But Can We Fix It?

One of the upsides people are always touting about having friends is that they can broaden your horizons and expose you to ideas or concepts that would have been outside of your thinking otherwise; the various social media available to us these days make sharing those ideas easier by allowing users to post links to articles on Facebook or Twitter or Twitbook or Facechat or in their Gwitter stati or to taunt their foes with links in Slappy Fish or Candy Clans or … whatever the kids are doing these days.  Not having any friends, I managed to shield myself from this phenomenon for several years before finally breaking down and sending friend requests to complete strangers on Facebook and adding names that sound cool to my Gchat list, which has gone a long way to solve the problem of my crippling loneliness at the expense of opening me up to countless Buzzfeed articles that have finally confirmed that I was alive in the ’90s, finally putting to rest that haunting question forever.  Of course, amidst the interminable dross that appears on my in people’s posts, I’ve found a couple of articles worth reading.

Your Gchat status is like a dark, gothic Neil Diamond

This past week, a number of my contacts have posted links to this article from The Verge by Nilay Patel decrying the current state of the internet in America, which by now I’m sure everyone has read.  (If you haven’t, maybe do, at least so the rest of this diatribe makes sense.)  I’ll admit that I only started reading it briefly before I actually decided to write angrily in response to it, because I have the mental capacity of a third grader, but at this point I have actually read the whole thing.  I’ll also admit that I actually agree with a lot of the points in it — and it’s hard for me to admit that I agree with anything, but I’m sure we’ll get there — but at the same time, because it was posted and linked to by so many people, I’m going to take it to task.  Besides, that’s … sorta my M.O.

Pictured: Me in 20 years

I don’t mean for this to be really be a review of the article, although I’m sure it will come off that way in places.  It’s generally well-researched and makes good supporting arguments for its thesis that the current state of the internet is suboptimal.  (Actually, the thesis includes the idea that “we can fix it,” which we’ll get to later … in the business, we call that “foreshadowing.”)  In the meantime, I’d like to ask a more important question, which isn’t really addressed anywhere in the article: does it matter?

The article cites the recent landmark case (hereafter, “the Verizon ruling”) decided in the favor of ISPs that want to be able to discriminate against what data they carry on their networks.  Now, I’m no expert, and in the rest of this article I may say things that are blatantly wrong (cherish it — you’ll never hear me say that again), but from what I can tell, the case basically boils down to this: ISPs want to be able to charge content providers for carrying their services — basically, Comcast wants to be able to charge Netflix for allowing people to get Netflix; if Netflix refuses to pay, Comcast can refuse to send Netflix’s data to its customers.  Meanwhile, in 2010, the FCC, who theoretically regulates the ISPs, issued an order laying out a vision for “net neutrality,” built upon the Three Laws of Robotics four principles of open internet laid forth in 2005 and somehow invoking the First Amendment guarantee to free speech, basically saying, “You can’t do that.” This issue got taken to court, where (in an admittedly totally BS ruling) the judge basically said, “FCC I totally agree with you, but you argued your case in the wrong words, so ISPs, go do whatever you want.”  Reports then have him cackling maniacally and stroking the white Maine Coon on his lap before having the FCC lawyers fed to sharks for his entertainment.

People’s response to this has largely been to declare that “the internet as we know it is dead,” but I have yet to see a compelling argument for it — people seem reasonably frustrated about the ruling, but they’re blowing the result way out of proportion and doing so not just without supporting their argument but without even making one.   Reasonable articles like this one that try to shed light on the new world vs. the old steer clear of making pronouncements about how the internet will cease to function or how the changes will result in a severely restrictive internet in America, and we’ll be surpassed by the relatively free internet societies in Europe until we ultimately get invaded by the Sino-PanEuropean Alliance in the year 2028 and forced to wear panda costumes in China’s remaining bamboo forests to replace their extinct national bear while European visitors ooh and ah at the “pandas'” graceful beauty.  I want to be very clear before I continue, because I know that some of the people who will read this are opinionated on this subject, and others actually have intelligent insight they can provide — If I had to lean one way or the other on the issue, I would probably prefer a neutral internet.  I want to hear an argument for why this ruling is fundamentally bad on its own.  Please, if you have one, leave a reasonably thought out argument for it in the comments; text it, tweet it, or post it to Instagram — I want to know.

The argument that I hear thrown around, and that the article in question touches upon, is that the ruling is “uncompetitive.”  I would disagree — the argument that actually holds water with me is that the state of the internet, both before and after the ruling, is uncompetitive.  The net neutrality ruling actually has nothing to do with this, but is critically affected by it.  The real indication of monopoly in the marketplace is the merger of Comcast and Time Warner, which is mentioned tangentially to the Verizon ruling.  The figure that’s thrown around is that this new conglomeration will control traffic to 19 of the 20 largest markets in the U.S., which presumably gives them market power in those regions.  This is a problem for 2 reasons — the first is alluded to in the article, which is that there is no incentive to improve upon existing infrastructure; this is why internet is both slower and more expensive in America than elsewhere.  The second is that a captive market, coupled with the new ruling, spells real trouble for content providers — Comcast can basically hold Netflix (and any other provider) for ransom, because they are the only game in town; “if you want to reach your 100 million customers in [INSERT ALL CITIES HERE], you better pay up.”  This would become a huge problem if, for instance, Comcast also offered a streaming video service that got to use its network for free; it would put Netflix out of business.

Let’s step back for a moment and assume that the internet market of today were, if not perfectly competitive, at least more so — say, instead of one or two options for service in the major markets, there are five or ten.  What happens with a non-neutral internet?  Market forces dictate a reasonable price for Netflix to get their traffic to users — if company A is going to charge $1 / Gb of traffic, company B swoops in and offers $.50, Netflix goes with company B, and Netflix users abandon company A in favor of company B unless company A lowers its offer to match, and so on.  The end result for users is that the cable bill goes down (Netflix is now essentially subsidizing their cable bill), while the cost of a Netflix subscription rises.  In the current state, Netflix customers are increasing traffic and increasing the cost of service for non-Netflix users, while in the new system Netflix users are paying for their content, and non-Netflix users no longer have to subsidize them.

This also opens up an interesting prospect in a competitive environment — the legitimate market for people who actually don’t want Netflix.  This gives residential ISPs  the ability to offer their own services, like the hypothetical Comcast streaming video service, without having to deal with Netflix.  Think of this as the Apple vs. Android dichotomy.  I imagine that most of the people freaking out about the ruling are Android users; highly-educated (typically bearded) young people who prefer a high degree of customization.  I’m constantly hearing Android from people that they hate Apple products because an iPhone won’t let you install a Flash player and some of the things they want to do are in Flash, or because they need Blue Tube to put “Dog Party” on their phone.

“Cat Party?” Welcome to five months ago…

What these people are forgetting, looking down at people from their various high horses, is that 98% of people on this planet won’t run into the specific customization issues they face — they want a well-integrated package that will do the things they want without having to be exposed to installation nightmares and source code.  You necessarily sacrifice something to get that — maybe the iPhone doesn’t support Flash, so you can’t get the Homestar Runner app, and that’s a bummer!  But at the end of the day, everything that’s available to you is available through a single source, and each piece of content has been vetted by experts who have verified that it’s safe and runs appropriately on the system in question.  This isn’t to say the system is flawless — it has the same drawbacks as any autocratic system, including the additional bureaucracy of releasing an app and a panel of judges whose opinions may differ from the users’, or whose judgments of safety may prove incorrect — but that doesn’t mean there isn’t a market for it.  I can certainly see the appeal to someone who doesn’t know the first thing about the inner workings of their devices; it’s a classical division of labor.  Just as in Adam Smith’s example of the nail factory, where one worker fashions the point of the nail and passes it along to a worker who fashions the head, their combined expertise allowing the nail-making decreasing the time spent on nail making by orders of magnitude, the App Review Board determines which platforms are safe for watching cat videos, freeing the Apple customer to watch even more cat videos without having to worry about which platform to use.

The critical thing that makes this system work is that there is an Android market, which serves as a competitor and allows the customization and an escape from the autocratic authority of the Apple package; no one is subject to the arbitrary rulings of the App Review Board, because they can always leave the Apple market.  Similarly, one can imagine that, in a competitive ISP market, certain residential ISPs might begin offering integrated packages, providing support for proprietary or third-party platforms for accessing specific web content.  It’s not hard to imagine the appeal of such a service in a home with children, where having reliable content restrictions placed in the hands of a third party without having to set up complicated hardware or software (that will ultimately be circumvented by the kids, since they’ll understand it better than the adults) might appeal to a number of parents.  The key here is to ensure that the customizable market still exists — that people who know what they’re doing and can evaluate the tradeoffs they’re making can decide that they want their content to come from Netflix instead of Hulu, because the Netflix connection is routed through their hometown whereas Hulu is routed through China or whatever.  The terrifying thing about the net neutrality ruling is that companies like AT&T can block FaceTime and Google Hangouts, and then users are left with no way to get them back, because there are no competitors they can turn to to get that content — that’s the real issue with the ruling.

Having established that the real case for the internet being broken right now is the fundamental lack of competition for service providers, and that this factor is the real issue behind the net neutrality ruling, what can we do about it?  Remember, the article’s thesis includes that “we can fix it” bit, so what does the article propose? We should treat the internet like a utility and … actually, that’s it.  It offers no other solutions.  It does offer four clear problems with the internet, to quote, “So there’s the entire problem, expressed in four simple ideas: the internet is a utility, there is zero meaningful competition to provide that utility to Americans, all internet providers should be treated equally, and the FCC is doing a miserably ineffective job.”  It argues the last 3 pretty well (we’ll get to the first in a moment), but when pressed, not one of these is given a solution, including this priceless quote from Free Press president Craig Aaron:

“What we need right now is decisive action,” he says. “We can still unfuck the internet.”

Or, in other words…

Of the four given problems, I think three have solutions that, if not explicitly mentioned in the article, are at least obvious given the nature of the problem: Treat the internet like a utility, treat all ISPs equally regardless of the medium of their network, and strengthen the FCC.   There is no explicit solution given to competition problem, although the argument implied seems to be that strengthening the FCC should solve this as well, because a strengthened FCC could fight back against monopolies.

But before we get to that, we have to examine the central argument that the internet is a utility.  This is the central argument — well, actually, argument is a strong word, it’s more of an assertion in this article; the closest thing he comes to an argument is, “My friend Paul Miller lived without the internet for a year and I’m still not entirely sure he’s recovered from the experience,” which … I don’t think qualifies something as a utility?  Actually, what he’s trying to say is that the internet networks are common carriers — which is different from a utility, which maintains infrastructure for a public service, and until internet access is declared a public service, which could happen but probably won’t given how long it’s been in the works, ISPs will not be utilities — and that common carriers are subject to regulation by a regulatory body, in this case the Federal Communications Commission.  As it stands now, internet networks are in many ways treated like common carriers, but they aren’t technically classified as such, so the FCC’s authority is a bit murky, although if there is a regulatory body governing internet behavior, it probably is the FCC.  (As I understand it, this is basically the reason the FCC lost the Verizon case — they insufficiently argued that they have regulatory oversight over the internet backbone service providers.)

Establishing whether the internet backbone serves as a common carrier is essential for the framing of the rest of the argument, because it determines the manner in which the FCC regulates the internet.  The concept of the common carrier exists because of the high cost of market entry — the common carrier label is used in cases of natural monopoly, in which the cost of required infrastructure to enter the market is so high that, once an entity has established itself, it is infeasible for potential competitors to make the same investment.  In those cases, the theory goes, it makes sense for the government to allow the monopoly, and by doing so, the government encourages innovation and investment in infrastructure by allowing the company to profit.  However, the government also sets up a regulatory body, which has the authority to stop the monopoly from unduly exercising the market power that the government has allowed it to have — this system is what allows local competitor to rent out the infrastructure from the monopoly (hence, common carrier), and ultimately allows the local water company to spend millions of dollars building water pipes out to your house, but also stops it from charging you $10,000 a gallon once a city has been built and populated with the assumption that everyone will have indoor plumbing.

(Incidentally, this is an argument to me against the internet as a utility or a public good — utilities are essential public services.  The assumption of cheap access to water has revolutionized the way we build cities — the Empire State Building couldn’t exist if we still emptied our waste into the streets or couldn’t pump water up to the 81st floor.  Similarly, the assumption of cheap energy has revolutionized how and where we build — whether for the better or not.  The ability to cool a home with air conditioning in the summer or warm a home in winter with cheap natural gas has led to population growth in southern and northern cities that would have been simply unsustainable without them, while simultaneously allowing builders to eschew previous methods for keeping a dwelling livable, like natural ventilation or insulation.  When the water goes out or the price goes up, people die.  When the power goes out or the price goes up, people die.  Even telephones, which serve as the primary method of emergency communication, are essential — this is why calling 911 is free, no matter what.  When the price of your internet goes up, you pay more to watch House of Cards.  When your internet goes out, you read a book.  Sure, price gouging on the internet backbone would do irreparable damage to the world economy, but people wouldn’t freeze to death or die and rot in their own filth.)

The internet backbone certainly seems like it could be considered a natural monopoly — the fiberoptic cables laid down probably cost billions of dollars, which is presumably enough to keep all but the largest competitors out of the market.  This means that the FCC can regulate it (or at least, someone can), and certainly means that the Verizon ruling is no good, since one of the tenets of common carriers is that they cannot refuse (legal) service — this is basically the foundation of the net neutrality order that the FCC issued.

So, if the internet backbone is a common carrier, the FCC can enforce net neutrality — but what does this mean for competition?  Actually, it’s probably a bad thing.  If we assume that principal problem with the internet is lack of competition, maybe we don’t want the FCC involved.  We’ve already established that the common carrier model was created for the explicit purposes of markets where there isn’t competition — if we assume the common carrier model, we’re basically stuck with the existing internet backbone, and the only thing the FCC can do about it is make sure that they’re providing service to everyone and that they’re not price gouging, which are admittedly good things, but basically leave us where are now — we don’t see cheaper or faster backbone service, and there’s not much of an incentive for further investment.  The common carrier model still allows for local competition, and the FCC may be able to foster a competitive environment for residential ISPs using the common carrier backbone.  The article is basically asking for more regulation through a strengthened FCC as though that would increase competition in the backbone, as in the trust-busting at the turn of the 20th century and the Bell breakup of the ’80s, but it forgets that it was the Telecommunications Act of 1996, championed by and strengthening the FCC, that allowed for the baby Bells to re-conglomerate.

Regulation swings both ways.  Regulation can either be used to protect competitiveness — trust-busting — or, as is the case for public utilities, to regulate the exercise of market power in non-competitive markets.  As someone with literally ones of years of experience in power markets, it strikes me that we don’t want the FCC to act in the second way; in fact, it is the “deregulated” energy markets in certain areas (the mid-Atlantic, the northeast, the midwest, California, and Texas, for example), rather than the highly-regulated markets (as in the southeast), that provide a framework for efficient allocations of investment in public backbone infrastructure through competitive pricing mechanisms, determined by local energy supply and demand.  Instead, we want an FCC that busts the Comcast-Time Warner merger and looks for anti-competitive behavior in the market, essentially creating a market where the outcome of the Verizon case leads to more competition, rather than less.

The article asserts that the internet is anticompetitive, and that “we can fix it,” but I’m not so sure.  The issue is (obviously) complicated, and the FCC’s power to regulate is unclear.  Classifying the internet backbone as a utility — or even as a common carrier — lends credibility to the FCC’s powers at the potential expense of a competitive market, and a competitive market undermines the credibility of the common carrier model.  It strikes me that the real way to fix the internet, if it is even possible to do so, is to create that competitive environment through private investment in internet backbone infrastructure — eliminate the case for the internet as a common carrier, remove the FCC (and its apparent incompetence) from the picture, and allow market forces to determine net neutrality and drive Comcast, Time Warner, and Verizon out of business.  Seriously, I hate those guys.

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