May. 29th, 2014

laurion: (zaphod politics)

Recently, the FCC decided to allow ISPs to charge content providers for the services ISPs provide in conducting content to customers.  This is principally a fight over bandwidth consumption from sources like Netflix and YouTube. Critics of this move have said that this will break the notion of Network Neutrality by allowing network providers to favor some providers over others, based on how it benefits the network provider.

Brett Glass, an ISP operator in Laramie, Wyoming, accurately described this as what is economically referred to as a two-sided market, with the advantage that ISPs can continue to offer customers a fixed bill (unlike, say, your electric bill which varies based on usage), while still being able to charge to account for fluctuating usage, by billing the content provider.  He uses the newspaper model as an example of a long standing, and successful two-sided market.

In the case of the newspaper, customers pay a fixed subscription cost regardless of whether or not the size of the paper varies from day to day, week to week, or whether the customer reads some or all of the paper, et cetera.  On the other side, advertisers pay a cost which covers the overhead of making the paper bigger to include the ads, such as extra printing and delivery costs.

But while this is a good example of a two-sided market, this is a terrible model for ISPs to ape.  An ISP is not a newspaper.  Take away all the ads from a newspaper and you still have a product that customers want to buy.  In fact, customers almost never want the advertising they receive anyhow, but accept it as the shared price of keeping their newspaper subscription costs low.  But take away all the Netflixs and YouTubes of the world from what your ISP brings you and the service distinctly loses value.  It comes down to the fact that a newspaper -is- a content provider, and is the primary content provider.  ISPs are a service provider.  They provide little to no content of their own.

Advertisers pay a newspaper for access to the subscribers because advertising is fundamentally an undesired product to most people. Netflix shouldn’t pay an ISP under a similar model because Netflix is providing a product that people want and pay to access.

The real problem comes with trying to apply a two-sided market model to a utility service model.  Currently, ISPs sell a fixed amount of bandwidth to customers at a fixed monthly cost, and offer tiers of service with different bandwidth speeds to try to differentiate their customers. And they charge very large amounts of money, while simultaneously underprovisioning.  They sell the speeds they offer to a large number of people, knowing that many people aren’t going to use nearly that much.  And now that popular offerings like Netflix and are around, more people are in fact using more of what they’ve bought.  And rather than improving their infrastructure to accommodate, or altering their tiered offerings or pricing structure, ISPs are taking this as an opportunity to get paid twice for the same traffic, once from the customer requesting it, and once from the content provider providing it. And they can do this because customers don’t really understand the concept of bandwidth.  Ever since the days of dialup access they’ve paid a fixed monthly cost without really understanding what that entails beyond unmodified access to the internet. So when streaming video gets choppy, customers are just as likely to blame the service provider as they are anyone else, even if it is a result of network congestion on the part of the ISP.  To return to the utility analogy, that would be like blaming the reservoir because the water pressure in your house is too low.  It’s -possible- the reservoir is out of water, but unlikely.

So a two-sided economic market model makes little sense when applied to ISPs which function more like a utility. And ISPs don’t want to switch to metered usage models (like your electricity or gas) because they lose the ability to oversubscribe and underprovision. And customers like the idea of a fixed bill with ‘unlimited’ usage.  So what’s the way out? How do we get to a model where people pay for what they use, and ‘fairness’ is restored?

Some people think the way out is for the FCC to actually regulate ISPs the way they do another utility service: the phone companies. This is called ‘common carrier status’ and proponents see it as a way to encourage competition and to allow for new entrants into the market that can experiment with different pricing models and service offerings.  Recent legal outcomes have made it clear that the FCC can choose to take this route, but so far they have been very reluctant to do so.  Time will tell.

Mirrored from The Black Horse of the Blog World.

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