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August 11, 2009 9:30 AM

Worrying About Net Neutrality's Potential Impact on Private Investment

The debate over net neutrality is set to roar back onto center stage after the recent introduction of a new bill that mandates broadband networks remain open.

But despite the fact that I support the notion of protecting consumers from the anti-competitive practices of monopolistic broadband providers, I think we haven't been addressing one of the core challenges of making net neutrality a reality, namely how do we balance our desire to see more money invested in broadband capacity with private providers' need to turn a profit on that investment?

Unfortunately, too often this argument is completely dismissed by net neutrality supporters. When the industry says that overreaching net neutrality rules will dissuade them from investing they're accused of greedily putting their hunger for private profit over the public good. They're branded as evil, and these claims are ignored.

Yet, let's consider them with a fresh set of eyes. Let's not assume anything and break this argument down a bit further.

First off, we must acknowledge that there's a finite amount of capacity in any broadband network.

Secondly, there's a finite amount of money any private provider is able and willing to invest in upgrading their capacity, and to justify any investment they need to realize a return on those dollars.

Third, broadband networks have two primary purposes: offering access to the public Internet, and supporting the delivery of private, managed services like TV and phone.

Fourth, private, managed services can offer higher profits to operators than just offering bandwidth.

Fifth, we want private providers to maximize their investment in the capacity of their networks.

Sixth, we want to make sure that as much of that capacity is going towards open bandwidth that grants unfettered access to the public Internet as possible.

With these basic ideas on the table, let's do some further analysis.

There are many net neutrality supporters who believe that broadband should just be a big dumb pipe. That there's little need for private, managed services to insure quality of service. And that there's more harm than good to come out of allowing incumbents to offer prioritized access to their networks.

The challenge with this attitude is how can we ask incumbents to invest billions more in upgrading their network capacity at the same time we're limiting how much money they can make off that investment? I don't see how we can spur the private sector to put up the massive investment that's needed to continue upgrading our nation's broadband infrastructure if we limit the broadband business to selling bandwidth. The returns are just too low to justify the big money that needs to be sunk into networks.

But many net neutrality supporters have come to realize this, as evidenced by the fact that this latest net neutrality bill allows for private providers to offer private, managed services alongside broadband. I'm supportive of this idea not only because it retains greater economic incentives for private providers to invest, but also because I think there's a lot of innovation that's made possible in networked applications once we're able to do things like guarantee quality of service, which is currently impossible on the open Internet.

Unfortunately, by doing this we may be creating another problem, namely how do we make sure that private providers don't spend all their money upgrading the capacity of their networks for these private, managed services instead of offering more bandwidth to the public Internet?

This isn't an easy question to answer as private, for-profit businesses want to invest their money in the areas where they'll get the highest return. So if they're going to make more money off private, managed services, then what's their incentive to invest in the part of their network that turns them into a dumb pipe?

In some areas competition from multiple broadband providers has been enough to drive investment in increasing open bandwidth. But that dynamo of competitive investment isn't working everywhere.

At the same time, we can't ignore the reality that without competition driving this investment, private providers actually have a disincentive to invest in open bandwidth as the more open bandwidth that's available the more opportunity over-the-top services have to compete with the private provider's own managed services.

This most recent net neutrality bill does at least touch upon most of these issues, but its only solutions to insuring private providers are investing in their capacity to offer access to the public Internet are vague calls for providers to promise to invest in delivering as much bandwidth as possible to their subscribers.

At the same time, while it does allow for the possibility of private, managed services, it specifically bans the practice of speeding up some Internet traffic, which gets to the heart of what private providers want to be doing as a way to drive sufficient revenue to justify their investments in new capacity. Again, while I support the notion of preventing providers from slowing down traffic, I'm not quite sure why we're banning them from selectively speeding some up, especially when that marketplace hasn't even been given a chance to work yet as no one's really doing any of this. I fear policy's getting ahead of the market and technology on this issue, which is rarely a good thing.

So while it looks like we're starting to get to the point where we've at least got the issues that matter on the table, it doesn't seem like we're doing enough to acknowledge and address the basic realities of how any profit-driven enterprise works.

At the same time in the language of bills like this latest one on net neutrality, we're not doing enough to precisely define goals and set strategies for achieving them, but instead are wasting time merely wishing for good things to happen.

But I believe the time has come for change, for us to stop demonizing private providers for making decisions driven by the desire to generate profit--like it or not, that's their nature--and for us to stop writing legislation that's imprecise and more wishful thinking than specific policies.

Notice that I'm not saying we don't need net neutrality legislation. Nor am I saying we shouldn't be holding private providers accountable for how well (or poorly) they're serving America's communications needs.

Instead what I'm suggesting is that if we're going to continue down the path of relying primarily on a market-driven approach to private providers deploying and operating our country's broadband networks, then we need to be crafting policies that are informed by how they will impact the profit motives of these private providers. And then we need to find policies that reward the kind of good behavior we want to see happen with opportunities to generate higher profits.

Because as it stands right now, I'm worried that this net neutrality bill is taking away profit motive rather than adding to it, while at the same time not doing enough to protect the public's interest by insuring that a substantial portion of that investment is going to increase our nation's open bandwidth.

So despite the many hours of hard work that I'm sure went into crafting this latest attempt at net neutrality legislation, I'm afraid that we're currently set up to achieve a lose-lose situation.

That doesn't mean we should scrap the thing entirely, though. Later on this week I'm going to give some suggestions for how we could consider tweaking this to make sure that we're protecting both the public's interests as well as the profit motives of private corporations so we can insure they continue investing in our nation's broadband infrastructure.

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Comments (2)

I'm glad we don't have these fights over whether only Ford or Nissan cars can use the "good" lanes on the highway - the ones without the bumps or congestion. Why don't we? Because we don't give allow profit-maximizing companies to write the rules for how to use the highway.

Posted by christopher mitchell on August 14, 2009 3:18 PM

I'm much more worried about a private company's building a FTTP network in a community and then using its monopoly power to preclude that community's ever getting great first-mile telecom services at great prices than I am about that private company's not investing in FTTP because net neutrality rules forbid using its monopoly power that way.

I also worry that net neutrality rules aren't enough. What about open access? What about structural separation?

When municipalities implement FTTP systems, they are motivated to serve the public interest -- they don't have to be coerced by regulation into refraining from flouting the public interest.

Posted by Jeff Hoel on August 14, 2009 5:53 PM

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