[governance] The Coming War Over Net Neutrality,,By Tim Wu, The New Yorker

[Riaz K Tayob]

  The Coming War Over Net Neutrality

By Tim Wu, The New Yorker

05 May 13

om Wheeler 
<http://www.newyorker.com/online/blogs/johncassidy/2013/05/tom%20-%20wheeler-federal-communications-commission.html>, 
Obama's nominee to run the Federal Communications Commission, surely has 
much he hopes to get done. Perhaps it's freeing up some more wireless 
spectrum or bringing cell-phone service to Mars - who knows. But chances 
are (assuming his confirmation goes smoothly) that he'll end up spending 
time on different challenges, and a chief candidate is a resurgence of 
the net-neutrality wars.

The outgoing chairman, Julius Genachowski, made many very good and 
important decisions, but he also made a rather terrible one that may 
darken Wheeler's term. Genachowski spent years and much political 
capital negotiating net-neutrality rules that everyone could live with, 
only to enact them in a way that is highly vulnerable to a court 
challenge 
<http://gigaom.com/2012/07/03/inside-verizons-attack-on-network-neutrality/>. 
That challenge (brought, cynically, by Verizon after it negotiated the 
rules it wanted) may soon invalidate years of work and create industry 
chaos.

The net-neutrality rules now in place reinforce the Internet's original 
design principle: that all traffic is carried equally and without any 
special charges beyond those of transmission. Among other things, the 
rules are a pricing truce for the Internet; without them, we can expect 
a fight that will serve no one's interests and will ultimately stick 
consumers with Internet bills that rise with the same speed as cable 
television's.

Unfortunately, like American Presidents who hope to avoid the politics 
of the Middle East, the F.C.C. may ultimately have no choice but to get 
involved in this fight. But one very important thing has changed since 
last time. Cable operators like Time Warner and Comcast, if they think 
carefully, should come to understand that they now need a net-neutrality 
rule more than anyone.

Ask a cable operator what makes its life miserable, and the answer is 
immediate and obvious: programming fees. Such fees have roughly doubled 
over the past decade during a period of near-flat inflation and economic 
stagnation. Sports is the most outrageous example: what ESPN charges 
cable operators keeps growing, and is now approaching five dollars per 
customer. The actual cost of providing the entire Internet to cable 
customers, which is something like a few dollars a month, is less than 
that. It is a lose-lose situation for nearly everyone (except athletes). 
The real victims are consumers, especially low-income consumers, who 
ultimately foot all the bills but cannot control the costs.

If programming costs are the worst thing in cable, the best part of the 
business is selling broadband. Cable broadband 
<http://www.newyorker.com/online/blogs/newsdesk/2013/05/the-number-167.html>, 
which costs almost nothing to provide once the infrastructure is built, 
has little real competition, and operators can charge between forty and 
sixty dollars for the product, yielding margins that analyst Craig 
Moffitt describes as "comically profitable." Margins greater than ninety 
per cent are a sweet business no matter what you're doing, and what 
cable operators have to realize is how crucial net neutrality is to 
making those margins possible.

An important aspect of the Internet's original design is that many 
prices were set at zero - what have been called zero-price rules. The 
price to join the network is zero. The price that users and sites pay to 
reach others is zero: a blogger doesn't need to pay to reach Comcast's 
customers. And the price that big Web sites charge broadband operators 
to carry their content is also zero. It's a subtle point, but these 
three zeros are a large part of what makes the Internet what it is. If 
net neutrality goes away, so does the agreement to freeze prices at zero.

What net neutrality means in practice for cable operators is that they 
don't have to deal with rising programming costs in broadband. Cable 
operators pay Disney good money to carry ABC as a cable channel. But 
when a cable customer watches ABC shows over the Internet, using Hulu 
Plus or Amazon, the operator pays nothing. When they go to the ABC Web 
site, they also pay nothing. Rather, the consumer deals with the content 
provider directly, by watching ads or paying Amazon. The result: cable 
doesn't have to pass on costs that it cannot control.

Back in the aughts, cable operators hated the idea of net neutrality 
because they hoped to charge then-rich firms like Yahoo extra cash to 
reach their customers (in telecom jargon, a "termination fee"). But that 
was when the Internet companies were far weaker. Times have changed, and 
firms like Google and Facebook now hold serious bargaining power. You 
can't expect to provide a decent Internet service that doesn't include 
Facebook and Google. And so, instead of being able to charge Google to 
reach its customers, cable operators, absent net neutrality, may have to 
pay programming fees to Google. In other words, Google might very well 
become the next ESPN, and the whole nightmare will start again.

Admittedly, it is hard to know exactly how things would work out if the 
zero-price rules are abandoned. Cable still has serious market power, 
and might, on balance, be able to charge more than it gets charged. But 
if you're a cable operator, why take that bet when you're already 
sitting on giant profit margins? Why risk the best business going? 
Beyond cable operators, a battle royale over Internet programming and 
termination fees would ultimately be terrible for consumers; the 
Internet would start to get both worse and more expensive.

Think of it this way: net neutrality, which sets all these prices at 
zero, is effectively a grand truce between the big app firms and the 
infrastructure providers. It eliminates an unnecessary middleman: 
consumers deal directly with content vendors and app firms. That's a 
much healthier market dynamic than one driven by hidden, passed-on 
costs. If cable TV isn't a good enough example, consider the dysfunction 
of the health-care industry, where consumers never see what they are 
paying for. That's what the present rule avoids.

Finally, and most importantly for the public, the net-neutrality rule 
continues to provide a kind of subsidy to smaller speakers and startups, 
from bloggers to Quora and Wikipedia. The Internet would look a lot 
different if these kinds of players had to pay cable before reaching 
their customers. It would start to look a lot more like cable TV, and 
few things could really be worse than that.

Wheeler and the other members of the Federal Communications Commission 
will be very tempted to try and avoid and ignore net neutrality 
<http://www.newyorker.com/archive/2006/03/20/060320ta_talk_surowiecki> 
during Obama's second term. If, magically, the rules aren't struck down, 
they will have that luxury. But if the rules are struck down, avoiding 
the problem may lead to a replication of the horrors of the 
cable-television market. There's trouble brewing; facing it is both the 
Commission's responsibility and its destiny.

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