Like it or not, more regulation is headed the U.S. telecom industry's way, it now seems, and the changes will come as "network neutrality" rules are applied, either by the Federal Communications Commission, or Congress, or both.
The big implications, though, will not be found in the narrow "bit discrimination" area. As typically is the case, the new rules will reshape industry profit margins, business models, marketing and operations in ways that are unforseen at the moment.
Consider the future of the video entertainment business. Most observers would agree that the goal of net neutrality rules is to prevent anti-comptitive behavior. One example would be a case where an ISP with its own Internet content operations actively blocks or slows down competing operations.
Most of us would likely agree that is an appropriate application of neutrality rules. But many would note that prevention of such abuse is already part of the Federal Communications Commission "Internet freedoms" principles.
But that's where matters get tricky. Can a content provider--whether affiliated with an ISP or not--apply some form of content acceleration to its own services or applications? Many software, video or audio content providers use content delivery networks precisely for that reason, for example.
Or consider the matter of bandwidth caps. Some would argue that such caps are needed to protect the quality of service experienced by 99 percent of users, against the one percent of users who consume 40 percent of total bandwidth.
But others see an attempt to protect linear video businesses. So are bandwidth caps legitimate ways of managing network resources (so long as the caps are generous enough to account for a typical user's needs) or anti-competitive measures to protect an existing business from new competition?
It isn't always easy to say.
The good news is that network neutrality proponents and opponents seem to have gained something important over the last couple of years: better understanding of each others' positions that seemingly has narrowed the range of differences.
The bad news is that the next couple of years will feature an additional element of uncertainty as the discussion moves toward some resolution. And though we might hope the new framework will not wind up in court, significant changes to telecom policy always have that result. So one should not bet against a rather lengthy period of court challenges, one way or the other.
Telecom regulation always is political, so elections have consequences. And since President Obama favors action on network neutrality, as does as-yet-unconfirmed FCC Chairman Julius Genachowski, as do members of the Democrat-controlled Congress, action on net neutrality seems almost inevitable.
But there seems to have been progress over the last couple of years. Recent hints from executives at AT&T and Verizon that they "could live with" a proposed fifth "Internet freedoms" principle of "network non-discrimination" that the FCC is expected to authorize.
Still, the devil is in the details. Lots of issues tangentially related to network neutrality now will be swept into the formulation of new rules. And most of those issues bear directly on business models and profit margins. That, in turn, means the new framework inevitably will affect other actions that have a direct bearing on consumer welfare.
If, for example, complete "open access" rules are applied to every network, service provider profitability could drop about 32 percent almost overnight, says Lawrence Spiwak, president of the Phoenix Center for Advanced Legal and Economic Public Policy Studies.
That inevitably would lead to higher consumer prices for things such as mobile handset prices and subscriber fees. By reducing the profit margin on any new network, such rules also would lead to less market entry by new entrants as well, as it would be harder to make a go of the business, and therefore contestants would have have a harder time raising money to enter the business.
It is common these days to rail against the virtues of markets and market-based mechanisms. But consumers and producers alike are highly sensitive to most price signals. Raise the price of gasoline to $6 a gallon and one would see nearly-immediate shifts of behavior: less driving, less purchasing of low-miles-per-gallon vehicles, higher vehicle prices (to account for more use of higher technology engines) and lower demand for vehicles overall.
And that's the real implication. Net neutrality rules almost necessarily will change the range of feasible business models. And though the desire is to protect consumers from anti-competitive behavior (a good thing), rules might also deter new entrants (bad for competition and choice) or deter or eliminate some business practices that promote consumer welfare and lead to faster innovation.
The reason is that net neutrality in its strong form tends to be viewed as "open networks" policy. But much of the incentive service providers have to roll out new features, services or devices is precisely the higher margin less-open network permit.
Subsidized handsets might generally be seen as a good thing, allowing more people to buy high-functionality handsets at affordable prices. But a full open networks regime might prohibit handset subsidies tied to service contracts.
But getting rid of the bundling also means much-higher handset prices, which will discourage adoption of newer devices. To the extent that new applications often are associated with capabilities of new devices, innovation might be slower, rather than faster, in a full open networks environment, at least in the key mobility space.
Nothing about net neutrality is going to be easy. And inadvertent damage to consumer welfare will be a constant danger.
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