The Internet Distinction

(From Benoit Felten’s blog and Communications Chambers)

Developments in Europe . . . Benoit Felten, A Slap in the Face of Net Discrimination Lobbyists:

Under the title Are Traffic Charges Needed to Avert a Coming Capex Catastrophy?, economist Robert Kenny builds a systematic refutation of the AT Kearney paper. Kenny disects each of the arguments that forms the AT Kearney reasoning and breaks each one of them down with clinical precision.

The starting point of Kenny’s piece is potentially the most important one: that the need for a change in traffic management is taken as a postulate by AT Kearney and in no way demonstrated. This to me is the most important messages for policy makers and regulators: before meddling with internet traffic management, make sure you understand exactly what is happening, don’t take anyone’s word for it.

From the Introduction to Robert Kenny’s rebuttal:

The net neutrality debate is now gathering steam in Europe, both at the Commission level and in member states. Against this background, four European telcos commissioned a report from AT Kearney [ATK], to support their opposition to net neutrality regulation. This report, A Viable Future Model for the Internet, claims that carriers are facing ballooning capex requirements to fund the growth of internet traffic and that the best way to address this structural problem is via traffic charges to online service providers [OSPs].

If massive capex is required, and this needs to be recovered from OSPs, that would be a significant argument against net neutrality regulation, since it would necessarily end the principal that consumers could access any (legal) site they wished – ISPs would block access to sites that had not paid the charges the ISPs had chosen to impose.

Broadly the logic of ATK’s report as follows:

• Telco investors are already seeing lower returns than investors in other players in the internet value chain
• Telcos face ballooning capex
• This capex is unsustainable
• OSPs are not contributing to the costs of traffic
• In a two-sided market, both sides pay
• Traffic charges are necessary because otherwise OSPs have no incentive to constrain traffic costs
• OSPs can easily afford increased charges
• Increasing retail prices will be challenging
• It is practical to implement traffic charges to OSPs
• Enhanced quality services can be introduced without degrading the basic internet

However I believe both its starting assumptions and its logic are open to significant challenge. This paper reviews the ATK report, from technical, economic and regulatory perspectives, and makes the case that ATK’s conclusion (that the best way forward is traffic charges to OSPs) is not at all well-founded. I consider in turn each of the logical steps above.

Note that the focus of the economic analysis in this paper is primarily on fixed networks, though the qualitative arguments apply equally to both fixed and mobile networks.