Explaining to CNET why NN is a subsidized rate for online giants #4

This is a continued CNET thread on why NN is a special low rate for online giants. 

Logical analysis and proven expertise

Posted by Scott Cleland (See profile) - July 11, 2006 9:21 AM PDT


Thank you for acknowledging that any legislation/regulation “needs to be carefully crafted” and that there can be “unintended consequences.” That is precisely why broadband providers are so concerned about net neutrality. The language is very sloppily drafted and very open-ended. They rightfully fear that bad, open-ended legislation in the wrong hands could be devastating. They learned the hard way in seeing what former FCC Chairman Reed Hundt did with clear de-regulatory language in the 1996 Telecom Act; he turned the intent on its head and pursued hyper regulation that took a decade of legal decisions to fix.

I used the word “decode” purposely because these issues, and the legislative and regulatory process sure are complex. If you review my background, http://www.netcompetition.org/docs/about/#chairman , you will see that I have testified as an expert witness before all of the subcommittees that you cite – on a variety of forward looking matters. You will also see that Institutional Investor named my firm and my telecom analysis as the Best Independent research on telecom in 2004 and 2005. I mention this because for over fourteen years, Congress, regulators and top investors have sought out and relied upon my forward-looking analysis.

From your writing, you appear to be a literalist, if you don’t see something in the plain language -- it must not exist or at worst be a “lie.” Have you bothered to check how this language fits in the broader context of previous legislation or legal precedent? Have you put it in the political context of who drafted the language, what their concerns are and what they were trying to achieve? Are you aware of how the existing marketplace operates and what this legislation would practically change? Have you compared it to similar language in other industries to understand what it would likely mean in practice? Have you thought about how a Republican and a Democrat could interpret the same language in very different ways? Surely you are aware that there are regulators and courts that must “interpret” this potential law? Would it be important then to understand how those processes work as well?

Does experience and expertise have any value in this context? I wish the legislative and regulatory process was so obvious and simple that any reporter could read any language and immediately be able to conclude definitively what it means. My background and expertise do give me a leg up on understanding the real world implications of this badly drafted, and open ended NN legislation. I openly admit that this is very difficult analysis to do with a huge amount of variables involved. That being said, I trust my expertise more than yours on this subject.

For practical purposes I am focusing on just the Snowe-Dorgan Bill because it is the only language potentially in play. The House bills and Wyden’s bills have been rejected or supplanted.

Let me explain why this NN language very much about a “special low government-set rate” for the online giants.

First, we all pay a competitive rate for the bandwidth we use. If we want more speed we pay more for a faster connection. Those who want more pay more. That’s competition and a free market. The fight over net neutrality is not about the average user. It’s about whether those who use the Internet the most – will end-up paying the least -- relatively.

The online giants: Google, Microsoft, Yahoo, eBay and Amazon, are the companies that use the Internet the most and benefit the most from it. All but Amazon enjoy 80-90% gross profit margins. These are also the only companies that have the scale and distribution to crash the Internet through mass distribution of video over the Internet. If you question this assertion/risk, ask Microsoft why it did not allow open downloading of the beta test of its new Vista system over the Internet. It legitimately feared that mass downloads of that much bandwidth load would clog the Internet for everyone.

The shift to video is a big deal for the future performance of the Internet for everyone. Did you know that one 2 hour HD video is the bandwidth equivalent of 35,000 emails? The current Internet was designed and priced for web surfing and emails. Currently a small minority of Internet users using video peer to peer are consuming most of the Internet’s available bandwidth. The problem is that the online giants want to earn all the profit off of distributing video over the Internet in the future, but shift all the new incremental cost to broadband providers and users.

How do I get to a special low government rate? The online giants advocate that consumers should pay the competitive rate for the bandwidth they use – meaning that the consumer should foot the whole bill. On the other hand Snowe-Dorgan in Section 12(a)(5) explicitly says “…without charge for such prioritization.” Have you thought through what the implication of that prohibition means in the real world? It practically means that those companies that want to use the Internet for mass distribution of video in the future should not have to pay anymore than they do now. The result is a special low rate -- care of government legislation that effectively subsidizes the cost of distribution of the biggest Internet users by getting everyone else to pay for it. It is a “Socialized-Internet” where Government is deciding what people pay, not usage or market forces.

Let’s use the ever popular highway and toll road analogy. Essentially what Snowe-Dorgan would allow, is that new trucking companies (i.e. the online giants wanting to distribute mass video) could put thousands of times more wear and tear on the roads (Internet) than anyone else … and not have to pay anymore than they did before.

The effect of well-intentioned “non-discrimination” language is to set up an implicit subsidy system where the light users (the average consumer) HUGELY subsidize a handful of the largest Internet users -- the online giants. Sounds effectively like a low government rate for bandwidth to me.