Ev Ehrlich's Everyday Economics

Under No Management

Here's an interesting clip.  Steve Jobs is introducing the high-resolution, video-conferencing iPhone 4 on June 7.  It's a heck of a phone.  Watch the clip.  He's trying to demonstrate his prodigious device, but he can't get a connection because of all the Wi-Fi activity in the audience.  So he asks everyone to turn off their Wi-Fi connections.

The point isn't to rag on Jobs.  The point is that this moment captures the issue that underlies the entirety of the broadband debate.  Jobs' suffering -- I couldn't resist that one -- is a modern parable about net neutrality. It captures why "neutrality" won't work, and how little it will gain us in exchange for what we're going to give up to get it.

Last March, when the FCC presented their Broadband Plan for America, they presetned creating a universal broadband network as the highest priority in Internet policy.  And I thought they did a reasonable job of showing us a way to get there. 

But the FCC's decision to reintroduce the regulatory authority that they were given eighty years ago to regulate the nation's phone system throws that plan out the window.  You can dress it up all you want -- call it a "Third Way," argue that you're only going to use the authority for specific, limited purposes, whatever -- in essence, the FCC is telling the providers of broadband connections -- cable, fiber, and wireless -- that it retains the ability to regulate their business.  And that’s going to put a pall over broadband infrastructure investment.

I was on a press call for Broadband For America this week and a reporter asked a reasonable question -- when you talk about this kind of regulatory authority leading to reduced investment in broadband infrastructure, he said, it sounds like some kind of all-or-nothing proposition, like the companies are going on strike, or are holding the Internet hostage -- you expect to get Patty Hearst's ear in the mail any day now. 

But that’s not it.  The companies in this business are gambling tens of billions of dollars by creating this infrastructure and are going to amortize it over decades.  Which means that they have to have some idea as to the environment in which it will exist over that period of time.  The FCC taking unto itself a full complement of regulatory authority -- whatever their intentions are at the moment -- turns that investment into a hostage.  The assurances of today's FCC chairman are worth very little over this larger time frame.

Another reporter asked, in essence, so is the FCC stupid, or what?  Good question.  And I told them, I don’t think the FCC thinks it can assert all this authority without some repercussions.  We can say with some certainty that it's going to be much harder for companies to put tens of billions of dollars into an effort that will take decades to repay and that could at any time be subject to a significant regulatory burden.  But I think the FCC thinks that this sacrifice is worth it because, if it had the regulatory authority it seeks, something would be gained.

 Neutrality advocates argue that what's gained is innovation at the "edge of the network."  They argue that, unless we guarantee that all traffic on the network operates under the same terms and speeds, the "Googles of tomorrow" will die a-borning, unable to compete with the superior connections the Big Websites are able to buy for themselves.

I see three things wrong with this argument.  First, the Big Websites already have compelling advantages.  Through caching, they can make their connections faster and stronger than can newer competitors.  When it's all said and done, the cost of an improved connection to the user will probably go down once we abandon the "one speed fits all" rule that the neutrality proponents want to enshrine in law.  That's true because websites won't want to buy an uninterruptable connection from broadband providers unless it's cheaper than their next best alternative (that's Econ 101, right?), and caching is probably that alternative.  So dropping the "neutral" framework should make competing easier for new entrants, not harder.

The second problem I have is with the idea that, if it weren't for the competitive "periphery," the Internet would be a stagnant morass.  In fact, I could argue that the great onrush of innovation from the periphery of the net -- the place where Google and EBays and so on came from -- was historically specific, that it was the equivalent of a "land rush" -- if you were first to get there, you won.  Now that the real estate of the net has been divvied up, the periphery is probably less important than before. 

And because of that, innovation is probably taking place at the center of the Net just as readily as its edges.  And restricting the center through neutrality has the prospect of impeding just as much, if not more, innovation than it encourages at the edges.  I've discussed before the illogic of a cardiac monitor's signal travelling at the same speed and under the same terms as a video of a cat playing the xylophone.  But think of it this way -- ATT approaches The New Orleans Jazz and Heritage Fetival to put on a live benefit concert for NOLA reconstruction that can only be watched on an iPhone.  In order to make it work, it has to make sure that the signal isn't lost in buffering -- who wants to freeze up during a staggering Jeff Beck solo during How High The Moon or Nessun Dorma?

If that happened, the neutrality advocates would raise holy hell and try to stop it, just as they complained about the iPhone's inabiloity to connect to any platform.  That's because they would argue that making sure that Jeff Beck's bits stay together until they hit your computer disadvantages all the other bits -- the cats playing the xylophone.  So, when you get right down to it, they're making the statement that we're giving up so much that might happen -- "land rush" aside -- that we should prohibit what will happen.

But there's a third, and more down-to-Earth, third reason why neutrality misses the point.  Traffic requires management.  And management means there are some rules or procedures for determining what goes where, when.  Red lights, green lights, variable speed limits, weight limits, HOV lanes and so on – those are the rules of a “non-neutral” traffic grid.

Under neutrality, we do away with that.  If the Internet gets congested, we all slow down together.  When Comcast, a few years ago, responded to congestion on its network by slowing down users of BitTorrent, there was outrage in some corners.  I think Comcast's greatest sin was keeping that practice a secret from their customers.  But absent a clear regulatory message that broadband providers can do what they want to optimize their networks' performance and let consumer judge how they did, it's hard to blame them for being reticent to announce what their practices are.  Besides, as I've said before, BitTorrent is used for file sharing, and file sharing generally is all a low-value use.  It’s like rules that stop you from watering your lawn during draughts.  You can argue that some people would rather be thirsty and dirty than have a withered lawn, or that they’d pay any amount to outsod the Joneses.  But generally, it’s a simple and easily understood rule that works when the reservoir is low.  Slowing down file sharing – as opposed to e-commerce or distance learning or whatever else – is the same kind of rule.  It’s not perfect, bit it works.

So here we are with Steve Jobs.  He wants to use the network, but too many people are on it for him to get the signal he needs.  So his presentation isn’t happening.  What he needs is network management, a system that allows infrastructure providers to optimize the productivity of their networks – not just to facilitate the flow of traffic, but to determine how the highest-valued uses get through, using markets to allocate these priorities much as they do everything else.

Jobs shows you what happens we avoid taking this inevitable step.  We cannot afford an Internet that is Under No Management.