Uncommon Wisdom

Mar 9 2011   2:01PM GMT

Net neutrality debate highlights need for financial settlement

Tom Nolle Tom Nolle Profile: Tom Nolle

Politicking over the net neutrality rules continues, with the House holding a hearing on the matter. It’s pretty hard for the House to overturn an FCC order without enacting legislation, and that’s not going to pass the Senate or a Presidential veto, so the whole thing is clearly an exercise. The real test for the net neutrality order will come in the courts, and it’s virtually impossible to say how long that might take to work through. But the debate shows the depth of idiocy associated with the whole process.

Meanwhile new developments in the market continue to raise the stakes for operators. The FCC’s position can be reduced to this: “Consumers lack enough choice in broadband providers to allow them to vote against site blocking with their feet”. True, but that’s not really the part of the order that most people object to. You can simply say “no blocking of sites or discrimination in traffic handling based either on the site or the traffic type” and be done with it.

The FCC didn’t do that. Instead it took excursions into things like whether offering premium handling was tantamount to a kind of blocking-one-by-exalting-another relativism. Even the question of whether a type of traffic could be blocked is kind of moot, in my view. As long as operators didn’t have the ability to apply different rules in different geographies, providers would face immediate competitive disaster if they were to impose unusual handling restrictions. But the real problem is whether the FCC has any authority at all in this matter, and that’s what the courts will decide.

Facebook’s deal with Warner Brothers to stream movies is an example of how many different kinds of players are emerging to treat “the Internet” as a kind of inexhaustible free spectrum to be used to broadcast anything at near-zero cost. But the “near-zero cost” really means “near-zero price” because operators are forced to carry the traffic, often with no compensation at all. Which opens my “technical” (as opposed to jurisdictional) objection to the order. We need financial settlement for the Internet, period. The bill-and-keep-and-laissez-faire-peering model is just too prone to arbitrage and that can kill investment incentives in key parts of the ecosystem. The Republicans are right in fearing that, but they’re not raising the settlement issue either because it’s not politically popular.

What’s interesting here is that pandering to the voter’s silly lack of understanding on how the Internet works (and must be sustained from a business perspective) is heading toward a point where the worst-case solution is the only one left to apply. You can’t stop usage-based pricing with regulations, even from Congress.

You can’t order a company to invest unprofitably. Of all of the options available to deal with the explosion in incrementally free traffic, the worst is charging the user. We need broadband fat pipes to deliver premium services, and we can’t get them by essentially declaring that there can’t be any premium services (no special handling) and that everyone can send for nothing. Usage pricing, here we come, unless Congress or the FCC gets smart, and if that were possible they’d have done it already.

The media’s not helping here, nor the industry. The 2011 Optical Fiber Conference (OFC) is the usual bandwidth-is-the-main-course love feast, even though at least one optical component vendor is signaling the industry that forward demand is looking really problematic.

The lack of a way to monetize incremental broadband traffic is an almost-certain fatal disincentive to develop it, and yet we’re prattling on about 100 GB Ethernet like that was the solution to the problem. It’s not capacity that’s a problem, it’s making capacity valuable.

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