probably the right trade-off in the early and middle 20th Century.  

The rural economics problem was solved by subsidies paid by sub/urban consumers to rural consumers through a required government program.  Again, probably the right solution for the time. We will come back to this.

But now come to the present. What's changed since two-wire telephone was all there was? Data, for one thing, and ever-growing demand for it. And wireless, including a lot of people "cutting the cord" of wireline POTS. And the future has more to come: efficient satellite phones, fixed wireless distribution, etc.

Data is interesting - it upset the tacit agreement that telcos would do only telephony and cablecos would do only television. Who gets the data franchise? And - gee - telephones are only kilobits in a megabit data stream... so if you offer data, why not combine and offer both? And then data services got good, enabling streaming to migrate value away from cable distributors to the big studios and tech companies like Disney and Netflix. We'll come back to this latter point in a moment.

Aside 1: It's not quite so easy to put a telephone on a data service. POTS has some very stringent requirements because it was - and still is - the service used to call for help. That was actually a benefit of the regulation. As such, the voice quality is (relatively) high, and it has to work even if the power goes out. (Legacy POTS phones are powered from the phone company central office, which typically had a basement full of batteries for power back-up.) Data services... not so much.

Aside 2: Putting (circuit-switched) voice into the (packet-switched) data stream creates many potential technical issues. (Contact me directly if you'd like to discuss. Set aside a couple hours.) In 1988, I was assigned the task of investigating these issues by designing a packet-based phone... the first such phone anywhere (as far as I know). I was successful and the first real (non-test) call was made from it by my lab's Executive Director (my boss's boss's boss's boss) while my colleague was demonstrating other aspects of the system to Arno Penzias (his boss). That phone is the precursor to everything VOIP you see today, including your mobile calls over WiFi.

Wired data service still has those same weird distribution economics: there is competition on installed plant, but not a lot of incentive to build more and compete more. Most places have only one high-speed data provider for this reason, with cherry-picking of "good" areas for competition overbuild. Add to that a long, strange history of who owns the plant, municipal regulation on building more, etc. 

Aside 3: "Telephone poles" are a complete mishmash. Some are owned by the telco; some by the electric co. They tend to be regulated irregularly by the municipalities to enable competition. There are rules to ensure distribution competitors can get slots on poles, and lengthy procedures to repair and replace them. It's so bad, Google Fiber paid big bucks to trench streets instead! But ultimately, "natural monopoly" tends to eliminate the incentive to compete.

And what about wireless? That opens all sorts of interesting issues. For instance, the telcos need to buy the licenses at great expense. The government has an incentive to keep prices high. But then the telcos need to be able to monetize. The good news is that wireless has better distribution economics - usually - and fewer permit issues - usually. But in all of this, rural isn't served well. 

The emergence of wireless creates another issue. Remember, rural telephone is heavily subsidized by urban and suburban customers. For decades, then, the fees for rural telephones were tied to wireline (not wireless). So, that $10/month for "phone" service offered by your data provider translates to $20 or more in your bill once the fees are added! But not on wireless. Hence the massive cord-cutting of the past 15 years.

Net Neutrality

So how does net neutrality help here? tl:dr; it doesn't. In fact, it may hurt the incentives for distribution competition and/or remove desirable cross-subsidies. (e.g., Grandma can get cheap broadband if it's bundled with specific streams.) Rather than net neutrality, we need innovation and investment in distribution. Like this for example, or competing offerings from Starlink. And so on. That is - there is potential competition in rural access for the first time, and rural access is a solvable problem today with rational and rationalized regulation. There's no need for enforced "neutrality" (although Starlink's owner has shown that there might be if there is no competition).

Local access for urban/suburban users remains an issue. The failure of things like Starry to take off - and the fact that most people have only one broadband provider to choose from - tell me that the natural monopoly is still strong, even though there is great dissatisfaction with service levels and prices. I am unusually fortunate - I have a choice of three broadband providers (plus broadband wireless) - but few people do. However, forcing everyone to an equivalent, neutral service simply removes *any* incentive to compete: with no differentiation, it makes for a race to the bottom which private companies will avoid. It's bad policy.

Back-end Interconnect

Now let's shift gears to the back end. This is the domain of enormous media companies and enormous tech companies doing business with the telcos and cablecos to get distribution. For most people, "peering agreement" does not mean anything, but here it matters. "Peering" is how large Internet providers connect. This is a complex topic, but a short version is that money flows with net traffic. If you are a large media provider, you pay others to carry your traffic, eventually to consumers. Makes sense, right? 

Well, except that these are not agreements just among telcos. One of the largest peers is Alphabet because they own YouTube. And (wisely, because that's the incentive) they built their own high-bandwidth data transport. So... Google is a large media source of data, but in fact pays little to distributors because it also transports traffic between distributors. And that's just one case of a very complex arrangement. Netflix has a program to cache content with distributors, for instance, so it does not need back-end transport for everything. And so on.

Net Neutrality purports to protect the little player, the startup without enough scale to play this game. Noble. But the network already is neutral - anyone can put up a website. It's just that they may not be able to get the same levels of transport... as those who have INVESTED, or pay, to have that improvement. And, really, do they need that level of service to deliver a website? If they do - for some new service - they should gather investment and pay to try. VCs will be happy to fund. 

So what does net neutrality accomplish? Very little. As envisioned under Obama, it was extremely heavy-handed and not very future-looking for things like fixed wireless broadband (backhaul by satellite - nice!). Obvious abuses in the market can be regulated more narrowly. 

I invite others to debate here. If you support NN, fine, but tell us what you expect it will accomplish and how that's the most economical way of accomplishing it.