In mid-January, the US Court of Appeals for the District of Columbia overturned two of the three provisions of the Open Internet Order passed by the Federal Communications Commission (FCC) in December 2010. The two provisions that have been struck down were meant to promote net neutrality, the principle that Internet service providers (ISPs) should treat all data on the internet equally, and not treat data of any particular type or from any source differently from the rest (for details on the ruling, see this excellent article by The Economist).
This ruling paves the way for ISPs to charge differentially for services that they think are using a disproportionate amount of bandwidth on their networks, such as music and video streaming services such as Spotify and Netflix. So in theory, ISPs could tell customers that a basic broadband pack costs $25 per month, but if they want unlimited streaming from Netflix, they’ll have to pay $10 per month extra. For customers who don’t, ISPs could restrict access to such services, or, more likely, throttle the speeds customers get while accessing such services. Alternatively, ISPs can charge companies that use large amounts of bandwidth in order to provide unfettered access to their services to customers. There’s some evidence that a few such backroom deals are already in place – with this ruling we’ll start to see many more of them.
If net neutrality goes away, the result will not be good for consumers. End-customer pricing might start to resemble the way cable TV is priced right now, with customers having to pay ISPs for bundles of services rather than bandwidth. Either that, or companies like Google and Netflix will have to pay ISPs to ensure customers get access to their content and services, skewing the field heavily in favour of companies with big pockets. Once such a precedent is set, it will become exponentially harder for any online startups (especially ideas that would use high amounts of bandwidth, like streaming services) to get VC funding. Paying ISPs to make such services reach broadband customers will become a gigantic “cost of doing business”, something only the internet giants can afford. And in case you’re thinking this has nothing to do with you since you’re sitting here in India, think again. Once this kind of pricing takes hold, it will inevitably make its way to India and the rest of the world – perhaps sooner than we can imagine.
All of which makes me wonder if the internet industry should not be regulated more strictly, perhaps like the electricity industry. Many parallels exist between the nature and applications of both these mediums.
- Electricity is a system that serves as a backbone for numerous applications (devices, such as TVs, air conditioners, microwaves, smartphones, etc) that humans use in their day-to-day lives. So is the internet – with the difference being that the applications built on top of the internet are services instead of hardware devices.
- Electricity is vital for our day-to-day lives, and plays a central role in fighting poverty and improving the well-being of the human species. What’s more, as a driver of development electricity is irreplaceable. The applications that use electricity cannot run on anything else. All of this is true of the internet as well.
- The demand for both electricity and the internet can vary widely. As a result, providers need to build excess capacity to handle peaks, which may sit idle for long periods during non-peak times.
- Both the electricity and the internet industries share a high fixed cost, low variable cost structure. Therefore, both industries are inherently skewed in favour of large, vertically integrated entities.
- As a result of the above, both industries suffer from extremely high barriers to entry, and lend themselves easily to monopolies.
It is these parallels between electricity and the internet that make me think, much against my pro-market nature, that the internet needs to be regulated as a utility, just like electricity. The increasingly essential nature of the internet, coupled with its vast and largely untapped potential for doing good for society, means that we cannot leave the supply of internet connectivity to purely pro-market forces. If private entities providing internet access can make more money by discriminating against certain customers and services, it is naive to think that they will choose not do so. Nor is it easy for new entrants to serve disgruntled customers if that happens – the barriers to entry are simply too high.