Net Neutrality

Few thoughts and many questions

Pietro Crocioni

Barcelona GSE13th May 2010

* The views expressed are those of the author and do not necessarily reflect those of Ofcom.

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Outline

• The Internet today;

• What’s NN?

• What is at stake?

• Pressure for change and risks;

• What is NN supposed to remedy?

– Foreclosure; or

– Wider regulatory concerns?

Fixed consumers

Wireless consumers

Local exchange /mobile mast

Traffic shaping

Content distribution

Network (CDN)

Traffic peering agreements

Peering point

CDNserver

Access network

Backhaul Internet core Service providers

Web hosting

The Internet

Retail ISPs

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Today’s situation

ISPs

Subscription/pay content providers

ConsumersPrice

ISPs need capacity at different levels:

a - Local loop and backhaul

- Vertical integration in the US- Mandatory access in the EU

b – Beyond (wider Internet) – contractual pay and peering arrangements

Advertising-financed content

providers

Price

Advertisers

No priceNo quality

differentiation(best effort)

Price

Defining NN

• Restrictions on the retail consumers’ ISPs on how they interact with CPs;

• But different versions – ISPs:

1. cannot charge CPs (zero price cap);2. cannot discriminate => two possible versions:

a. cannot price discriminate across content providers;b. cannot degrade the quality of the access services.

• Note 1 also achieves 2.a. but not necessarily 2.b.

• NN (extreme view) claims (based on non-economic and “economic” arguments) that ISPs should provide access to all for free on a “best effort” basis.

• However, even today some traffic management (discrimination) takes place).

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Significant practical implications

• NN debate started in the US:– A few cases – most important Comcast (blocking consumers from using BitTorrent

and PTP applications but not informing them) and Madison River (a telephony provider blocking VoIP);

– Following Comcast FCC added to its current four Freedoms Internet principles two further. Broadband providers:• cannot discriminate against particular Internet content/services but may engage in

reasonable network management; and• must disclose their network management practices;

– FCC lost Comcast appeal, but issue now very political (current administration strongly supports NN) and FCC will try to go ahead through a different legal route;

• Debate has now moved to Europe (and elsewhere – e.g. Canada):– Ofcom; European Commission and ERG to consult in June;– Other regulators have already acted (e.g. Norway and Sweden) with a focus on

transparency and non-discrimination.

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Pressure for change

• Capacity constrains (and additional capacity - especially mobile - is costly);• Emergence of data intensive applications (e.g. video);• Delay-sensitive applications (e.g. games, video, VoIP or telemedicine); and• There is pressure to invest in capacity of access networks.

Mobile data volumes

968 1316 1509632 753 933 11311150

2064

752 9321093

1035

1536

1934

12931862

2500

37914122

5207

6715

5721,257

2,1753,152

4,336

6,3287,378

10,142

13,353

0

3000

6000

9000

12000

15000

Q4 Q1 2008

Q2 Q3 Q4 Q1 2009

Q2 Q3 Q4

Da

ta v

olu

me

s (t

era

byt

es)

3UK

Vodafone

T-Mobile

Orange

O2

29%27%23%22%20%19%18%3G subscriptions as % of total

31% 32%

Source: Ofcom

Consumer Internet traffic forecast

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The potential risks of the status quo• If trends continue current “best effort” for all for free (i.e. NN) carries risks:

– Congestion: everyone “worse-off”; and

– Crowding-out: value of delay-sensitive applications may be lost or severely reduced (severe congestion may not be necessary for crowding-out to occur – i.e. lack of priority suffices);

• Absent net neutrality a two (or more) tier system could develop:

– Capacity reserved for priority access (definition (based on latency)? quality of service (guaranteed?) for a fee;

– “best effort” access for free; and– Content providers and/or consumers could chose.

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What is NN trying to remedy?

• Prevent exclusionary behaviour ? => no discrimination rule:a. “Typical” foreclosure (absent wholesale regulation)?b. “Sabotage” (with wholesale regulation)?

• Wider regulatory objectives (with competing ISPs)? => zero price rule:c. Two-sided-markets implications – i.e. remedy to a “competitive bottleneck”?d. Investment incentives (for ISPs/network vs. CPs)?e. Demand side (consumer information)?f. Is QoS a USO?

• (Access) Remedies:– NN as a blanket ex ante rule (but different versions);– Case-by-case approach – i.e. ex post intervention.

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Foreclosure

• ISPs could have ability and incentives to discriminate against rival content providers – e.g.:

– ISPs leveraging into content/applications; or– Content/application providers leveraging into Internet access?

• Potential concern if conditions exist:

– Market power – in Europe many ISPs in the US cable and telephony network duopoly;

– Vertical integration – present (e.g. Sky providing video and Internet access) but limited?

– Incentives and effects – always/often present? Key question is what is better: • Blanket NN ex ante obligation; or • Case-by-case approach?

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Foreclosure: is Internet different from telephony?

• Foreclosure incentives and risk of consumer harm - compare to “traditional” (voice) telephony:

– Voice telephony => historically strong incentive to exclude rivals that provided services like those of the incumbent; service range limited to voice telephony;

– ISPs may have their own content/services, while rivals can provide competing services – e.g. VoIP -; but the largest majority of third party services will be complementary to those offered by ISPs – e.g. auction sites, social networks etc. Incentive to exclude more confined?

• Sabotage – with cost-based access incumbent has an incentive to engage in non-price discrimination in supplying access to rivals. Used to justify functional separation on BT. NN is an extreme version.  If an ISPs has to offer access to a rival at zero price it may then have incentives to deteriorate the quality of access it provides to rivals.   Hence, sabotage is a concern that emerge from NN as a zero price rule.

• Is the case for ex ante intervention stronger in Internet?

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Wider regulatory objectives?

• What maximises efficiency when:

– Capacity is constrained or costly to expand;– Consumers are heterogeneous; – Application have different requirement (“best efforts” or “priority”)? and– Fixed/common costs?

• Few basic principles:

– Rationing demand;– Product differentiation;– Price discrimination.

• Under (an extreme view of) NN none of the above could be possible;

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Internet Access is a two-sided market

ISPsConsumersContent

Providers

Price?Price

additional consumers benefit content providers

extra content benefits consumers

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What can we learn from the two sided market literature?

a. Cross-group externalities need to be reflected in the efficient structure of prices => efficiency may require one side to be “treated better”;

e.g. advertising supported media => advertisers cover most of the costs viewers/listeners/readers often get it for free;

b. Market failure possible in certain types of two-sided markets (“competitive bottlenecks”) depending on facts and evidence => multi-homing side charged “too much” (inefficient price structure).

• Price (on each side) =

• Cost of provision +• Degree of Market Power ±• Cross Group Externalities

One-sided/ traditional “components”Two-sided “component”

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Which view is right?

• All advertising supported media (TV, radio, newspapers etc) => consumers pay ~ 0, CPs and advertisers pay all => viewers value incremental content less than content providers (and advertisers) value access to extra consumers?

• Internet largely advertising based. Is a different treatment justified?

• “Competitive bottleneck”?

Some factors could counter the “competitive bottleneck” outcome

1.Do consumers single-home (home, office, mobile etc)? 2.CPs may reverse outcome with exclusive contracts - e.g. Apple is paid and does not pay O2 for IPhone;3.Google, Amazon etc. have bargaining power. So may also niche content providers. Are consumers loyal to content providers or ISPs?

“Competitive bottleneck” price (“Too High”)

Efficient price – takes into account cross – group externalities but does not allow for market power exploitation

Price = zero with a NN obligation (“Too Low”)

Removing NN obligation

Price level range without NN

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Investment incentives

• Debate focused on:

– CPs - without NN => disincentives for “next Google”? Or hampering delay sensitive services?

• Simple intuition: without NN, ISPs would charge CPs => fewer funds to invest; • True if ISPs had market power (ISPs could extract CPs’ “rents”); • But CPs with NN could have choice between “free” best effort and pay “priority”;• They could chose “priority” if their customers valued priority access;• Without “priority” some services (e.g. telemedicine) will never emerge?

– ISPs -“best effort” for all => excessive investment in capacity?•   

• With NN, with competing ISPs when congestion arises ISPs/networks could:a. Invest in extra capacity; orb. Ration demand;

• a. is not necessarily more efficient than b. If capacity is lumpy and future demand uncertain b. > a.;

• Without NN, no control of demand => only a. is possible.

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Is contract transparency an issue?

• Absent NN:

– Today there is already some traffic management;

– Tomorrow priority access is likely;

• Consumers contracts may become increasingly complex raising issues about the provision of clear and transparent information;

• A duty to promote transparency of contract provisions in relation to ‘information on any procedures put in place by the undertaking to measure and shape traffic’;

• A further duty to require operators to ‘provide information on any procedures put in place by the provider to measure and shape traffic …, and on how those procedures could impact on service quality.’

• Could concerns be reduced if consumers can chose which content providers to prioritise? Experiments?

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Is QoS a USO?

‘In order to prevent the degradation of service and the hindering or slowing down of traffic over networks, Member States shall ensure that national regulatory authorities are able to set minimum quality of service requirements on an undertaking or undertakings providing public communications networks.’ (New EU Framework)

• Is this a USO type of intervention – i.e. focused on the quality of the service rather than location?

• What is the unit of measure – latency, speed etc.?; is it measurable/verifiable?; will it need to change over time – depending on features of the services it needs to support?

• All USOs are costly. How costly?

• If QoS is set too high would consumers that demand lower QoS be priced out?

• Could ISPs guarantee QoS when they may have not control of some network elements?

Thanks

&

Questions?

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