Regulatory Capture: What Do Net Neutrality and Regulation of Railways Have in Common?


What is Net Neutrality?

According to Wiki:

Net neutrality is the principle that Internet service providers and governments regulating the Internet should treat all data on the Internet the same, not discriminating or charging differentially by user, content, website, platform, application, type of attached equipment, or mode of communication

But, is that really true?

Currently, all segments of the ‘internet’ are privately owned by a number of providers. These companies have invested billions into building out their networks to provide the best service to their customers. Most of us know about AT&T and Verizon but many of these segments are connected to the ‘internet’ because the companies have decided to cooperate and allow data to cross into and out of their private networks.

AT&T (I think) for the longest time never opened up their internal network to other carriers’ traffic. This cause more than a few bottlenecks and bad feelings as AT&T dumped their traffic onto other providers’ networks when it needed to get someplace AT&T didn’t go. Imagine a network of roads with all of them built and maintained by private corporations and having a whole series of roads that you couldn’t use, that’s what the situation was before. Finally AT&T relented and allowed other providers to use their internal network.

All-in-all, the traffic across the networks was roughly balanced and everyone benefited so it’s in all of the ISP’s interest to cooperate and let traffic flow through their private networks.

This was the Internet’s model since its inception, private infrastructure that was shared because it benefited all ISPs.

Bandwidth Requirements

In the old days, sometime starting in the 90’s, private companies including what was generally considered Internet Service Providers, like Comcast but before there was Comcast, other carriers like telephone companies, and some large companies that had private networks built their own networks to handle traffic within their business and customer base.  The transmittal of data between and across these networks was symmetrical in that everyone shared what they, the flow of information was roughly balanced based on the size of each companies’ network.  Additionally, each ISP committed to, and had to financial resources to, maintain their part of the network.

Net Neutrality: How it changes the paradigm!

It’s all about Bandwidth! Bandwidth! Bandwidth! With the advent of the streaming services, much of the current internet traffic is now asymmetrical in that there are quite a few sources of traffic like video streaming and such from companies like Netflix such that the traffic only goes one way through these networks, i.e. to the end-users. In other words, these content originators contribute nothing to the infrastructure but place huge demands on the infrastructure.

Unless these streaming services have reached agreements with, and helped pay for infrastructure, the asymmetry of traffic flow and the huge volumes of traffic from the streaming and other providers, the streaming services were being throttled or slowed down by companies like Comcast and Cox whenever the internet providers were becoming overburdened by the huge volume of traffic from these streaming services.

They saw it as a service level agreement or expectation that they had with their customers. We, the customer, paid for a service and the ISP’s invested to provide that service to us but someone outside of the network had the ability to impact the customer’s service.

Infrastructure: Who Pays for that Bandwidth?

Remember, streaming services require Bandwidth! Bandwidth! Bandwidth!

The money is going to have to be spent on infrastructure development and re-development (think fiber optics or the innovation after that) one way or another. Right now it’s a combination of what the ISPs are willing to spend based on their subscriber fees and their tolling agreements with companies like Netflix.

For the services they get the money for the people get what they paid for and the fees are generally set by the local franchise fees set by the towns, cities, and counties each ISP services.

If the streaming services don’t pay to help offset the additional infrastructure for the bandwidth their products use then the ISPs will be forced to upgrade their networks to handle the increase traffic based on the fees they can charge in their service areas (fees that they don’t control.)

Infrastructure expenditures are never ending, i.e. unless the ISPs allow their infrastructure to age and fall behind the technology. That means that, because they are subject to local franchise agreements that the ISPs may not raise their fees but they probably won’t invest to upgrade their networks to handle the increased demands based on these streaming services!

This should result in an aging infrastructure that stagnates and, over time, you will wonder why they haven’t given you cool things like fiber optics and 1 gigabit speeds.

On the other hand, without Net Neutrality, if the streaming services continue to pay fees to the ISP to help upgrade and maintain their infrastructure then the networks can move to gigabit because the ISPs can get enough capital to continue modernizing their networks.

So, the money needs to be spent but with Net Neutrality, the demand for increased speed and the infrastructure that needs to be continually built out, will not be available unless your subscription fees increase substantially.

But… They pay – like everyone else – at their point of access to the network, don’t they?

[Updated: In an attempt to make this article complete I’ve included some of the comments found below.] Some see paying their ISP for their connection(s) for their streaming services with their huge data loads as just the status quo for the internet and how its been used over the years? That misses what is really going on.

Until the creation and take-off of these streaming services the internet paradigm had very few entities with large data usages and most of those were point-to-point intranet communications between related businesses, think Exxon offices or GE manufacturing plants.

For these intranets the companies established dedicated pipes between points within the companies and paid someone for that dedicated infrastructure, usually a Tier 1 provider. From Wiki:

Tier 1 providers, the largest providers, known as tier 1 providers, have such comprehensive networks that they never purchase transit agreements from other providers. As of 2014 there are six tier 1 providers in the telecommunications industry. Current Tier 1 carriers include Level 3 Communications, Telia Carrier, NTT, Cogent, GTT, and Tata Communications.

What companies like Netflix and Hulu are offering and the demands placed on their dispersed, non-corporate, delivery destinations are nothing like what the internet has been over the years.  Large data originators have always paid for the infrastructure costs that they used, only they paid for it quietly through these Tier 1 providers.

For more information there’s this on transiting between networks https://en.wikipedia.org/wi… or this one on the cost sharing when utilizing other networks, https://en.wikipedia.org/wi…. It’s clear to me that the Net Neutrality group wants to distill a complex relationship on the internet and its infrastructure owners down to some meme that advantages them over the companies they are trying to take advantage of.

Market Efficiency: Who Should Pay?

In reality, the end-users are paying either way, when either the content providers or streaming video companies pay they always distribute their expenses across their user bases?  One answer can be found in looking at the efficiency of each model.

Which payment model has the least amount of collateral damage done to to the pocketbooks of non-consumers of streaming content? If you look at it that way then things start sorting out.

So, if the consumer that consumes the service pays for the streaming content by increased user fees at the ISP then I don’t see how to get only SOME of an ISP’s customers to pay for the services they use.  Therefore, some and maybe a majority of ISP customers that never use the streaming services are paying for infrastructure to support the streaming services’ heavy usage demands used by the minority of an ISP’s customers.

For example, you may not use Hulu or any streaming services at all nor do, say, 60% of your ISPs subscribers… that means that either the rates for the 60% of the service subscribers will be have to be set higher than would be necessary in order to subsidize the higher usage rates of the 40%!

But, if the streaming companies are the ones that have to kick in the fees then the ISPs will set their fees based only on the, essentially, balanced burdens placed on the network by each user. They can do that because the additional infrastructure costs are paid for by each streaming service provider based on a pro-rated use of the ISPs network. Smaller streaming service providers will pay less than the big companies like Netflix or AmazonPrime but, the bottom line is that each company pays for the differentiated level of burden they put on each ISP.

Maybe I’m off here but it seems to me that we have to choose between burdening the 60% of the users with low usage (because they don’t use streaming services) with higher ISP fees, or… we have to collect a fee from the streaming providers in such a way that the fee is easily distributed across each providers’ user base because Hulu and other streaming companies just build it into their pricing model for their services.

When forced to choose between those two options most conservatives would choose the one that didn’t increase the fees on the non-users of streaming services. In other words, they’d resist what Net Neutrality would do and stick with the current model.

What about data size plans similar to that of cell phones where those who download more pay higher fees?

It might work but, my major point on the cost analysis was at the relative efficiency of the two paradigms. The paradigm before Net Neutrality had evolved within, essentially, unconstrained market forces and the best solutions was, apparently, for the originators of the large streaming content to work within the three relationship models that had evolved naturally in the marketplace, namely:

The relationships between these networks are generally described by one of the following three categories:
– Transit (or pay) – The network operator pays money (or settlement) to another network for Internet access (or transit).
– Peer (or swap) – Two networks exchange traffic between their users freely, and for mutual benefit.
– Customer (or sell) – A network pays another network money to be provided with Internet access.

If you believe Hayek, these market mechanisms came into being as a spontaneous solution (order) that were both stable and efficient. While we could try to hypothesize a more efficient price mechanism and impose it on the market, Hayek’s principle sounding what he called the Fatal Conceit comes into play. That is:

A key flaw within socialist thought, which holds only purposefully designed changes can be most-efficient. Also, he says statist (e.g., “socialist”) economies cannot be efficient because dispersed knowledge is required in a modern economy.

Because of what I think is a profound insight into markets, I tend to question mine, or anyone else’s ability to design a better market mechanism than what the market has already created. As Chesterton pointed out with his fence across the road analogy, we should probably leave this fence in place until we fully understand why it’s there. Hayek would agree with that decision.

Crony Capitalism and the Application of Socialism to the Internet

The huge companies like Amazon, Netflix, etc. lobbied the FTC and, in the best crony capitalism way, decided that they shouldn’t have to pay anything to the ISPs and they invented a concept they euphemistically called, Net Neutrality, and in a bold example of Regulatory Capture, put enough supporters in the FTC.  Consequently, the Obama appointed socialists at the FTC decided that they were going to use a depression-era law and treat the ISPs as common carriers (like the phone company or power transmission) and force the ISPs to give away their capacity for free.

In their best imitation of NewSpeak they called that Net Neutrality but it wasn’t ‘Neutral’ in any way, shape, or form because the streaming service providers were advantaged by getting to use capacity without paying anything to support it.

So, if you haven’t noticed, Net Neutrality is  not even remotely how we have had internet in the past.

Regulation of the Railways – Lessons Learned

I think the best example of this can be found in the regulatory controls placed on the train companies in the early part of the 1900’s and the resultant decimation of the infrastructure, both tracks and rolling stock. The companies weren’t free to raise their rates to make enough of a profit and they didn’t have money to keep up the tracks. As a result every part of their infrastructure deteriorated and trains were either run far below the speeds they needed to run to be profitable or they were derailing because the tracks were in such bad shape.

So, it’s our choice!  Either the streaming companies pay now or you will pay later with either higher fees on the non-users of streaming services or terrible service or both from you ISP.

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