The economics of Net Neutrality

I haven’t really blogged much about digital rights here recently, mostly because the majority of my digital rights content at the moment tends to be published over at ORGZine. So here’s a little piece on the economics of Net Neutrality.
The story so far: Net neutrality is the idea that ISPs should treat all traffic equally, as zeroes and ones, rather than differentiate based on the content those zeroes and ones represent. Proponents of net neutrality believe that all users should have equal access to the net, regardless of the type of content they are viewing, the sites they are visiting, the platform or device they are using. If I can install Linux on a badger and want to use it to indulge my kink for Hansard, then I should be able to do that, without interference from my ISP.
Opponents of net neutrality, on the other hand, believe that ISPs should be able to discriminate against or prioritise certain traffic based on content or other factors. This would allow ISPs, for instance, to prioritise traffic from certain content providers, or to sell different packages based on content (much, for instance, like Sky TV does). They argue that the free market will work it all out in a way that is fair and efficient, that there is no need for regulation. My colleague @robcoh has a fun model for this. He calls it the Ryan Air principle: if you don’t have checked luggage, or use the toilet on the plane, why should you pay for it? Equally, if there is a part of the internet you don’t use, why should you pay your ISP for access to it? Rob would quite like a Sky-style internet access package. Other customers may have a need for other types of packages – demand and supply will sort all of that out.
Now, one of the three things I learned from my economics degree (I’ll tell you the other two some other time) is neatly summarised by the following stat: Out of said three-year degree, we spent one week learning how the free market worked, and the remaining time learning about all the ways in which it doesn’t. I therefore tend to approach “free market” arguments with a dose of suspicion. There’s a lenghtier economic argument to be made here, with reference to differences between perfect and free markets, rent-seeking, and the commoditisation of internet access, but I’ll leave that as an exercise for the reader. Here are just a few reasons why I am firmly in the camp of net neutrality proponents.
Firstly, ISPs aren’t content providers. They are infrastructure providers. If you’re an online gamer, an iTunes customer or a Netflix user, you’re already paying the content provider. ISPs implementing Rob’s Sky TV/Ryan Air model would be a bit like the council (which maintains the roads) charging you extra for your road usage depending on whether you’re going to the cinema or to the shopping mall. Now, there are good reasons why that is an incredibly attractive thought for ISPs. Infrastructure is a commodity, and commodities don’t exactly carry a lot of profit with them. Bandwidth from TalkTalk and bandwidth from BT are pretty much identical, so the lowest price wins. Content, on the other hand, is “value add” – you can differentiate your product based on content and therefore charge a premium.
Secondly, if your ISP drops Net Neutrality in order to give some companies preferential traffic, you are being ripped off. You are paying for your broadband. The content provider is also paying your ISP for the privilege of delivering their content to you faster. One of these payments is pure profit for the ISP. That is very far from the free market as defined by economists.
Thirdly, there are issues with anti-competitiveness here. Let’s say Sky – which is both an ISP and a content provider – decides that its ISP arm will prioritise traffic from its content arm over other content. That is clearly anti-competitive – a bit like Microsoft bundling Internet Explorer in with Windows, for those of us old enough to remember. In a more general case, it also creates barriers to entry and innovation. If the Next Big Thing in Web 3.0 can’t get off the ground because it can’t afford to pay ISPs to prioritise its traffic, you have a serious issue that has negative impacts well beyond just that one service.
Finally, there’s a public interest argument here too. Connectivity is rapidly becoming a utility, an essential part of our infrastructure, like water, electricity, gas and transportation. Some countries in Europe are actually going as far as legally defining internet access as a human right. These days, the inernet is a key tool for accessing education, employment, government services, and for participating in society and democracy. Compromising Net Neutrality would compromise all of those things. You can call me a communist if you want, but those are not things I’m prepared to just auction off to the highest bidder. Or would you think it’s okay for the water company in an emergency to prioritise supply to those who can afford to pay more?
There is a flip side to all this. Broadband, like infrastructure investment of any kind, doesn’t come cheap. I am told by people who work in the industry that the major ISPs who put out for the actual physical infrastructure are still waiting to make their money back on investments from the 1980s, which is why they’re so reluctant to lay any new cable and therefore why there are still large chunks of the rural Britain on dial-up. One of the major issues is that there are massive positive externalities associated with having a proper broadband infrastructure: lots of knock-on benefits for all kinds of people and society as a whole which are so indirect and dispersed that ISPs can’t monetise them. There are entire new industries which could not exist without that infrastructure, but it’s difficult to make everyone who benefits just from the fact that broadband exists (rather than from their specific usage of it) pay for those benefits. So in some ways ISPs carry the cost, while the rest of us reap the rewards.
Externalities – both positive and negative – are a form of market failure. They’re simply things the market doesn’t naturally deal with. There are a number of ways of addressing them, generally involving government intervention. So there is a strong case for the government to lend a helping hand when it comes to provision of connectivity infrastructure. Studies have shown that investment in connectivity can pay back up to ten-fold, and while that number is probably exaggerated, the payback is still very significant. It’s hardly likely, however, that this particular government would invest in anything, and so we’re stuck with the Net Neutrality debate instead.

2 thoughts on “The economics of Net Neutrality

  1. Marc

    “My colleague @robcoh has a fun model for this. He calls it the Ryan Air principle: if you don’t have checked luggage, or use the toilet on the plane, why should you pay for it?”
    Fair enough on the checked luggage, but your colleague Rob clearly hasn’t thought through the consequences of charging for toilet on planes.
    I’d rather not sit next to the poor mother who can’t afford to change her child’s nappies. If I have to pay a premium to avoid sitting next to her, then why should I fly Ryan Air?
    If it would be individually cheaper if Ryan Air charged everyone equally for the toilet facilities, then is that not arguably a failure of the Ryan Air principle?
    Beyond the economic arguments, there are broader socialm ethical and legal responsibilities to consider as well. There’s a reason that night clubs are expected to offer free tap water to customers, for example.


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