Internet or Else, Peasants!

There was a bizarre column in the New York Times this week about net neutrality that managed to mangle the issue as severely as anyone has (Net Neutrality and Economic Equality Are Intertwined.) The author, Eduardo Porter, is the paper’s economics writer, but most of the column deals with technology issues rather than economics. It illustrates what happens when people opine on tech policy without understanding the “tech” part.

Let’s start with his metaphor:

Imagine a network of private highways that reserved a special lane for Fords to zip through, unencumbered by all the other brands of cars trundling along the clogged, shared lanes. Think of the prices Ford could charge. Think of what would happen to innovation when building the best car mattered less than cutting a deal with the highway’s owners.

In the world that I live in, California, there actually are special lanes on the (public) highway for carpoolers, low-emission vehicles, impatient commuters willing to pay a toll for faster service, police, and emergency vehicles. Originally, these special lanes were only for carpoolers, but there is so little carpooling that the public policy arguments for additional services were accepted by the state legislature as compelling enough to warrant inclusion. If I'm running late to a meeting in Santa Clara, I'll pay the toll to use the special lanes and be happy to do it. If I'm in less of a hurry, I'll happily save two or three dollars and enjoy the music in my car a little longer. This is public infrastructure.

This is not simply a quibble with the writer’s analogy. The cellular network effectively reserves special lanes for voice and text messaging apart from the slower lanes it has for data. It does this for good reasons. Voice needs lower latency than web data, and less variation in the deliver time between one packet and the next. The ear is challenged by the variable nature of mobile communication under the best conditions, as signal quality inherently drops as we move farther from the tower that handles our calls and handoffs between towers are often accompanied by the loss of a packet.

Voice is low bandwidth, so it’s a reasonable tradeoff to boost its quality at the expense of high bandwidth data. We also pay more per packet for voice than we do for data, again a reasonable trade because we appreciate clear calls. Text messaging costs more than e-mail on a per-byte basis, but it has the advantage of being inherently spam filtered so again there’s a rationale for the fee.

So the analogy is neither apt nor persuasive because it confuses the quality requirements of services of different kinds with discriminatory pricing schemes for services of the same kind. Economists are supposed to know that all commodities are not equally valuable.

He then jumps from the notion of rational price discrimination between disparate services to the criticism of irrational price discrimination based on deal-making capacity in connection with some of the complaints Netflix founder Reed Hastings has been making recently about the treatment of its Internet-based video service by ISPs:

“Net neutrality has broad consumer and voter support,” Reed Hastings, the chief of Netflix, said in an interview. “It is important for the sake of public access that the rules apply equally.”

This is quite a leap. There may be many policies and entitlements with broad consumer appeal that aren't sound policy. Consumers may favor free ice cream, especially young ones, but it’s neither sound economic policy nor a particularly good use of the personal calorie budget. There’s also the annoying fact that most voters have no idea what net neutrality means and why they should care about it. So we're left with another unsound argument in support of a unsound premise.

Hastings asks an intriguing question:

“If I watch last night’s ‘S.N.L.’ episode on my Xbox through the Hulu app, it eats up about one gigabyte of my cap, but if I watch that same episode through the Xfinity Xbox app, it doesn’t use up my cap at all,” Mr. Hastings wrote on his Facebook page. “In what way is this neutral?”

This echoes Susan Crawford’s complaint that some over-educated people were trying to drag the Xbox issues "down into the weeds of network architecture technicalities," but I have an answer to share anyway.

When Tim Wu first wrote about the notion of net neutrality, he was very clear that he wanted ISPs who also offer non-Internet services such as TV programming and voice to be neutral at their Internet gateway with respect to Internet-based services, and he was also clear that there needn't be an assumption of equality between services provided within their private networks and those provided over the Internet.

This is a simple distinction that should be easy to grasp: If the service is provided solely within a cable network, it’s regulated by the Communications Act under the appropriate title, but if the service is provided over the Internet it falls under a different set of rules (such as the FCC’s Open Internet regulation.) There is no assumption in law or policy that services that depend in the interconnection of multiple private networks must be competitive in all times and places with those provided solely over one private network.

There’s a sound rationale for making a distinction here. The cable network was designed to deliver television programming to the mass audience, it’s by far the most efficient means in the universe of doing this. It sends one copy of SNL to every subscriber, not a personalized copy to each interested viewer, so there’s no popularity penalty built into it as there is on the Internet. If you're the kind of viewer who sometimes watches SNL, you can record it on your DVR and watch it anytime you want without any sort of cap or limitation, and indeed without even paying for Internet service.

If you don't have your own DVR or you forget to record SNL, you can use an “On-Demand” service provided by the cable company that effectively uses their DVR to watch it at your convenience, once again without paying for an Internet service. If you're a Comcast customer with an Xbox, you can use your Xbox to access the Comcast DVR as well, once again without paying for Internet service. Comcast and the other cable companies can do this because they know what the most popular shows are, they have licenses to these shows, and they have the ability to populate their cable network with stored content with a large audience.

This isn't comparable to the Netflix service that provides individual consumers with highly idiosyncratic content that generally does not have mass appeal. Netflix is working the long tail, while Comcast is serving the mass audience. Porter confuses the very different nature of these services with the market conditions around their delivery systems:

The emerging dispute between Netflix and Comcast underscores the core weakness of the Internet economy. To reach the multitude of online services competing for your attention, you must first get through a bottleneck that is not competitive at all: high-speed broadband access...

Costs are higher when there is little competition. If only 43 percent of American households with income under $25,000 a year have wired access into the home, it’s because most of the rest cannot afford it.

The issue of bottlenecks is less significant technically than the fact that not all services are equal from the standpoint of audience appeal, marketing, and licensing. As much as many of us love the Internet, the mass audience of actual consumers holds it in lower esteem than their cell phones and cable TV services. There are more cell phone subscriptions in the U. S. now than there are people, and substantially more cable TV subscriptions than Internet service accounts at the home: 85% of American homes pay for cable or satellite TV, but only 67% pay for Internet services. This isn't a question of cost, because Internet service is cheaper than a nice cable TV plan with HBO. As Matthew Yglesias wrote in Slate’s Moneybox economics blog recently, "People Just Aren't That Into the Internet."

The problem for people who do want to watch all their TV over the internet is that to provide enough video content to everyone for that to be the standard way of doing things, you'd need much more broadband capacity. And we could build much more broadband capacity, but people would have to want to buy it. And at the moment, it seems like people don't really want to. Of course they would want to if cable television stopped existing, but all the infrastructure is already there. Now maybe aggregate population preferences will change over time. There’s certainly some evidence that they're shifting a bit. But hard as it is for web junkies to remember, lots of people seem perfectly happy checking Facebook on their phone.

So the issue is that cable TV is not only more efficient that Internet TV, it’s also more popular, so the economics that may some day make Netflix competitive on a technical basis with with ABC’s Tuesday night lineup delivered to your DVR just aren't there.

Porter also makes the usual defective comparisons between U. S. triple play offerings the low price packages offered by Free.fr in France over the DSL infrastructure that was put in place by the formerly government-owned phone company. Free is a price leader that only offers services that Americans would consider competitive in a limited group of large cities, and only has fiber in selected neighborhoods in Paris. Free’s efforts to buy market share in mobile service started strong, but have now hit a wall as users discover the service quality to be quite poor:

In addition, each week around a thousand customers who had switched to Free rejoin Orange, SFR or Bouygues Telecom. So it’s become a numbers game — how can Free balance growth and stop the sort of churn that could undermine its strategy right from the start?

So what we have in the spat between Internet-based and cable-based video providers is a conflict between technologies that can only be resolved in the Internet’s favor by changing its network architecture to something more friendly to high-value content, mass distribution, and consumer choice. The alternative proposed by Porter, Wu, and Crawford is to force TV consumers off cable and onto the Internet by imposing irrational price increases on cable TV, as if content creators weren't raising prices enough already.

There are many reasons to like the Internet and many ways to promote it, but using brute regulatory force to mask the technical differences between Internet and cable TV strikes me as very destructive and not at all consumer-friendly. It’s also massively ignorant of those dreaded “network architecture technicalities,” but nobody ever said technology has to be easy to understand.

Photo: "I Love Lucy - Home From Europe," CBS