Marc Andreessen on net neutrality

by on May 23, 2014 at 2:05 am in Economics, Law, Uncategorized, Web/Tech | Permalink

So, I think the net neutrality issue is very difficult. I think it’s a lose-lose. It’s a good idea in theory because it basically appeals to this very powerful idea of permissionless innovation. But at the same time, I think that a pure net neutrality view is difficult to sustain if you also want to have continued investment in broadband networks. If you’re a large telco right now, you spend on the order of $20 billion a year on capex. You need to know how you’re going to get a return on that investment. If you have these pure net neutrality rules where you can never charge a company like Netflix anything, you’re not ever going to get a return on continued network investment — which means you’ll stop investing in the network. And I would not want to be sitting here 10 or 20 years from now with the same broadband speeds we’re getting today. So the challenge, I think, is to accommodate both of those goals, which is a very difficult thing to do. And I don’t envy the FCC and the complexity of what they’re trying to do.

The ultimate answer would be if you had three or four or five broadband providers to every house. And I think you actually have the potential for that depending on how things play out from here. You’ve got the cable companies; you’ve got the telcos. Google Fiber is expanding very fast, and I think it’s going to be a very serious nationwide and maybe ultimately worldwide effort. I think that’s going to be a much bigger scale in five years.

So, you can imagine a world in which there are five competitors to every home for broadband: telcos, cable, Google Fiber, mobile carriers and unlicensed spectrum. In that world, net neutrality is a much less central issue, because if you’ve got competition, if one of your providers started to screw with you, you’d just switch to another one of your providers.

The entire interview is interesting, including his discussion of the Obama administration and the possibility of a fragmented internet.  By the way here is Marc on EconTalk with Russ Roberts.

1 Max May 23, 2014 at 2:57 am

You can imagine a world where building access networks is expensive, and you can imagine a world where lots of redundant access networks are built, but if you imagine both at the same time, then you’re not thinking clearly (or you’re blowing smoke).

2 dan1111 May 23, 2014 at 3:24 am

In other parts of the world (such as in Britain, where I live) there are many competitors for broadband to most homes. This is not just hypothetical.

And competition doesn’t automatically mean redundant capacity. It is not like there are five phone lines running to every house. All of the broadband providers use the same phone network at the most local level; their infrastructure is farther back. And if there are five companies providing internet in a city, each one of them is has less infrastructure than if there were only one company–since the infrastructure that is expensive is tied to the amount of bandwidth being provided.

3 andrew.vandever@gmail.com May 23, 2014 at 3:30 am

It’s not prohibitively expensive, but really you’re talking about two very different types of network building here. One is the network that connects into consumers’ homes, and the other are the “backbone” networks that connect those networks to other parts of the country and the world. The costs that Comcast and friends complain about and charge e.g. Netflix for are the backbone kind, not the end user kind. The lack of competition for the last-mile networks is mostly government’s fault: http://www.wired.com/2013/07/we-need-to-stop-focusing-on-just-cable-companies-and-blame-local-government-for-dismal-broadband-competition/

4 Dan Weber May 23, 2014 at 8:39 am

Building out often requiring greasing the right palms. Check out this guy http://seattletimes.com/html/businesstechnology/2023420101_briercolumn21xml.html who is the perfect example of everything that is wrong with trying to build an ISP. “Google wants to build here, and they have a lot of money, so we should get some.”

Google couldn’t build Google Fiber into San Fran because people said the boxes would be ugly.

It’s the NIMBYism and BANANA-mindset writ right down to the local level. Everyone gets a chance to bitch and hold up your project, so you have to pay them off.

It’s mostly an issue of localities getting exactly the government they deserve. If your city is managed decently, people can build infrastructure in it. If not, they can’t.

5 Rahul May 23, 2014 at 3:23 am

I thought this was quite a bold leap of logic: Net Neutrality → no return on network investment.

What’s the evidence for this? Telco’s have been investing in the network for decades now. Are there signs they are stopping? Besides, its not as if Netflix doesn’t pay. They do pay whoever runs the network to their datacenters. Or to Akmai.

6 dan1111 May 23, 2014 at 3:31 am

Ok, but isn’t net neutrality a limit to return on investment by definition?

The rationale is that we need to stop ISPs from implementing a charging model which will make them more money at the expense of consumers. In other words, net neutrality is an attempt to limit the companies’ return on investment for the sake of the greater good.

7 Max May 23, 2014 at 4:09 am

“Ok, but isn’t net neutrality a limit to return on investment by definition?”

No, return on investment is unlimited. It’s a constraint on the collection of economic rent.

8 dan1111 May 23, 2014 at 6:10 am

Well, I didn’t intend limit to imply a hard ceiling. Maybe “limit” wasn’t the best word choice. But it is definitely a policy that would reduce return on investment.

I’m not sure how you see this as a limitation on rent extraction. Net neutrality is the side of the debate that makes the market less free. Under such a policy, customers whose traffic might be more expensive than other traffic in a free market are collecting rent. Yes, ISPs in the U.S. are extracting rent in other ways, mainly through policies that limit competition. However, the answer to that is eliminating the restrictions on competition, not adding new regulations.

9 Rahul May 23, 2014 at 5:10 am

Yes, maybe, but we do that all the time, don’t we?

Say, my city’s (monopoly ) cab service decided that for every rider carrying an iphone it would send Apple a bill for 10 cents. If Apple refuses to pay cab service stops accepting riders possessing an iphone. As condition of carriage they add the right to perform a deep pocket inspection.

I’m wondering, would we allow them. Why not? Obviously they’d make more money (they think) by doing so. Why limit their return on investment?

10 dan1111 May 23, 2014 at 6:04 am

It is true that we do that all the time, and this in itself doesn’t prove that the policy is good or bad. But the fact that it does so was the premise of the post, and you seemed to be questioning that.

Your example doesn’t really work. It is outrageous not because of price discrimination against Apple or iPhone owners, but because iPhones have nothing to do with travelling by cab. In terms of analogies, the realm of transport is not very favorable to your argument, because there are all kinds of cases where we accept non-neutrality. You can pay FedEx more if you want your package (dare I say “packet”?) to arrive faster. Carpool lanes allow a favored class of commuters to travel more quickly. Airlines charge vastly different rates to different customers. Public transport often has off-peak fares. And so on. In many cases this non-neutrality is highly beneficial to the consumer.

11 NPW May 23, 2014 at 7:42 am

I don’t pay more to both receive and send a package faster through FedEx.

Carpool lanes are part of how politicians buy votes. I don’t see the correlation.

Airlines charge vastly different rates to different customers, yes, but there isn’t a charge to the ticket holder and to the person the ticket holder is about to visit.

And so on.

12 Rahul May 23, 2014 at 7:51 am

@dan111

Highway Patrol tells Toyota to pay a surcharge or it wouldn’t allow any Toyota models on the carpool lane. That’s the analogy you are looking for, I think.

Or United told Samsonite that unless it paid up all Samsonite branded luggage would be handled with low priority.

13 dan1111 May 23, 2014 at 8:13 am

@Rahul:

1) Toyota and Samsonite are not actually the parties that are travelling, making this analogy bizarre. The ISPs would only be charging actual users of the network.

2) You seem to be implying that all types of internet data are the same; thus, any preferential treatment would be blatant discrimination. But in fact, email is very different from streaming video; browsing the web is very different from file sharing. Different types of use have different bandwidth and performance requirements. Kind of like the difference between an urgent letter and a 3rd class package, or a freight train and a passenger train.

3) All of your examples are founded on the premise that ISPs will threaten to block content. This has never happened and is not plausible. What does happen currently is that ISPs manage content for the benefit of consumers, such as by limiting file sharing that would bog down the network. They also may negotiate special deals with large customers (such as the recent Netflix deal). Neither of these two is clearly bad for consumers (indeed, the former especially is quite beneficial), so net-neutrality proponents have to resort to claims about content being blocked.

14 dan1111 May 23, 2014 at 8:14 am

@NPW, what does being charged at both ends have to do with it? This is a reality of the internet and will still exist under any neutrality law that is passed. The point of the debate is charging different prices/offering different speeds to different customers and with different types of content.

15 derek May 23, 2014 at 8:20 am

No. It is a surcharge for extra luggage.

Netflix isn’t being targeted because of a name, it is targeted because it uses bandwidth, lots of it. It also has the characteristic, similar to electrical consumption, of everyone turning it on at the same time.

So the guy who shows up at 7am at the airport terminal with a dog, cello and complete model train collection in his luggage holds up everyone else who has a light carry on.

16 Rahul May 23, 2014 at 8:27 am

@derek:

I disagree. If the ISP wants to do bill based on total usage bandwidth they can go right ahead. Does it matter that I generated 20 Gigs of Netflix streaming traffic versus text file downloads?

But that’s *not* what the ISPs want to do.

When an airline charges you for extra luggage they weigh it. They don’t do a deep inspection to bill you differently for 20 lbs of Macy’s shopping versus 20 lbs of Walmart bags.

17 NPW May 23, 2014 at 8:35 am

@dan111

Consumers already pay extra for speed.

Charging both ends is not at all how the post office works or any of your other examples.

“The point of the debate is charging different prices/offering different speeds to different customers and with different types of content.”

Different consumers are already charged different prices/offering for different speed. And they pay extra for more speed. Charging consumers more indirectly through a content provider is not somehow better.

“Under such a policy, customers whose traffic might be more expensive than other traffic in a free market are collecting rent.”

Except that’s not how it works. Consumers must pay more, right now, in the current system for more bandwidth. There is no “collecting rent”. To get the speeds necessary for enjoyable video steaming consumers have to pay more.

Allowing Comcast/Verizon to hide their fees by permitting double entry charging giving the appearance of contect providers raising their prices, is not “highly beneficial to the consumer.”

18 dan1111 May 23, 2014 at 8:37 am

@Rahul, but not all 20 Gigs of usage are created equal. Netflix needs high speeds at peak times during the day to deliver its service. You don’t care if your 20 Gigs of text files take a little longer, so it doesn’t really matter if it goes a bit slow when you download it at 7pm. Thus, the Netflix service needs more infrastructure to support it, while your text files do not.

And of course, no one actually downloads 20 gigs of text files, which is a big part of the point. It is a certain kind of content that is driving the bandwidth explosion.

19 dan1111 May 23, 2014 at 8:40 am

@NPW, the problem here is that Netflix is also a customer of the ISP. Charging Netflix more for bandwidth is exactly the same as charging residential customers more. But apparently one is ok and the other is not.

20 Rahul May 23, 2014 at 8:43 am

@dan111:

Do you really think Netflix gets to put its gazillion packets on the internet without paying any Telco / ISP?

21 NPW May 23, 2014 at 8:47 am

@Dan111
“Charging Netflix more for bandwidth is exactly the same as charging residential customers more. But apparently one is ok and the other is not.”

Except they already do charge Netflix more, just like they do residential customers.

They want more money to prevent competition to their entertainment business, not to get profit from their internet infrastructure.

22 dan1111 May 23, 2014 at 8:55 am

@Rahul, I am aware that Netflix already pays. The point is, different kinds of content have different costs, even on a per-unit basis.

23 derek May 23, 2014 at 10:18 am

Rahul: More like showing up with a dog you want to ship on the airplane than the equivalent volume weight in bedding.

Video streaming requires more than bandwidth. It requires low latency high quality bandwidth. The cable companies have provided that very thing for years, reliably and well. The internet protocols are used for streaming only because it can use existing pipes, but only to a point.

When Netflix becomes a substantial proportion of the used bandwidth, which it already is, the people providing the pipe and are expected to invest in the infrastructure to make it work can say with some justification that the pipes and services are already there, work far better and have for years. The only reason people are using Netflix is because it is very cheap. Not a problem when Netflix is small, but why should the pipe providers be expected to invest in something that doesn’t work very well, replaces an existing and working infrastructure, and causes them to lose revenue to boot?

Because they should be kind and good and contribute to some universal karma bank?

If you want to argue that price fixing is a good strategy to promote investment and innovation, go ahead.

24 Emil May 23, 2014 at 12:34 pm

Derek, I fully agree with the thrust of your argument but you are wrong to say that IP protocols are not the most efficient delivery mechanism for streaming. Cable is a multicast technology whereas streaming is unicast (just like browsing or emails). Even on cable networks the video on demand will typically be delivered inside the IP DOCSIS stream. Broadcast and streaming video content are two completely different beasts for a network

25 Dan Weber May 23, 2014 at 8:42 am

A lot of very different definitions get shoved into the term “net neutrality.” In the past few days I’ve had people seriously suggest that net neutrality requires ISPs to never let their peering points reach capacity.

26 Rahul May 23, 2014 at 8:46 am

Yeah, the confusion / misinformation surrounding this debate is mind boggling. We have people here in comments thinking Netflix gets to push millions of TCP (UDP?) packets onto the internet for literally free. Sigh.

27 Komori May 24, 2014 at 12:46 pm

It’s not mind boggling, it’s purposeful. Once this debate started the telcos immediately started using the term “network neutrality” in ways the original proponents hadn’t meant, in order to create just this confusion.

It’s a common political tactic these days. Makes it much harder to have reasoned debate and popular support if no-one involved is using the term in the same way, and as long there are some people benefiting from the status quo, they’ll take advantage of it.

28 david May 23, 2014 at 3:27 am

If you’re a large telco right now, you spend on the order of $20 billion a year on capex. You need to know how you’re going to get a return on that investment. If you have these pure net neutrality rules where you can never charge a company like Netflix anything, you’re not ever going to get a return on continued network investment…

surely these are costs for the privilege of being a tier 1 ISP: you are obligated to invest enough so that you can maintain settlement-free peering if the other guy decides to dump more traffic on you

29 Emil May 23, 2014 at 12:37 pm

No, that’s not how it works. Peering is free between equals (broadly similar generation and consumption of traffic). Entities that are not equal but that are i stead skewed in their traffic balance have to (and have always had to) pay for IP transit

30 prior_approval May 23, 2014 at 4:32 am

Well, this is wonderfully America-centric – ‘f you also want to have continued investment in broadband networks’

Somehow, all of the countries with better broad band networks than the U.S. (here’s a list – http://www.bbc.co.uk/news/magazine-24528383 with prices/speeds) were able to construct them using what was previously considered the only model that the Internet employed – packets are handled without preference (yes, UDP, yes…)

Watching the train wreck that is the U.S. is fascinating – as with its health care system, America’s broadband infrastructure is considered woeful by those living in countries where American practices are unknown.

Like those forced to suffer with faster and cheaper brodband outside of the U.S. being able to choose between multiple Internet providers. Providers required to compete on a basis of price and quality. Not the U.S. cares about that in practice, in the age of the excuses for why a CEO needs another bonus for increasing a company’s potential monopoly power at the expense of its customers. But why argue about theories when a real trainwreck is happening in such public view.

31 dan1111 May 23, 2014 at 7:16 am

Agreed about the woeful state of American broadband competition.

However, if you are going to argue from “what has worked so far”, the overwhelming conclusion would be that net neutrality laws are not needed. The internet has successfully developed without laws enforcing neutrality, either here or in Europe (except for very recent laws in a few European countries). Content has not been blocked (by the ISPs, that is–EU courts are another matter) or given preference in a way that harms consumers.

Proponents of neutrality are speculating about changes that will come as the internet expands. But this expansion will also mean new infrastructure needs. Thinking about such a law’s effect on building future infrastructure is perfectly legitimate.

32 Dan Weber May 23, 2014 at 8:50 am

San Francisco ISPs suck because of San Francisco government.

http://pando.com/2014/02/25/having-being-burned-once-before-google-wont-bring-fiber-to-san-francisco/

In New York City, Blasio has called equal access to FiOS an issue of “economic justice.” Who in their right mind would want to enter that quagmire? Take your investment dollars and go elsewhere. Go fund the next twatbook or whatever.

33 CW May 23, 2014 at 10:19 am

prior_approval: I am actually very interested to see where the European end user consumer last mile Internet access services market will be in 5 years or so, because some of the rules being proposed and passed over there don’t seem to make a heck of a lot of sense to me if I’m an ISP trying to make money from my investment in the last mile infrastructure. I’m talking about enforced “net neutrality” regulations (enforced by a huge regulatory army) and caps on charges which can be recovered by ISPs from their end users for these services…. doesn’t seem like a very healthy mix to me, from a future investment on last mile network perspective.

34 derek May 23, 2014 at 10:22 am

http://www.michaelgeist.ca/content/view/6905/125/

OECD Report Confirms What Canadians Have Long Suspected: Wireless Pricing Among Highest in the World

What everyone needs is a government who cares.

35 Dan Weber May 23, 2014 at 10:45 am

Someone pointed me at this the other day to try to show how much US download speeds suck: http://www.netindex.com/download/allcountries/

But there is no country with faster download speeds bigger than the US. The biggest country that is above the US in speeds is France, which is less than 1/10th the size of the 48 states.

Akamai regularly ranks countries by actual speeds, based on their own measurements. The US does decently in these lists. It will never match Singapore or South Korea, though.

36 dan1111 May 23, 2014 at 10:54 am

It would be interesting to see how a part of the U.S. with similar population density to some of those other countries would compare.

Still, I do think removing barriers to competition would help the U.S. in this area. As an American who moved to Britain, this is one of few services which is better and cheaper over here–the other main one being mobile phone service. Of course, higher population density helps both of these, but Britain also has many more companies competing in both sectors.

37 Dan Weber May 23, 2014 at 10:59 am

In the US cities, it varies a lot based on local government competence.

De Blasio hired a civil rights lawyer to force Verizon to provide FiOS to low-income households.

This is a signal to other players run away as fast as possible.

38 JWatts May 23, 2014 at 3:31 pm

“America’s broadband infrastructure is considered woeful by those living in countries where American practices are unknown. ”

Average American broadband speeds are on par with Average EU speeds.

According to this report the US is ranked 10th in the world. And it’s speeds were substantially better than Germany by the way.
http://www.xconomy.com/boston/2014/04/23/u-s-10th-in-average-internet-speed-rankings-s-korea-still-no-1/

39 Rationalist May 23, 2014 at 5:06 am

I don’t understand this:

“you can never charge a company like Netflix anything, you’re not ever going to get a return on continued network investment”

The companies can charge consumers more for faster speeds. Therefore they get a ROI for providing better speeds. This is especially true if there is competition.

I seriously don’t understand why charging customers more money for better speeds doesn’t constitute return on investment…

40 Anon. May 23, 2014 at 5:39 am

>If you have these pure net neutrality rules where you can never charge a company like Netflix anything, you’re not ever going to get a return on continued network investment

I don’t get this argument. Why can’t they make a profit by charging their customers instead of blackmailing third parties?

41 Curt F. May 23, 2014 at 6:07 am

Who is a third party? I think they want to be able to charge all their customers, regardless of whether they are consumers.

I’m no expert on net neutrality, but as I understand it, it’s a bit like arguing that if you pay for a post office box, then the post office should never be able to charge anyone who wants to send you mail any money, because you the consumer already paid for access to the network.

42 NPW May 23, 2014 at 7:34 am

The post office does not require both the sender and receiver to spend money to get the package moved faster.

I paid for my post office box and my computer, so in both instances I’ve paid for end terminal. I’d be happy to have the payment scheme the same, where each party, sender or receiver, is only paying for one direction.

I would not be happy if I paid to mail a package overnight and then the receiver had to pay additional costs to avoid waiting a week to get the package.

43 Rahul May 23, 2014 at 7:54 am

Ironically, in the Internet’s case both sender & receiver are *already* paying. Netflix sure pays humongous amounts to TelCos to get network links at the sending end. How else would it upload the movie streams on to the internet?

44 Dan Weber May 23, 2014 at 8:55 am

Funny you bring up the post office.

In new neighborhoods, the post office will only deliver to one centralized box for a street. My parents, just outside Detroit, get mail delivered literally to their door. My sister, in a super-nice suburb an hour or so out of Boston that costs a multiple, has to drive to her mailbox.

This neighborhood could easily afford to pay more for actual home delivery. But there are some kind of rules restricting that, so the receiving of mail is much less convenient for them.

45 JWatts May 23, 2014 at 3:33 pm

“I would not be happy if I paid to mail a package overnight and then the receiver had to pay additional costs to avoid waiting a week to get the package. ”

The US post office does charge extra for expedited delivery.

46 Herb May 23, 2014 at 7:39 am

Curt, your understanding is not very accurate. “Net neutrality” has little to do with who’s paying. It’s about the routing of information. To use the post office analogy, it would be like the post office offering to deliver your letter faster for an extra fee….but putting your letter on the same truck as everything else.

That is to say, Marc Andreesen is on the right track when he’s talking about net neutrality as a way to guarantee a return on investment. It’s less about building a better internet than shielding telcos from the risks associated with investment.

Consider: If a telco never need worry about losing money on a dunderheaded investment, how will a “bad” telco ever fold?

47 dan1111 May 23, 2014 at 8:19 am

I don’t understand the “putting it in the same truck” part–ISPs really do offer faster speeds for higher fees. So it is more like the post office charging to deliver your letter faster, and then actually delivering it faster. This is what the post office already does (at least in theory, anyway) and no one thinks it is unjust.

48 Dan Weber May 23, 2014 at 9:00 am

The fear is that the ISPs will just let service degrade for “normal” users while delivering the traditional level service to the new “premium” users.

I trust ISPs as far as I can throw them. This doesn’t necessarily mean that every idea that people shove into the “net neutrality” tent is a good one. I don’t think there’s a problem with people paying for more faster service, or for the ISP giving preference to certain kinds of packets (my neighbor’s VoIP packets need better service than my download of the latest Unbuntu .iso). But I don’t want ISPs throttling services that compete with the ISPs own video or phone offerings.

49 JWatts May 23, 2014 at 3:36 pm

“But I don’t want ISPs throttling services that compete with the ISPs own video or phone offerings.”

Now, this I definitely agree with. And if the proponents of Net Neutrality had stuck to just this issue, they’d probably have gotten a regulation to that effect passed years ago.

50 Silas Barta May 23, 2014 at 6:48 pm

It’s more like saying, “If you order a bunch of packages from Amazon, they shouldn’t be held up in preference to packages from the ISP’s crappy InstaShop service.”

Should they?

51 buddyglass May 23, 2014 at 6:41 am

“If […] you can never charge a company like Netflix anything, you’re not ever going to get a return on continued network investment”

Couldn’t you steal share from your competitors given consumers prefer faster networks? There’s a large up-front cost but in exchange you steal some amount of recurring revenue. Or does the math not work out such that it’s a profitable play?

Say I’m paying $50/mo for 6 Mb/s DSL. Google (or whoever) comes along and offers 1000 Mb/s for $70/mo, 50 Mb/s for $50/mo or 8 Mb/s for $30/mo with no contract. Tack on a large-ish connection fee to defray the up-front cost of the network build out and discourage customers from immediately switching to a competitor if one comes out with a better deal. Say $240. Then offer an option where, with a 2 year contract, a customer can spread the connection cost over the course of the contract in the form of a $20/mo fee.

As the consumer I have little reason not to switch. For $30/mo + $20/mo connection fee I can get better service than I have now (8 Mb/s vs. 6 Mb/s) at the same monthly cost. At the end of 2 years my price drops by $20/mo at which point I can either pocket that cash or upgrade to the next tier and get vastly better service for the same monthly cost.

This must not be profitable (given the current regulatory landscape) or I’d expect Google to be doing it more places than the few pilot Fiber programs they’ve done so far.

52 dan1111 May 23, 2014 at 8:30 am

Why is it ok to charge a consumer more for faster speeds, but not ok to do the same to Netflix?

53 NPW May 23, 2014 at 8:44 am

Is your understanding of the internet that Netflix has a hookup that it doesn’t pay for?

Do you really think that Netflix doesn’t pay to connect to the internet?

Do you really think that they don’t pay for faster speeds, just like everyone else?

Upload/download speeds are on there for us all.

Netflix pays for its access, its speed, and its ability to stream. Consumers pay extra to be able to steam video.

54 dan1111 May 23, 2014 at 8:58 am

Huh? When did I say otherwise?

55 Dan Weber May 23, 2014 at 9:11 am

Everyone loves analogies. Here’s another one:

People in my neighborhood order things from Amazon. The UPS trucks come into my neighborhood. Everyone is happy.

Now, 20% of people in my neighborhood start ordering tractor trailers from Amazon. They are delivered on giant trucks that necessitate repaving the street every 4 months. So my neighborhood starts charging the giant trucks to enter my neighborhood. The people ordering their tractor trailers bitch because they are already paying for the street upkeep through their taxes.

It’s useful to compare ISPs to water or electric utilities. But you have to realize the differences as well as the similarities. Usage patterns for water or electricity are very stable. Me and most of my neighbors fall within 20% or so of each other. But network usage can easily vary by orders of magnitude.

Also, a big difference from the water company is that the ongoing costs to an ISP are not based on how much the resident consumes. Once a network is built, the cost to move bits around it is a rounding error. The real cost is the fact that the ISP needs to keep on putting out more and more infrastructure, so that two years from tomorrow at 7pm when everyone wants to watch The Avengers 3 on Netflix, the network can handle it.

(BTW, I’m not saying that ISPs require no regulation. I don’t trust them to look beyond their own self-interest.)

56 buddyglass May 23, 2014 at 10:17 am

Without addressing the rest of your analogy…

“Me and most of my neighbors fall within 20% or so of each other. But network usage can easily vary by orders of magnitude.”

Water usage especially can vary by an order of magnitude among users in the same utility area. One guy lives in a high-rise apartment with minimal landscaping-related irrigation. Other guy lives in a single-family dwelling with 10,000 sq. ft. of St. Augustine turfgrass. And let’s say they both live in an area that’s experiencing drought conditions, meaning almost all of that lawn’s water requirement will come from the utility (as opposed to the sky).

Electricity usage is more linear, but in hot areas where everybody has A.C. and runs it for 7 months out of the year (and where many people also use electricity for heating) usage will vary roughly linearly by the sq. footage of someone’s home. Not quite an order of magnitude, but the 6000 sq. foot guy will probably use about 5x the electricity of the 1200 sq. foot guy.

“Once a network is built, the cost to move bits around it is a rounding error.”

Out of curiosity, how much does backbone bandwidth cost? If I stream 300 GB/mo of content from China, how much would that actually cost Time Warner (or whoever) in terms of what it pays for access to upstream networks?

57 Dan Weber May 23, 2014 at 10:32 am

This is a few years old, but 300GB/mo is, very roughly, 50 bucks.

https://josephscott.org/archives/2009/01/how-much-does-one-terabyte-of-bandwidth-cost/

That’s a 24-7 usage of just under 1 megabit per second if I did my math right. (300 * 1000 / 30 * 8 / 86400)

58 Rahul May 23, 2014 at 10:38 am

@buddyglass:

It’s an interesting question. It’s tricky to calculate because your the ISP gets billed by upstream not on the basis of GB of data but rather on the link bandwidth (I think). e.g. If Time Warner buys a 1 Gbps link to upstream it pays whether the link runs full or not.

I think the links sell for ~ $1 per megabit (in say NYC, small towns might be higher) but costs are dropping very rapidly (~20% a year). I’ve no clue what average utilization factors of these links are (I bet quite poor since they must size them for peak hour congestion).

But say you had a 20% avg, utilization, it still comes to less than a cent per GB I estimate. So 300 GB/mo of usage shouldn’t cost your ISP any more than $3 tops as fees to the upstream tier.

I could be wrong. But was an interesting calculation.

59 buddyglass May 23, 2014 at 10:46 am

“This is a few years old, but 300GB/mo is, very roughly, 50 bucks.”

I suspect its much, much lower. Not only because that link from 2009, but also because it reflects how much cloud companies charge to their own customers. So their margins, whatever they are, are built into those prices. But I’ll admit I have no data to back up that suspicion. That said, the cost isn’t zero. Just curious how “non-zero” it is. Is the cost differential between a 10 GB/mo customer and a 200 GB/mo customer really very significant relative to the ~$50-70/mo each of them is paying?

60 Dan Weber May 23, 2014 at 11:07 am

For the water company, the house that uses 10x the amount of water really puts 10x the cost on the system. (There is maintenance of the pipes and capital costs of the initial construction.)

But not with the ISP. Even at the prices I quoted — which I agree are high for the reasons you say — a GB is around 5 cents. 10GB is 50cents, 200GB is $10. So I feel safe saying the 99th percentile user isn’t costing more than 10 dollars a month in direct bandwidth costs.

The big ongoing costs to the ISP is constantly building more stuff.

61 buddyglass May 23, 2014 at 12:15 pm

“For the water company, the house that uses 10x the amount of water really puts 10x the cost on the system.”

Not so sure. First there’s the last-mile issue. Both a 1200 sq. foot home and a 6000 sq. foot home need a pipe running to them. Is it 10x as expensive to install a “large” pipe to a 6000 sq. foot home as it is to install a “small” pipe to a 1200 sq. foot home? Probably not. Then there’s the ongoing maintenance. Is the degradation of water pipes linearly related to the amount they’re used, or do they just decay with time? Is it 10x as expensive to repair a “large” pipe as it is to repair a “small” pipe? Etc.

An interesting facet of utility pricing, though, is that its progressive. The rationale is that we don’t want anyone to be unable to afford electricity and water. So the first X units consumed at priced one way, then the price-per-unit increases the more you use. Someone who uses 10x as much water as a “normal” household is almost surely paying more than 10x the price. (At least, for the last unit used.)

Imagine the freak out if network providers started using this pricing structure. It would no doubt result in more users, since low-bandwidth consumers would less (relatively) than they do today. Their discount would be subsidized by high-bandwidth users.

62 derek May 23, 2014 at 9:38 am

That is a red herring. Netflix pays for it’s pipe out of where ever they have their servers. It is provided by whoever they buy it from. If I connect to Netflix, the bandwidth is provided by whoever I buy it from. Vastly different cost structures, business models and technical challenges.

63 buddyglass May 23, 2014 at 8:51 am

I’m not necessarily arguing that it is. My comment was purely questioning whether its truly not worth the providers’ time to build out new networks if they’re prohibited from charging content providers.

To your question, though, I’d say it’s not okay to charge Netflix if a regulatory structure in which network providers are allowed to charge content providers results in an equilibrium that is inferior (from the consumer’s perspective) than the one that would exist in the scenario where this is not allowed.

It may be that the consumer (or, possibly, certain consumers) are no worse off under the scenario in which network providers are allowed to charge content providers. If that’s the case then I’m fine with it.

64 Komori May 24, 2014 at 12:55 pm

It’s apparently not worth the providers time to build out network improvements under any circumstances (barring Google Fiber moving in). They’ve been paid billions in federal money to do just that, and the improvements paid for never happened, after all. If they won’t build under those circumstances, almost nothing suffices.

The only reason Google Fiber is causing any change is because they’ve got the size, pocketbook, and legal power to brute-force their way through the regulatory restrictions. I live in Austin, so it’s been very instructive to me how things have played out. Google Fiber announces their selection. AT&T follows up by announcing “GigaPower” (really just 300 Mb)… but only in the exact areas Google is building out. Then Time Warner and Grande jump on the bandwagon, with the same restrictions.

It’s obvious only competition is going to force any of the telcos to improve, and the regulatory barriers make it nearly impossible for competition to happen in the first place. If that’s not addressed, then the telcos are an oligopoly with local monopoly bonus, and heavy regulation is the only way to keep them from becoming (staying) rent factories.

65 CW May 23, 2014 at 10:14 am

Exactly. There is investment on the last mile, and there is investment on the backbone (and regarding backbone, I’m referring to domestic and international btw, because many of the larger companies will be international in scope). Companies that invest in the IP backbone are doing so to make money, and that’s not bad or evil. It’s a net good.

And please: everyone who is conflating the last mile marketplace with the IP backbone marketplace, you need to be very very careful because they’re not the same thing.

66 Silas Barta May 23, 2014 at 6:49 pm

Because the former doesn’t discriminate by traffic origin, thereby encouraging rent-seeking from the most deep-pocketed content providers.

67 andrew' May 23, 2014 at 6:44 am

Obama=opportunist

Accepting apologies and congratulations presently. But hurry time is running out.

68 Mesa May 23, 2014 at 10:41 am

I think there are a few interesting points here:

1. If you charge for internet services by integrated bandwidth used (Gbytes) (not peak potential speed Mbytes/sec or other measures), should both the sender and receiver share the cost somehow or is that “double dipping”? (Answer: Yes, since they both benefit, and it’s almost impossible to just charge on side.)
2. Is is fair to charge more for bandwidth used during peak times? (Answer: Yes since it will allocate resources more efficiently. This is done with electricity prices in the SW US for example during peak air conditioning hours).
3. Is it fair to give large customers volume discounts on bandwidth? (Yes if it is cheaper to service those accounts. Again there is an analogy with commercial electricity users).
3.5 Is it fair to charge very large customers more if they are 80% of your usage for business risk issues if you need to invest in infrastructure that would not be used if they went out of business? (Yes. Just like any other business)
4. Is is fair to charge different amounts for different types of data? (No, unless there are latency, speed, peak or other actual costs. This should be the main point).

Charging for integrated bandwidth. charging for peak use, charging for quality of service (latency), appropriate discounts for normally large users, potential surcharges for very large customers Doesn’t this solve the problem?

69 Mesa May 23, 2014 at 10:43 am

And it goes without saying that either there needs to be competition in these priced markets, or it should move to a regulated monopoly. The unregulated quasi-monopoly solution is where you don’t want to end up.

70 Ian King May 23, 2014 at 10:44 am

If ISPs were permitted to charge not just consumers, but also content providers, two things would happen. 1.) Innovation on technology to implement more efficient services would increase, and 2.) The average Internet user would no longer be forced to subsidize bandwidth gobbling services such as 4K video that benefit only the most wealthy amongst us. The limitations of the human eye limits the benefit of 4K to those that have homes large enough to install gigantic home theaters.

71 Nathan W May 23, 2014 at 12:35 pm

Without net neutrality the deepest pockets get fastest service.

That’s a loss for small operators. That’s a loss for innovative people who haven’t yet made it. That’s a loss for democracy, because it formally institutionalizes the legitimate use of technologies which shape the speed of web traffic. It can and will be abused (already is, and it’s not even legal yet).

If big companies with deep pockets build networks a little more slowly as a result, then that’s perfectly fine by me.

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