Democracy & Technology Blog Will net-neutrality build a world-class Internet infrastructure?

If you thought “net neutrality” is primarily about preventing telephone and cable companies from blocking access to particular web sites or degrading someone else’s services and applications, you would be wrong. AT&T and BellSouth, who are seeking approval from the Federal Communications Commission to complete their merger, will voluntarily commit not to do those things. Consumer groups, however, want the FCC to impose an “additional fifth principle of non-discrimination” on AT&T and BellSouth as a condition of their merger.
If you’re keeping track, here are the four principles that are no longer subject to debate:

(1) consumers are entitled to access the lawful Internet content of their choice;
(2) consumers are entitled to run applications and services of their choice, subject to the needs of law enforcement;
(3) consumers are entitled to connect their choice of legal devices that do not harm the network; and
(4) consumers are entitled to competition among network providers, application and service providers, and content providers.

If the FCC falls for this suggestion, to impose a non-discrimination requirement on network providers, it would outlaw the partnership, bundling and pricing strategies that are the basis for all advertising efforts. That would harm consumers, who benefit the most from advertising.

Advertisers underwrite much of the cost of producing and delivering newspapers, television and magazines. Users pay a small subscription fee, and ads pay for the rest. The cost is split. But when it comes to the Internet, content providers like Google, Yahoo and eBay get to keep every dollar spent on online advertising. The content is supported by advertising, but the delivery is not. Consumers thus pay more for broadband Internet connections than they otherwise might.
It’s worth reminding that only 15 percent of adults who live in households with an annual income of $30,000 or less currently have broadband compared to 57 percent in households whose incomes exceed $75,000 annually, according to a survey by the Pew Internet and American Life Project. The price of a broadband connection is one of the factors affecting the demand for broadband (the availability of attractive content is another).
Consumers in South Korea and Japan can now get 50-100 mbps. Samsung recently demonstrated wireless technology that will deliver 1 gigabit per second to stationary clients, and 100 mbps to clients traveling 70 miles per hour. Here in the U.S., Verizon offers 30 mbps in some parts of the country but it will cost you $179.95 per month!
Network operators like AT&T, Verizon and Comcast have relied mostly on flat subscription fees to finance costly Internet upgrades, but want to try adapting their business models to the new capabilities of advanced fiber-optic connections to homes and businesses. Online advertising, which generated $12.5 billion in revenues last year, is one potential source of new revenues.
In their efforts to position their own applications and services in premium locations on the desktop, Internet content providers have demonstrated how advertising revenues could be used to recover the cost of upgrading the Internet at a lower cost to consumers. For example, Google agreed to pay Dell $1 billion over 3 years to preinstall its software on up to 100 million Dell PCs. will receive a minimum of $900 million in ad revenue from Google over 3 years, and in exchange a Google search box is expected to appear on every MySpace page. EBay will allow Yahoo to exclusively provide advertisements on eBay sites in the U.S., while Yahoo has agreed to promote eBay’s PayPal payment service on its sites. An eBay spokesperson pointed out that the ad revenue would allow eBay to charge lower prices to consumers.
This appreantly makes good business sense. The content providers believe that many consumers choose their software the first time they boot up a new computer (and then never change it), and that when an Internet search bar is built into a software application it becomes the starting point for a high percentage of searches. In fact, Google believes that built-in search boxes are the source of 30% to 50% of a user’s searches.
But the point is that these Internet content providers are “discriminating” for and against specific content, just like supermarkets sell premium shelf space, at the end of an aisle or at the eye-level, to producers who are willing to pay extra to promote their product. Network operators could create similar opportunities by creating their own user interfaces.
Allowing the market to allocate ad revenues between Internet content and delivery would allow network providers to make billions of dollars in network investments withough having to recover all of it from consumers.
Some people find it horrifying that there could be winners and losers unless network operators are prohibited from experimenting with innovative pricing and service options. But if we consider that low subscription fees will increase the number of users connected to the Internet and the rate they adopt new services, it is possible to see how a cautious approach on “net neutrality” could benefit innovators — as additional users on the Internet increase the web’s appeal to advertisers, creating a virtuous spiral yielding increasing benefits for everyone.
Sen. Edward M. Kennedy recently said,

Net Neutrality — and the Internet itself — can fulfill [its] promise only if America builds a world-class Internet infrastructure. We need to build an ever faster Internet in order to compete effectively in the world, create good jobs here at home, and meet the needs of our citizens. This mission is extremely important and Congress has an essential role in ensuring that such an infrastructure is built.

Advertising provides a significant revenue source to pay for this. But I have a feeling that what he’s talking about is raising taxes.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.