Genie's Coming Out of the Bottle: Net Neutrality is Dead

Communications policymakers are about to let the genie out of the bottle. Once they feared the possible impact of internet service providers charging some app providers for using their networks. That gave us network neutrality. 

Now, some appear more worried about a few hyperscale app providers, to the extent that they are willing to gut network neutrality entirely. 

It is hard to know just what else might also change. As with any tax, the firms affected by the tax will not “pay” it. Customers, shareholders or business partners will do so. The only question is which sets of stakeholders see higher costs. 

And, as with any tax, once the principle is established, other sets of payees might emerge later. And tax rates will tend to grow. 

But network neutrality will be an early casualty. 

One might well argue the whole net neutrality policy was wrong from the beginning. We may someday look back and argue the “sending party pays” policies for app providers were equally wrong. 

Some might argue that new taxes on a few hyperscalers shed more light on broken business models of some ISPs, in some regions. Almost always, such taxes bear the mark of attempted industrial policy as well: efforts to protect domestic suppliers from foreign suppliers. 

Ironically, many of the same people and policymakers who touted the value of network neutrality now are appearing to kill network neutrality. Net neutrality was supposed to protect app providers from internet service providers. 

The overturning of net neutrality will happen to protect ISPs from hyperscalers. Never was it more clear that every act of public policy has private consequences; winners and losers. 

The new policies--similar to taxes levied in South Korea--would charge fees on a few hyperscale app and content providers, and represents a shift in funding of universal service and access networks in general.

Basically, customers and taxpayers have funded universal service and, by extension, universal service. For the most part, customers have paid the costs of the access networks. The new policies proposed for EU countries would add taxation of a few large app providers to that mix. 

This will kill the logic behind network neutrality. Once governments accept the principle that the big providers of apps ISP customers use must pay to use the access networks, the door is open to charge other app providers. 

The door is open to effectively subsidize some apps and not others; to allow some apps expedited access or higher quality of service, as has been true for business grade services, even where network neutrality rules are applied. 

It is difficult to see all the potential ramifications. Once the notion of taxing traffic sources gains traction, how might other business practices change? And what traffic sources might be taxed next? Large data centers? Content delivery and edge network providers? 

Will peering relationships return to the older transit model, at least where traffic imbalances exist? 

The debate over how to fund access networks, as framed by some policymakers and connectivity providers, relies on how access customers use those networks. The argument is that a disproportionate share of traffic, and therefore demand for capacity investments, is driven by a handful of big content and app providers. 

But the list of “traffic sources” is larger than that. The South Korean and proposed EU regulations distinguish between traffic sources and traffic sinks (senders and receivers). In pre-internet days, that traffic was considered to be voice traffic between telcos. At the end of the true, firms would “true up” payments to cover any unequal traffic flows. 

The new principles essentially apply that same sort of logic to some traffic sources. But if “sources” are broadened, why would the category of sources not be later broadened further?

It is a novel argument, in the area of communications regulation. Business partners (other networks) have been revenue contributors when other networks terminate their voice traffic, for example. 

But some point to South Korea as an example of cost-sharing mechanisms applied to hyperscale app providers.

South Korean internet service providers levy fees on content providers representing more than one percent of access network traffic or have one million or more users. Fees amount to roughly $20/terabyte ($0.02/GB).

Some might argue it is inevitable that European connectivity providers will get government sanction to levy fees on a few hyperscale app and content providers as a matter of industrial policy and faltering economics. The measures are protectionist in that all the proposed app payers are based in the United States. 

Opponents--especially the hyperscalers--view it as an internet app tax. It arguably is all of the above. 

Yet others might note that such a policy undermines the argument for network neutrality regulations, at its core. The fundamental argument for net neutrality was to prevent unequal treatment of bits, no matter who the owner.