Posts tagged ‘Price Discrimination’

Unclogging the Pipes – Does the Net Need a Joe the Plumber?

With all the focus these days on Joe the Plumber, I couldn’t resist the desire to use the nation’s newest cliché. But this post’s topic is not on the issue of taxes on small business that Joe so artfully brought to the forefront but rather on the issue of the effect of net neutrality regulation for businesses selling online. The issue has gained importance in the past year, even prompting Senator Obama to declare it a priority in his first year if elected to office of President. (Broache 2007)

What Is Net Neutrality?

Net neutrality is unfettered access to content on the Internet. Net neutrality legislation would prevent Internet providers from controlling user access to certain content on the Internet. The Internet’s function is to move content from provider to user. While this seems obvious enough for those of us who have grown accustomed to a growing Internet, some believe that there lurks a growing potential for Internet Service Providers, who control access to the Internet, to begin using that control in such way as to filter or limit access to certain sites and services.

To understand the threat this imposes, it is helpful to view the Internet as a broad set of connected pipes. Data travels through these pipes, known as bandwidth, which is shared among consumers. When some consumers devote large amounts of time to downloading music, streaming movies, and consuming other forms of rich media, they essentially begin clogging the pipes of the Internet which affects the service to other consumers that share the pipe. To reduce this effect, ISPs can either upgrade (e.g. widen) the pipes, improve the technology (e.g., speed data through the pipes) or reduce the traffic at either its source or destination. Unfortunately, widening the pipes or improving technology takes money, and many of the ways that ISPs can raise this money have been viewed as impediments to providing a neutral network that does not discriminate based on the nature or source of the content that moves through it. Ways that ISPs could raise this money involve charging the users, charging the content providers, or filtering the content that goes through the current pipes.

Currently, many ISPs charge the consumers a flat fee for unlimited access to the pipes. This method of charging consumers essentially has the lighter Internet users subsidizing users that download large volumes of rich media. Recently some ISPs have begun allowing consumers to self-select into the wider or faster pipes via tiered and metered usage pricing schemes. For example, I pay $10 more per month to have my broadband service delivered at download speeds up to 20.0 megabits per second – supposedly double the speeds that 10.0 customers receive. Presumably, it allows me to work on my blog while my spouse searches the Internet, my older son plays Xbox Live, my daughter talks to friends using VOIP (our phone service via our ISP) and my other son works on his school project on his laptop - all without any significant loss in performance of these online activities. Although tiered pricing is not new (i.e., it was used by ISPs such as AT&T Broadband, Charter Communications and Cox Communications as early as 2002 to curb illegal movie downloading and music swaps), ISPs around the nation are testing similar plans (again). For example, Time Warner’s latest plan is to allow consumers to choose a tiered plan based on usage while allowing customers to monitor their usage in order to choose the right plan. (Bosworth 2008) “One way or the other, as video becomes a bigger part of overall broadband usage, it is inevitable that usage-based plans supplant current ‘all you can eat’ plans. Video is the reason.” (Kim 2008) In Australia, the three major ISPs use a price discrimination plan based on quotas that limit the access of the consumer to the Internet and charge heavier users who go over these quotas additional usage fees. (Winterford and Hill 2008).

In each of these cases, paying for service upgrades is coming from charging the users of the content. Where the biggest source of concern seems to be is that ISPs might begin charging content providers who provide and encourage the use of the many forms of rich media, such as YouTube, iTunes, MSN, Yahoo, peer-to-peer sites, etc. Content from these sites tend to “clog the pipes” more so than text content. The fear is that ISPs will charge premium fees to these content providers to prioritize and push their content through the pipes at faster rates than providers who don’t pay premiums. Or ISPs might simply charge premiums to content providers who have sites heavily laden with rich media. In which case, those firms with deeper pockets will be more successful at reaching and serving the consumer. With net neutrality legislation filtering or slowing content would be illegal. An example of what such legislation might look like can be found in a bill introduced into the Senate in January 2007 co-sponsored by Senator Obama and his former Democratic opponent Hillary Clinton titled the Internet Freedom Preservation Act. A similar bill was introduced into Congress titled the Internet Freedom Preservation Act of 2008 in February 2008. Neither bill seems to have made it out of committee.

A recent case that led to sanctions by the FCC (which represented its first net neutrality ruling) brought the issue of a non-neutral net into the spotlight. Comcast, the nation’s second largest ISP, was managing (or delaying) the use of bandwidth by its consumers with respect to peer-to-peer technologies such as BitTorrent. These activities gobble up bandwidth and clog the network pipes. Comcast claims that it simply limited these activities during high Internet traffic times. In a joint statement in March, Comcast and BitTorrent issued a joint statement that they were working together to solve the bandwidth issue and that government intervention is unnecessary. “Both BitTorrent and Comcast expressed the view that these technical issues can be worked out through private business discussions without the need for government intervention.” Regardless, the FCC’s decision to sanction Comcast came on August 1, 2008. On September 5, 2008, Comcast filed a suit against the FCC to overturn the decision. Also, as a result of the suit, beginning on October 1, 2008, Comcast will include a quota or monthly cap on users in its pricing strategy. These quotas are extremely high and meant to snare only the highest bandwidth hogs. This plan is an alternative to slowing a particular service or access to any one site.

What Does Net Neutrality Mean for Small Businesses Selling Online?

According to Cummings (2007), small businesses fear that telephone and cable companies will “rig the system so that the Web pages of premium-paying customers would open faster and be ranked higher than those that don’t pay the extra fee.” This puts smaller businesses at a disadvantage to larger businesses. She quotes Branch Heller, a retiree in Delaware, who says the law is needed to ensure that big corporations can’t dominate the Internet by censoring content or slowing — or blocking — links to their competitors’ customers.”

This issue particularly affects small businesses that sell or provide rich media content such as movies, music, interactive games, training videos, etc. online. ISPs could use their positions to slow access to these sites. Another fear is that Internet service providers may want to charge premiums to prioritize traffic connecting to some sites. Better and faster service would be provided to sites of firms who pay higher premiums.

However, another issue is that many small businesses are also turning to various forms of rich media for advertising online. Rich media advertising is a fast growing form of online advertising. This form of advertising may include sound, video, or Flash, and with programming languages such as Java, Javascript, and DHTML. These slow the loading of web content and may add a strain on the network. The Interactive Advertising Bureau is attempting to set standards for this media to reduce the strain. Examples may be found here. DoubleClick’s study of its online advertisers learned that customers are 5 time more likely to click video ads, that video ads usually play at least 2/3 of the way through, that users click the video “Play” button more than they click on image ads, and that 8% of video ads generate a user reaction. Some rich media ads even allow consumers to interact with the seller even without leaving the current site they are visiting. PointRoll says that rich media accounted for 116% click-through rate over standard banner ads and that consumers spend an average of 14.7 seconds of time with the brand. These are all topics for posts on another day but these stats will lead to an increased interest and therefore use of this pipe clogging media. Control of access to that media is feared to be in the hands of those who hold the pipes. Because of that control, proponents of net neutrality want preventive legislation. Opponents say that legislation leads to further regulation of the Internet.

What Are the Presidential Candidates’ Views of Net Neutrality?

One look at the Presidential candidates’ websites illustrates the extent to which both candidates use rich media on the net. Both Presidential candidates have opinions about net neutrality, and as expected, their views fall along party lines. Senator Barack Obama believes that net neutrality should be legislated.

“I will take a backseat to no one in my commitment to network neutrality…Because most Americans have a choice of only one or two broadband carriers, carriers are tempted to impose a toll charge on content and services, discriminating against Web sites that are unwilling to pay for equal treatment. This could create a two-tier Internet in which Web sites with the best relationships with network providers can get the fastest access to consumers, while all competing Web sites remain in a slower lane.” (Interview with CNET News)

Here are some relevant and related excerpts from Obama’s Technology Plan:
• Barack Obama strongly supports the principle of network neutrality to preserve the benefits of open competition on the Internet.
• Obama will encourage diversity in the ownership of broadcast media, promote the development of new media outlets for expression of diverse viewpoints, and clarify the public interest obligations of broadcasters who occupy the nation’s spectrum.
• Barack Obama and Joe Biden will use technology to reform government and improve the exchange of information between the federal government and citizens while ensuring the security of our networks. Obama and Biden believe in the American people and in their intelligence, expertise, and ability and willingness to give and to give back to make government work better.
• Obama and Biden believe we can get true broadband to every community in America through a combination of reform of the Universal Service Fund, better use of the nation’s wireless spectrum, promotion of next-generation facilities, technologies and applications, and new tax and loan incentives.
More on Senator Obama’s views can be found here.

Senator John McCain believes that net neutrality should be regulated only if necessary. McCain’s plan focuses on letting markets and firms go as far as possible in ensuring a neutral network and use regulation only when the market fails. Perhaps the negotiations between Comcast and BitTorrent are an example of such a settlement.

“In general, I believe that we need to move to a different model for enforcing competition on the Internet. Its focus should be on policing clearly anticompetitive behavior and consumer predation. In such a dynamic and innovative setting, it is not desirable for regulators to be required to anticipate market developments, intervene in the market, and try to micromanage American business and innovation.” (Interview with CNET News)

McCain’s technology plan suggests that existing antitrust legislation can handle many of the issues that may arise that cannot be privately negotiated. Some excerpts from the McCain Technology Plan:
• Given the enormous benefits we have seen from a lightly regulated Internet and software market, our government should refrain from imposing burdensome regulation. John McCain understands that unnecessary government intrusion can harm the innovative genius of the Internet. Government should have to prove regulation is needed, rather than have entrepreneurs prove it is not.
• John McCain will focus on policies that leave consumers free to access the content they choose; free to use the applications and services they choose; free to attach devices they choose, if they do not harm the network; and free to chose among broadband service providers.
• John McCain does not believe in prescriptive regulation like “net-neutrality,” but rather he believes that an open marketplace with a variety of consumer choices is the best deterrent against unfair practices.
• As President, John McCain would continue to encourage private investment to facilitate the build-out of infrastructure to provide high-speed Internet connectivity all over America. However, where private industry does not answer the call because of market failures or other obstacles, John McCain believes that people acting through their local governments should be able to invest in their own future by building out infrastructure to provide high-speed Internet services.
More on McCain’s views can be found here.

Net neutrality is sure to become an issue that resurfaces again and again. The issue is so large that I can’t possibly have done the topic the justice it deserves here, but hopefully it is a little less mysterious. In my Bibliography and Additional Reading, I included additional sources if you have further interest in the issue.

Bibliography and Additional Reading

Broadband Access Policy: The Role of Antitrust, J. Thomas Rosch, June 13, 2008, http://www.ftc.gov/speeches/rosch/080613broadbandaccess.pdf

No Need Now For New Net Neutrality Regulation, Tom Giovanetti, 05/03/2006 http://www.ipi.org/ipi/IPIPressReleases.nsf/0/c656d6236605f60785257163007936e8?OpenDocument

Inside Obama and McCain’s Conflicting Takes on Net Neutrality, Glenn Derene, October 8, 2008, http://www.popularmechanics.com/technology/industry/4286547.html?series=46

Frequently Asked Questions about Net Neutrality, http://www.savetheinternet.com/=faq

Obama pledges Net neutrality laws if elected president, Anne Broache, October 29, 2007, http://news.cnet.com/8301-10784_3-9806707-7.html?tag=mncol;txt

Net neutrality is an ‘American problem’, Brett Winterford and Julian Hill, ZDNet.com.au, 24 September 2008, http://www.zdnet.com.au/insight/communications/soa/Net-neutrality-is-an-American-problem-/0,139023754,339292161,00.htm

Test of Tiered Pricing for Broadband Access, Gary Kim, Thursday, January 17, 2008, http://ipcarrier.blogspot.com/2008/01/test-of-tiered-pricing-for-broadband.html

Time Warner To Test Metered Pricing For Broadband, Martin Bosworth, Jan. 17, 2008, http://www.consumeraffairs.com/news04/2008/01/tw_bandwidth.html

Obama Biden Technology Plan, http://origin.barackobama.com/issues/technology/#open-internet

John McCain Technology Plan, http://www.johnmccain.com/Informing/Issues/cbcd3a48-4b0e-4864-8be1-d04561c132ea.htm

Comcast to Appeal FCC’s Decision On Internet Blocking, Amy Schatz, September 5, 2008, http://online.wsj.com/article/SB122055137368500197.html?mg=com-wsj

Comcast to Cap Data Transfers at 250 GB in Oct., Chloe Albanesius, 08.28.08, http://www.pcmag.com/article2/0,2704,2329170,00.asp

Video Ad Benchmarks: Average Campaign Perfomance Metrics, A DoubleClick Rich Media and Video Report, February 2008, http://www.doubleclick.com/insight/pdfs/dc_videobenchmarks_0702.pdf

The Human Face of Net Neutrality, Jeanne Cummings, April 9, 2007, http://www.politico.com/news/stories/0407/3461.html