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January 2007
Volume 10 / Number 1

What's the Price Tag for a Tiered Internet?

By John Cimko
 

 

What exactly is the network neutrality debate all about? It’s not easy to get a handle on what’s at stake. Internet access suppliers, in fact, claim there is no issue — everything works fine and the government should let the marketplace control the provision of access to the Internet. Internet content and application providers counter that the new paradigm being promoted by the access providers is a calamity because it would freeze out new entrants, stifle innovation, and burden Internet users with higher rates and poorer service.

One way to get a better sense of the debate is to think of it (as Adam Penenberg suggested in a recent article posted on the Slate Web site) as a battle over business models. Under the current model, end user customers and content and application providers pay access suppliers to get on the Internet access ramps, but there is no differentiation among the various providers. That is, everybody is supposed to get the same transmission service from the broadband suppliers, regardless of how the transmission service is used. It doesn’t matter whether you’re providing a search engine, streaming video, online auctions, or voice over the Internet — everybody’s data is moved the same way without distinction or discrimination.




The access providers want a new business model — a tiered Internet, under which content and application providers would be able to get preferential treatment by cutting deals with the access providers. If you’re able and willing to pay more, then you get faster, more reliable access. If not, you move to the back of the line.

Verizon CEO Ivan Seidenberg (speaking at the Consumer Electronics Show last year) explains the model this way: “We have to make sure that they [content and application providers] don’t sit on our network and chew up bandwidth. We need to pay for the pipe.” In other words, access providers are spending a lot of money to build the high-speed infrastructure that can handle IP video and other services that demand major chunks of bandwidth. For this investment to make sense, access providers argue they need a tiered Internet to help recoup their expenditures.

This business model advocated by access providers raises an important question: How much would this cost end user customers and content and application providers? The question, of course, is an important one for VoIP providers. A recent study by Infonetics Research Inc. estimates that businesses (both domestic and international) will spend $8.34 billion on VoIP (define - news - alert) telephony services by 2008. A recent survey conducted by a company called TeleGeography found that 2.7 million U.S. households subscribed to VoIP service in the second quarter of last year, up from 75,000 in 2003. These growth trends could take a detour if VoIP providers are confronted with new costs associated with a tiered Internet.

The price tag question also raises an important policy issue. If Internet access providers set up a tiered pricing system for the flow of data between end users and content and application providers, will it be possible to make sure that prices for preferential, high-speed access provided to the first tier of content providers are set at reasonable, non-discriminatory levels?

Kevin Martin, chairman of the FCC, believes that the market will be a sufficient check to avoid discrimination and ensure reasonable pricing levels. In recent testimony before a Senate committee, Chairman Martin expressed his general view that “a robust, competitive marketplace, not regulation” is the best way to guard the public interest, and that “competition drives prices down . . . .” Press reports have indicated that the Chairman supports a tiered Internet with different levels of service at different pricing levels. Meanwhile, the FCC has adopted some non-binding principles about how the Internet should operate, including the principle that “consumers are entitled to competition among network providers . . . .”

And there’s the rub. If the underlying premise of policymakers is that competition in the network operator marketplace will protect content and application providers — and end user consumers — against unreasonable and discriminatory pricing practices, then there could be a problem. More than 90% of broadband Internet access is provided by telephone companies and cable companies. According to a Government Accountability Office report released in May 2006, 98% of Internet connections in the residential market are provided by telephone or cable companies. In addition, commentators have argued that the emergence of more robust competition is problematic because significant barriers (such as the high cost of building new last-mile networks) discourage competitive entry.

If duopolists control the “last mile” portion of the broadband network, making them the gatekeepers for Internet access, can they be relied upon to set the price for a twotiered Internet in a way that doesn’t disadvantage their competitors? This, of course, is an important question for VoIP providers, who are in head-to-head competition with the cable companies and the phone companies in providing voice services to residential and business customers. If the FCC’s policy is that a robust, competitive marketplace is the best way to make sure that a two-tiered Internet would not be overprices, anticompetitive, and discriminatory, then the FCC also needs to examine whether the current last-mile broadband market meets the FCC’s competitive test.

John Cimko served for 15 years at the FCC, and currently practices law at Greenberg Traurig LLP. He can be reached at cimkoj@gtlaw.com. The views expressed in this article are solely those of the author and should not be attributed to his firm or its clients. Greenberg Traurig is an international, full-service law firm with more than 1,200 attorneys and governmental professionals in 24 offices in the U.S. and Europe. For additional information, visit the firm’s website at http://www.gtlaw.com.

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