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We use the Internet an enormous amount. At home, we consume north of 150 gigabytes of data every single month; on the go, we consume 7.5GB of LTE mobile network data, in addition to an unknown amount of data via our office computer.
The Internet, amazingly, appears to work awfully well, considering the rapid increases in bandwidth consumption over the past several years (with one notable exception, the quality of out-of-home Wi-Fi). Honestly, we have more trouble accessing video-on-demand via MVPDs than we do streaming content via the Internet.
Yet there is a tremendous amount of focus on whether to or how to regulate the Internet to ensure its openness and foster innovation. These actions/inactions have the potential to impact every company we follow. While the FCC has not even laid out its formal plan yet, there has been a firestorm of criticism from technology companies claiming the FCC’s new policies will literally destroy the Internet and stifle innovation. There’s even a White House petition circulating.
Do fast lanes mean there are, by definition, slow lanes?
Starting with net neutrality, the key fear/concern from open Internet advocates is that enabling ISPs to create “fast lanes” is a disaster for innovation and creativity. Essentially, the belief is that creating fast lanes means the rest of the Web will be stuck in the “slow lane.” Sen. Al Franken’s comments from earlier this week make it sound like the entire Internet as we know it as at grave risk, based on the concept of fast lanes.
An ISP’s bandwidth is not fixed at current levels: As MVPDs shift to all-digital infrastructures, they have significant capacity to dedicate a larger portion of their “pipes” to broadband, which can meaningfully increase bandwidth available to consumers from today’s levels.
Think of bandwidth as a highway: If an entirely new lane is added at the ISP’s expense, that does not harm anyone riding along on the preexisting highway. We struggle to understand why enabling an “extra” HOV lane is bad policy that requires government regulation.
One should not simply assume that the creation of fast lanes of dedicated bandwidth forces everyone else who chooses not to pay ISPs, or cannot pay ISPs, into slow lanes. While those lanes may be slower than the fast lanes, they were slower with or without the fast lanes.
And if bandwidth-heavy traffic that would have traveled over the open Internet (adding to congestion) is offloaded onto a separate fast lane that does not impair the preexisting pipe’s bandwidth capabilities, it should actually ease congestion on the existing lanes, rather than create slow lanes.
The regulatory question is whether ISPs are intentionally harming the overall health of the preexisting pipe to force an increasing number of bandwidth-heavy content sites to seek paid fast lanes. If we end up with fast lanes occupying far more of the pipe because ISPs stop investing in the core “non-prioritized” pipes they provide consumers, the government will clearly need to revisit this issue.
Think of fast lanes like HBO and MTV
Net neutrality proponents continue to write that there is no way to create fast lanes without creating slow lanes. We fundamentally disagree with fast-lane skeptics. In fact, we suspect that many fast-lane skeptics have actually been using fast lanes and did not even realize it: ISPs across the country are delivering managed or specialized network services.
The FCC enabled managed services or specialized network services in its December 2010 Preserving the Open Internet order. (Note: This rule-making was mostly overturned by the courts earlier this year):
“In the Open Internet NPRM, the Commission recognized that broadband providers offer services that share capacity with broadband Internet access service over providers’ last-mile facilities, and may develop and offer other such services in the future. These “specialized services,” such as some broadband providers’ existing facilities-based VoIP and Internet Protocol-video offerings, differ from broadband Internet access service and may drive additional private investment in broadband networks and provide end users valued services, supplementing the benefits of the open Internet.
“At the same time, specialized services may raise concerns regarding bypassing open Internet protections, supplanting the open Internet, and enabling anticompetitive conduct.”
Managed service “fast lanes” are how VoIP works today on cable systems, and net neutrality proponents never complain. Beyond VoIP, Cablevision, Time Warner Cable, Cox and Comcast all have live, linear IP-video products that are delivered in the home as managed or specialized network services to a variety of devices.
For example, Time Warner Cable dedicates distinct bandwidth for its in-home TWC TV apps, no different than when it needed to allocate bandwidth years ago for HBO HD or MTV HD. Time Warner Cable is not harming or taking bandwidth away from its Internet product at all. What is happening is that the 6 MHz channels that historically were used for analog video are being repurposed in an increasingly all-digital environment, freeing up capacity for other uses.
The TWC TV content flows from Time Warner Cable’s digital center in Denver directly to households across their footprint on Time Warner Cable’s proprietary backbone, the TWC TV app‘s content never touches the open Internet (no peering, no interconnections). As a managed service, the TWC TV content can be delivered more reliably and in higher quality without impairing the Internet in any way.
Complaints over managed service (fast lanes) last reared their head in 2012, when Netflix’s Reed Hastings called out Comcast’s Brian Roberts on his public Facebook feed for net neutrality violations.
Conceptually, if Netflix or any other company wants to pay Comcast or any other ISP to create a dedicated channel for their IP-based service that never touches the actual Internet, we have a hard time understanding why the government needs to impose regulations to prevent that. How can the government decide that adding VoIP is okay, or adding HBO Ultra HD is okay, but adding a dedicated Netflix IP-channel is bad?
Full disclosure should prevent bad behavior
Lastly, and maybe most importantly, the FCC has made clear that it will require full disclosure and accountability if and when it chooses to put in place “fast lane” paid access agreements. The essence of FCC Chairman Tom Wheeler’s comments last week at NCTA was that if the ISPs abuse their broadband opportunities and end up harming consumers, the FCC would not hesitate to invoke Title II regulation, which would be devastating to ISP public market valuations.
This essay is excerpted from two recent BTIG blog posts; read them in full here and here. (Free registration required.)
Rich Greenfield is a TMT research analyst at BTIG in New York. Previously, he was managing director and co-head of research at Pali Capital; earlier in his career, he worked at Goldman Sachs and Fulcrum Global. Reach him @RichBTIG and rgreenfield@btig.com.