A version of this post originally appeared on George Scoville’s blog.
Courtesy of Politico Morning Tech, here’s a real doozie of a quote from the head of the world’s premier video streaming service:
Some big ISPs are extracting a toll because they can — they effectively control access to millions of consumers and are willing to sacrifice the interests of their own customers to press Netflix and others to pay.
Woof. Charging a toll is exactly what ISPs are doing, not only because they can, but because they should:
Verizon can only supply a limited amount of mobile bandwidth on its 3G and 4G networks — just like a 12-volt battery can only supply a limited amount of power. When many users with no barrier to their consumption of data — or at least no barrier above a $30 per month fee — they have in effect incentives to over-consume the limited resource. This is a classic collective action/tragedy of the commons case, and the fact that, [when consumers face very low prices for network access], Verizon’s network experiences strain from lots of data-hungry consumers [and can’t keep up with demand], the current pricing system is inefficient.
I suspect that the pervasiveness of mobile video is probably the cause of this problem generally — and mobile video probably wasn’t as prevalent in the marketplace as it is today when Verizon originally designed its pricing scheme. But the addition of both the iPhone and the iPad to Verizon’s suite of devices, including wireless modems, probably adds additional strain to their network.
One of the ways economists suggest dealing with inefficiencies like this — in the allocation of Verizon’s bandwidth across its customer base — is congestion pricing. As a matter of public policy, we usually talk about this in terms of metered parking spots, or tolls on major highways [since the same principles apply in transit]. Here’s a great video primer on the basic economics of congestion pricing:
Netflix specifically, too, has recognized and embraced these principles before when they raised prices on consumers and split video and DVD/Blu-ray into separate subscription services. As their subscriber base grew, the strain on their servers and the costs to send physical media via First Class Mail both rose.
Like Verizon needed to change its data plans when video-capable mobile devices came online, especially the iPad and iPhone 4, Netflix now needs to meter its [outgoing] bandwidth more carefully. Netflix accounts, after all, for 30% of all web traffic in the U.S. Offering every subscriber unlimited access to content for a set price, in addition to a certain number of DVDs per month, costs a lot of money — which says nothing of ever-rising postage costs for shipping DVDs via first class mail. Splitting subscriber plans into fully-serviced DVD and streaming plans makes good business sense because of the efficiency gains in the markets for bandwidth and rented DVDs shipped first class. Netflix will be better able to provide services over time to subscribers in each domain — or to people in both domains, like me, who will probably subscribe to both plans (until all content is licensed for streaming capability — then I’ll think about cutting the DVD service, although access to Blu-ray discs has been nice for me).
Hastings’s complaint is similar (and just as silly) to the consumer complaints that erupted when Verizon and his own Netflix raised prices on their consumers. Netflix subscribers already pay two prices to stream video: one to their ISP for service, and one to Netflix for a license to view the content. They pay for downstream bandwidth (downloading). Netflix, which has deep market penetration and saturation, especially thanks to mobile apps and apps on television parallel devices (Blu-ray players, gaming systems, etc.), all in addition to laptop and desktop computer browsers, has burdened networks with a rapidly increasing share of upstreaming bandwidth (uploading), and often in high definition, no less. Netflix should pay the people and companies responsible for carrying that content from Netflix servers to subscribers for that activity, just like Internet service and Netflix subscribers should pay more for faster download speeds. This is pretty basic economic thinking.
Reed Hastings doesn’t want to have to pay more for content distribution, because if he does, he’ll have to pass his costs on to his consumers, and he might lose some of them. That’s bad for Netflix’s bottom line. Building its own physical networks would be costly, too. And with iTunes, Google Play, Hulu, and lots of other streaming content providers now competing for the same sets of eyeballs, the stakes of competing are a lot higher. So Hastings and his allies instead call for the government to implement “hard” network neutrality regulations: blunt instruments of public policy that cynically employ terms like “neutrality” to have broad appeal, the elevator pitches for which include terms like “consumer choice” and, in some cases, run right up to hyperbole like “foremost free speech issue of our time.” Dan Rayburn, too, has a great post about how Netflix clouds this issue more than it offers a solution (perhaps deliberately, he argues) — here’s an excerpt:
Late yesterday, Netflix’s CEO published a blog post making the argument that “stronger” net neutrality is needed and that Netflix will “fight for the Internet”. This follows a post earlier in the week from Level 3 in which they said some ISPs are playing “chicken” with the Internet and purposely causing “congestion”. Unfortunately, both companies are only telling half the story when it comes to this subject and are leaving out some very important facts. They are also making some statements that are factually inaccurate, contradicting themselves and providing nothing in the way of clarity to the topic.
If anything, Netflix, Level 3 and Cogent are doing the opposite and muddying the conversation by using vague, generic and high-level terms, with no definition of what they mean or how they think they should be applied. Even worse, they aren’t detailing any business or technical alternatives on how they think the problem could be solved. They are all doing a lot of posturing and complaining in the media, yet to date, none have outlined any detailed proposal on how they would like to see interconnection relationships regulated or how they want net neutrality rules changed….
So as much as Netflix wants to make this into a net neutrally issue, it’s a business issue. Netflix has alternatives, they chose not to use them. One could also argue that, by Netflix not routing around the performance issues with Cogent, the end result is that it forces the ISP to take angry calls from consumers. And if the ISP gets enough of those calls, maybe the ISP would then agree to join Netflix’s Open Connect program and allow Netflix to come into the ISPs last mile to place their own servers. Netflix’s motives in this whole argument is to protect their business, which is fine, but then they should not portray their argument as one where they are “fighting for the Internet”.
Net neutrality isn’t about what’s best for consumers. Net neutrality is about what’s best for crony capitalists. Don’t be fooled by the packaging of the message.