When you get right down to the real nitty-gritty, as Shirley Ellis used to sing, the “net neutrality” debate comes down to this – is the market for broadband dominated by a voracious, two-headed cable-telco duopoly monster that will dominate the Internet and expropriate its transformative value? That’s an important – if not the important question – because a competitive market would check the various abuses “neutrality” advocates claim to be just around the corner.
One sign that competition is working in the broadband market is that the price of connectivity is falling and its adoption spreading. A 1 mbps connection costs about XX today, $7 per month in 2006, $26 per month in 2002, and didn’t exist commercially eight years ago. And broadband is permeating the market as fast as or faster than PCs, DVDs, or any other electronic/data product in recent memory.
For some neutrality advocates, it’s not enough. “But there are only two of them!” is the essence of their rejoinder.
Look – there were only two guys in the ring for the Ali/Frazier fights, and they beat each other’s brains out! And that’s what’s happening in broadband today. There are plenty of reasons to think the “duopoly model” doesn’t apply to broadband – and here are five of them.
First, the point of a duopoly is to collude against the public by agreeing to set a price. But that’s because, in duopoly theory, the two producers are making a standard, static good. The only way they can compete is on price – there’s no quality competition, no competition to innovate.
But cable and telco companies in the so-called “duopoly” compete every day, regardless of what prices are – by offering leapfrogging speed and reliability. (JB: Need Link’s – or Jeff? - leapfrogging examples. What do we have?) Like Ali and Frazier, they are beating each daily in the race to provide faster and more reliable connections for customers.
A second key difference is fixed cost. About half the cost of a system such as FiOS or cable is fixed, including depreciation, the amortization of research and software, and shared system-aide operating costs. The cost of adding a new user to the system is very low once these up-front investments are made. So cutting prices to increase the system’s use allows the competitors to spread their massive investments over a large number of users. It’s the classic natural monopoly problem, but instead of lethargic regulation of one sanctioned producer, we have two producers – and maybe more – willing to battle it out. It is the very “ruinous” competition that the regulation of natural monopolies such as electric utilities sought to avoid.
Did I say “maybe more” than two producers? That’s the third point. The “third pipe” many analysts hope to see in the broadband market may not be a pipe at all – it might be wireless broadband. One-sixth of all households only use a mobile phone – no fixed line hook-up – and most of them are folks under 25. That’s not to say that young people are about to abandon their broadband hook-ups for their phones, but it is to say that once mobile broadband gets better, customers may flock to it just as they have flocked to mobile telephony. And that may not be that far away -- mobile systems in Australia offer speeds up to 10 mbps. Nielsen recently reported that three out of five mobile broadband users are considering swapping out the home ISP, and that Internet access is “the next frontier of wireless substitution.” So the potential for a large-scale flight to mobile broadband is there -- cable and telco may prove to be the “only” two producers of a product that the markets turns away from.
A fourth consideration is the changing face of the broadband market. Until very recently, a broadband customer was assuredly a dial-up customer being brought into a new world. Now, they’re often an existing broadband customer being brought into an even newer world. The vast pool of dial-up customers is becoming an Aral Sea – soon there will be none left, and cable and telcos will have to find new customers either from each other’s customer base or from users of their previous generations of projects. And at the same time, their users will be more knowledgeable, demanding, and sophisticated about broadband. Providers are going to have to work harder to keep up; the future of the industry is more competitive, not less.
Finally, there’s the dimension of competition that focuses on what’s perhaps most important of all – what the consumer wants. And paradoxically, this is precisely the kind of competition the “neutrality” advocates want to do away with. Their version of an Internet that is “open end to end” really means that nothing can be given priority over anything else, and they are certain that is what consumers want.
Really? Consumers don’t want the feed from a heart monitor to get priority over a song download, or an E-Trade transaction to go faster than a Facebook posting? They don’t want different Internet search or e-mail services to compete on the basis of speed of connection? They don’t want a broadband provider to think up creative new applications or special features, much as being connected to AT&T Mobile allows you to use an iPhone?
Who says, and who knows? The cable and telco providers are trying to find out, because whichever of them figures it out first is going to win the competition for customer allegiance – until consumers change their minds. But the “neutrality” crowd wants to prohibit this competition in a way that is, ultimately, uncompetitive.
No one doubts that the Internet is a Promethean phenomenon. But the fact that it is transformative doesn’t tell us the best way to bring it to fruition. “Neutrality” advocates want to shape the Internet in the image of their own assumptions, the most important of which is that the broadband market isn’t and won’t be competitive, which is why we have to guide it through regulation.
They’re wrong. When you get right down to the real nitty-gritty, there is competition for broadband, and as in any competitive market, the customers, not the advocates, are always right.
The Real Nitty Gritty
When you get right down to the real nitty-gritty, as Shirley Ellis used to sing, the “net neutrality” debate comes down to this – is the market for broadband dominated by a voracious, two-headed cable-telco duopoly monster that will dominate the Internet and expropriate its transformative value? That’s an important – if not the important question – because a competitive market would check the various abuses “neutrality” advocates claim to be just around the corner.
One sign that competition is working in the broadband market is that the price of connectivity is falling and its adoption spreading. A 1 mbps connection costs about XX today, $7 per month in 2006, $26 per month in 2002, and didn’t exist commercially eight years ago. And broadband is permeating the market as fast as or faster than PCs, DVDs, or any other electronic/data product in recent memory.
For some neutrality advocates, it’s not enough. “But there are only two of them!” is the essence of their rejoinder.
Look – there were only two guys in the ring for the Ali/Frazier fights, and they beat each other’s brains out! And that’s what’s happening in broadband today. There are plenty of reasons to think the “duopoly model” doesn’t apply to broadband – and here are five of them.
First, the point of a duopoly is to collude against the public by agreeing to set a price. But that’s because, in duopoly theory, the two producers are making a standard, static good. The only way they can compete is on price – there’s no quality competition, no competition to innovate.
But cable and telco companies in the so-called “duopoly” compete every day, regardless of what prices are – by offering leapfrogging speed and reliability. (JB: Need Link’s – or Jeff? - leapfrogging examples. What do we have?) Like Ali and Frazier, they are beating each daily in the race to provide faster and more reliable connections for customers.
A second key difference is fixed cost. About half the cost of a system such as FiOS or cable is fixed, including depreciation, the amortization of research and software, and shared system-aide operating costs. The cost of adding a new user to the system is very low once these up-front investments are made. So cutting prices to increase the system’s use allows the competitors to spread their massive investments over a large number of users. It’s the classic natural monopoly problem, but instead of lethargic regulation of one sanctioned producer, we have two producers – and maybe more – willing to battle it out. It is the very “ruinous” competition that the regulation of natural monopolies such as electric utilities sought to avoid.
Did I say “maybe more” than two producers? That’s the third point. The “third pipe” many analysts hope to see in the broadband market may not be a pipe at all – it might be wireless broadband. One-sixth of all households only use a mobile phone – no fixed line hook-up – and most of them are folks under 25. That’s not to say that young people are about to abandon their broadband hook-ups for their phones, but it is to say that once mobile broadband gets better, customers may flock to it just as they have flocked to mobile telephony. And that may not be that far away -- mobile systems in Australia offer speeds up to 10 mbps. Nielsen recently reported that three out of five mobile broadband users are considering swapping out the home ISP, and that Internet access is “the next frontier of wireless substitution.” So the potential for a large-scale flight to mobile broadband is there -- cable and telco may prove to be the “only” two producers of a product that the markets turns away from.
A fourth consideration is the changing face of the broadband market. Until very recently, a broadband customer was assuredly a dial-up customer being brought into a new world. Now, they’re often an existing broadband customer being brought into an even newer world. The vast pool of dial-up customers is becoming an Aral Sea – soon there will be none left, and cable and telcos will have to find new customers either from each other’s customer base or from users of their previous generations of projects. And at the same time, their users will be more knowledgeable, demanding, and sophisticated about broadband. Providers are going to have to work harder to keep up; the future of the industry is more competitive, not less.
Finally, there’s the dimension of competition that focuses on what’s perhaps most important of all – what the consumer wants. And paradoxically, this is precisely the kind of competition the “neutrality” advocates want to do away with. Their version of an Internet that is “open end to end” really means that nothing can be given priority over anything else, and they are certain that is what consumers want.
Really? Consumers don’t want the feed from a heart monitor to get priority over a song download, or an E-Trade transaction to go faster than a Facebook posting? They don’t want different Internet search or e-mail services to compete on the basis of speed of connection? They don’t want a broadband provider to think up creative new applications or special features, much as being connected to AT&T Mobile allows you to use an iPhone?
Who says, and who knows? The cable and telco providers are trying to find out, because whichever of them figures it out first is going to win the competition for customer allegiance – until consumers change their minds. But the “neutrality” crowd wants to prohibit this competition in a way that is, ultimately, uncompetitive.
No one doubts that the Internet is a Promethean phenomenon. But the fact that it is transformative doesn’t tell us the best way to bring it to fruition. “Neutrality” advocates want to shape the Internet in the image of their own assumptions, the most important of which is that the broadband market isn’t and won’t be competitive, which is why we have to guide it through regulation.
They’re wrong. When you get right down to the real nitty-gritty, there is competition for broadband, and as in any competitive market, the customers, not the advocates, are always right.