Responding to Martin Geddes
Martin Geddes left a great comment on the entry below that I'd like to promote to primary blog fodder. (His very good blog is here.) I'd like to take the chance to talk about internalizing externalities (what did you have for dinner tonight?). Martin is a very clever guy, and I'm listening carefully to him. He says:
Where common carriage means “no discrimination between destinations within a service type”, it would be reasonable to start charging telcos who don't provide this for rights of way. Rather than compaigning for network neutrality, you can then campaign for a telco tax, which should find plenty of happy takers in Congress — there's no shortage of public debt to service. In fact, reframing this around “no right-of-way subsidies to telcos” makes a lot more sense than “network neutrality”.
I think common carriage means offering service on a nondiscriminatory basis, neutral as to use and user. If the innkeeper's customer has red hair, he shouldn't charge him more than his blond customers. These are just bits we're talking about. Making them into “service type” decides the question up front — they're not services until the carrier decides to call them that. And it also seems to me that if the second customer speaks more quickly than the first customer (because he's done the equivalent of hiring Akamai or some other private middleman to help him out), the innkeeper also shouldn't discriminate.
But discriminating between classes of application (or even specific applications) is a different think. Lumping it into “common carriage” doesn't make sense to me.
It does to me. Martin continues:
And if they want to price discriminate between them, what's the big problem with sending out “Monopoly rents over here — come and get it!” price signals? Why pass laws that entrench the status quo forever by undermining the scope of possible competing business models that may rely on such application price discrimination?
Ah, but in the U.S. we just don't have competition for broadband access. Americans don't have real choices in this area, and the upfront costs of starting an alternate national network are too high for anyone to do it realistically (unless Sascha Meinrath has his way and we all start forming ad hoc local networks right and left). Monopoly rents won't be an occasion for competition to arrive — monopoly rents will just be monopoly rents. And we'll all be paying them.
And what if your assumptions on how networks are run and finances slowly become obsolete, just as the definitions of the '96 Telecom Act became? (Think of how different Skype Zones are from traditional network payment methods, for example — should this be illegal? I don't think so.)
Aha. This is where we get to the internalizing externalities point. Telcos want to be sure to be able to monetize their networks by discriminating in favor of particular services and applications, and claim that if they do that they'll have incentives to build more broadband in the U.S. In other words, they want to internalize the externalities created by these networks. But the network neutrality side of things doesn't think this makes sense.
The theory behind internalizing externalities (or spillovers), is that if property owners are both fully liable for third party costs (the burdens their property creates, like pollution) and entitled to appropriate all the benefits of their property, their interests will magically align with those of society, and they'll make efficient decisions. They'll have all of our best interests at heart, and their private welfare will line up with general social welfare. If you believe this theory, you think that spillovers (values that aren't captured by property owners) are bad because they get in the way of these optimal decisions. These un-appropriated spillovers won't give enough signals of what consumers want. (There's a recent paper called Spillovers by Lemley and Frischmann that explains this in a very clear way.)
But, in fact, spillovers can be good! Route 128 failed and Silicon Valley succeeded, because the Valley allowed things to move around and allowed other people to make value out of initial innovations. There are lots of social values created by internet use that aren't adequately “paid for” by individual internet subscribers, and aren't appropriately appropriated by network owners. Innovation is one of those positive spillovers that we don't want to allow a single property owner to own forever, because the second innovator might do a better job with the idea. Same thing online — the network owners shouldn't necessarily be allowed to internalize all of these externalities, because we can't assume that optimal social values will be the result. Rewarding a single innovator isn't always the best thing to do.
This is a long way of saying that I disagree with Martin. I don't think it should matter how Skype makes money. I do think that transport — the substrate, the common carrier — should be treated differently than the layers above, because we don't have competition for transport. So our costs are high and our speeds are low.
The idea that the telcos have zero competition (where there's no cable, for example) isn't true, because there's always (at a price) the option for users to collectively revolt and built their own access network. The proposed neutrality regulations are a tonic that soothes the pain of monopoly and ensures that the level of local political outrage never reaches a critical action threshold.
Don't throw me into the neutrality patch, Mr Fox!
I do think these guys have zero competition (or only gentle competition) because the upfront costs of an alternate network are insuperable. I do think there's a risk of creating a “neutrality patch” that is a comfortable humid swampy environment for these monopolists, and that's why I'd rather treat them like any other utility. Like a pipe.
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7 Responses to “Responding to Martin Geddes”
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Readers may be interested to know that this relates to a wider debate between “Chicago school” economists who believe in the unsustainability of monopoly rents and futility of predatory pricing, and everyone else. I'm probably a “pragmatic Chicagoist” — allow the monopoly price signal to exist, but not indefinitely. At some point, call in Mr Sherman to break up the party. A priori elimination of the price signal offends my Illinois tendencies, particularly when discriminatory practices are currently the exception rather than the rule.
Mark Goldberg has some useful things to say on the terminology to be used for distinguishing service and user discrimination. Again, some see these as part of a continuum which cannot be partitioned, whereas others (including me) see the divide as being acceptably clear.
You write one of the most amazing things I've ever read: These are just bits we’re talking about. Making them into “service type” decides the question up front — they’re not services until the carrier decides to call them that.
Wow, Professor. May I suggest that you ask a network engineer if this is remotely true? At issue in the COPE Act is the fact that some bits are in hurry while others aren't, and from this fact a number of service levels are readily apparent. If all bits were just bits, tiered levels of service wouldn't be an issue.
And it's also the case that COPE only applies in areas where there is an incumbent cable franchise, so it's a competitive scenario in every case. Broadband may not be as diverse and competitive as we'd like, but under COPE it's hardly a monopoly.
Susan, when you say “I do think that transport — the substrate, the common carrier — should be treated differently than the layers above…” I agree, but I question what is “substrate” for Internet connectivity. Just because we gave out some monopoly rights in the past - for phone, cable, etc. - doesn't make those rules a good starting point for what is a fundamentally different problem. The former were specific services. The Internet is a platform supporting multiple applications, services and new innovations.
Yes, there is a bottleneck - the right-of-way in front of our homes and businesses - which needs to be regulated by an appropriate legal framework. But consider that pace of evolution at the various “layers” that make up a local connection.
* Routers and Switches, i.e. TCP/IP or Ethernet: Faster than Moore's law
* Lighting the fiber: Similar to Moore's law
* Fiber itself: Slowly improving - 20 year useful life
* Conduits and poles: Slow evolution - 20+ years useful life
* Local rights of way: Fixed, limited and communally owned.
Laws evolve slowly - over decades! Wouldn't it make sense to regulate access to the right of way and/or to slowly evolving dark fiber and raw copper, but foster competition at every higher layer where technology will continue to outrun the best of regulatory intentions? There's a bit more on this in my blog posting of a few days ago.
Thanks, Brough.
I'm hoping we can define the substrate!
They've managed to do it in Japan — and have forced the fiber network to open up.
The problem is that you can't count on “technology” or “a market” when there is no real competition.
Susan
The vast majority of broadband connections in Japan are traditional DSL, and they're no more open than US DSL.
NTT's private fiber network is aimed primarily at business users and apartment complexes, and was made possible by a big infusion of cash from privatization.
It's amazing how many urban legends fly around about this stuff.
Japan's regulator requires local loop unbundling for both DSL and fiber.
“With the exception of New Zealand [and this just changed recently], most industrialised countries have put the regulatory framework for some sort of LLU in place. But few have made it a commercial success.
Japan is the most advanced. Of the country's 9.9m DSL lines, 6.2m are provided by rivals to incumbent NTT, such as Softbank's Yahoo! BB. . . . In Japan, NTT charges rival operators a mere Y168 ($1.56, £0.83) per line per month, which has certainly helped unbundling take off there.”
http://www.benking.co.uk/art/Iliads_epic_success_with_the_local_loop.php
Right, Japan has the same deal for DSL that we have in the US for DSL at the moment, unbundling. My statement won't be true in a few weeks.
And has unbundling in the US lead to a massive investment in the DSL infrastructure? Clearly not, as cable is a vastly more functional plant, and it hasn't been unbundled. So what we can learn from this, exactly?
We can learn that a newly-privatized government monopoly with tons of cash might want to invest in FTTH, that lightly-regulated investor-funded business might, but that investor-funded business strapped with massive government regulations clearly won't.
The fallacy that all net neutralitarians run into is the idea that the Easter Bunny builds fiber networks for the fun of it.