Making Net Neutrality Sustainable

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(From, see attribution info at the bottom)

Executive Summary:

Network Neutrality as currently conceived requires changes in carrier behavior that are contrary to their corporate culture and business model, so we can expect their active opposition even after Network Neutrality becomes law. If carrier resistance prevails, the Internet stands to lose its key success factor. The Network Neutrality movement can learn from history; the demise of Unbundled Network Elements (UNEs) and the ensuing collapse of telephone and Internet competition provides an parallel. The solution is strategy that is more ambitious and more patient, that addresses industry structure rather than carrier behavior.


Network Neutrality Movement vs. Carriers

I'm proud to be part of the Network Neutrality movement, which raised the prohibition of, "any service that privileges, degrades or prioritizes any packet . . . based on its source, ownership or destination," from an unknown issue in 2005 to a cause célèbre in 2006. It achieved this victory despite a press blackout so complete that Project Censored named Network Neutrality its #1 most under-reported story of 2006! The Network Neutrality movement is leading a struggle for the Internet's essence; the Internet would not be the everyday necessity it is today, or hold promise for tomorrow, if it were not neutral.

At the same time, I've grown concerned that Network Neutrality rules and regulations based on constraining carrier behavior are not sustainable as long as the carriers -- the telephone, cable and mobile companies -- whose behavior these rules would constrain, continue to operate according to their legacy business model. And I've seen signs that some of the Network Neutrality movement's leaders don't seem to take account of how the carriers' vertically integrated business model and special-purpose networks have shaped carrier culture. Just as understanding the cultures of Iraq might have guided the U.S. to a different course there, so might understanding the legacy that motivates telephone, cable and cellular companies help us make a neutral Internet sustainable.

The task is urgent, because as I write carriers are trialing a new infrastructure called Internet Multimedia Subsystem (IMS) that will embed discrimination in their entire Internet access infrastructure. When IMS is deployed, it will effectively prevent the return to a neutral Internet.

However, before I launch into this exploration of carrier culture, carrier business models and how we can make the Internet's neutrality stable and lasting, let me clearly emphasize two things, lest my message be distorted by Network Neutrality's opponents: 1. Network Neutrality as currently conceived is a good thing and an important step forward. 2. The leaders of the Network Neutrality movement are heroes who have devoted their careers to the creation of good technology policy and who made miracles in 2006.

How Carriers Understand the Internet Threat

In the waning hours of 2006, during the FCC'S negotiations on AT&T's merger with BellSouth, Network Neutrality advocates fought hard and won several very important concessions. However, in post-negotiation discussions, they adopted a "talking point" to the effect that Network Neutrality would not hurt the giant merged telephone company's business interests. One of the movement's negotiators said, "The conditions placed on this merger will show irrefutably that Network Neutrality and phone company profits are not mutually exclusive." Another said, "The fact that AT&T reported nearly $2 billion in profits, up 17% from a year ago, double-digit growth in earnings per share, growth in residential lines should put to rest any concerns that Network Neutrality requirements will harm AT&T's growth now or in the future."

At best, the talking point is inaccurate, because we have not yet seen systematic Internet Discrimination or its effects on carrier profits, but I think it points to deeper misunderstanding. Carriers don't spend $1.5 million a week as they did in 2006 lobbying against Network Neutrality unless they believe they will be harmed by it! I think the carriers' belief is correct; Network Neutrality rules strong enough to keep the Internet neutral will indeed weaken their business. (I don't think that's a bad thing provided we can figure out other ways to provide Internet access.) I've been saying for a decade that the Internet is incompatible with telephone companies in their current form Then I warned (with David Weinberger) that there's an untenable paradox when carriers that are built on a legacy of special-purpose networks sell plain, neutral Internet connectivity . In 2002, many of my colleagues and I wrote to the FCC urging that it should avoid propping up incumbent carriers and let them fail fast so new, more Internet compatible operating models might emerge The conclusion of this work for carriers is that the neutral, stupid, end-to-end Internet is such disruptive technology that they must denature it or face the risk that it could weaken them and ultimately put them out of business.

A decade ago the big telephone companies were complacent about the Internet. Now they see Internet applications beginning to have revenue impact on their core businesses. Skype, for example, is an Internet telephony application that is capable of better voice quality than telephony, with useful features impossible for a conventional telephone company to deploy. It isn't tied to the telephone company's network and it can run on any Internet connection. In a similar manner, video applications such as Vuze provide disruptive Internet alternatives to conventional cable-based video services, and wi-fi appliances using Voice over Internet Protocol promise to disrupt the mobile telephony sector.

In the early 2000s carriers began to understand the threat. Carrier executives started speaking publicly about it several years before Ed Whitacre's famous complaint about how popular Internet applications are using "his pipes" for free. In 2003, for example, AT&T CEO Dave Dorman complained, "Email is a feature that nobody pays for," and called for the restoration of "network resident" applications. Coincidentally, 2003 marked the first of three carrier milestones that rolled back their obligations to provide a neutral Internet. These were the FCC triennial order of 2003 (which lightened key public obligations on the installers of local access fiber), the Supreme Court's Brand X decision in 2005 (which lightened many public obligations of cable owners) and the subsequent FCC DSL order (which lightened the public obligations of DSL providers).

Viewed against these milestones, Network Neutrality is a come- from-behind tactical reaction that only arose after the legacy of common carrier obligations had been hollowed out, after critical distinctions between infrastructure and information, carriage and content, and basic and enhanced services had been defined into fragmentary meaninglessness, and after the competition envisioned as better than government regulation by the Telecom Act of 1996 had devolved to a grunch of giants.

Accordingly, we need more than legal policy if a neutral Internet is to endure. We must address the non-neutrality of the carriers' technological infrastructure, core business model and, indeed, their self-concept.

The Carrier Business Model

Carriers are slow to act, but once they do, they're relentless. Their next step, the introduction of Internet Discrimination, is likely to take a decade, maybe two. It is an economic imperative to them. Discrimination is built into the special-purpose networks that are the foundation of their business model.

For 130 years, if you wanted telephony on a telephone network, you used the telephone company's telephony application. There were no alternatives. Application discrimination was automatic. Now, in contrast, on a neutral Internet connection you can run Skype or Vonage or Gizmo or CallVantage or dozens of other Internet telephony applications. But on Verizon's conventional telephone network you can only run Verizon telephony. These facts may seem obvious, but they're important because tying the application to the underlying network is the cornerstone of the carrier business model.

In other words, until the Internet arrived, carriers have always sold the application and used application revenues to operate the underlying special-purpose network. So, for example, a cable company's core business is selling video entertainment it chooses rather than connectivity, via its cable, to anything, including other video entertainment! The Internet breaks the special-purpose network based carrier business model.

Carrier executives are now scared. In private, when I talk about Network Neutrality with them, they talk about capital expenditure, incomplete amortization, the loss of traditional customers and the growing strength of application-based competitors.

It is extremely difficult for established companies to adopt a new business model. It is not clear how companies build successful new business models in the first place, but Eric Beinhocker in The Origins of Wealth suggests that successful models may come more from trial and error than from insight and intent. Clayton Christiansen's Innovator's Dilemma describes how businesses actively suppress innovation; at budget time when there's a decision between improving an established product or developing a young, risky, marginally profitable one, it's a no-brainer. In addition, Robert Jackall, in his study corporate culture published as Moral Mazes, observes that under Management by Objective, bottom-up innovation causes pain for one's boss, which, in turn, reduces one's promotability with predictable effects on innovation. In all cases, the larger the change, the more likely that change will be suppressed. A new business model based on a nondiscriminatory Internet would be difficult and risky at best.

Carriers see themselves as providers of telephony, video entertainment and mobile telephony. These applications have shaped their corporate culture, their way of doing business and their physical infrastructure. Carriers see Internet access as a new, supplemental business. They see their road to profitability paved by Internet Discrimination, because Internet Discrimination casts the Internet in terms that are congruent with their historical, established business model. So the carriers are intent on rolling back the legal prohibitions against Internet Discrimination.

In addition, they're developing and testing a new network architecture that tracks packets across the network and enables differential packet-by- packet treatment and charging. It is called Internet Multimedia Subsystem, or IMS. IMS is to be the technological realization of the carriers' plan to cast the Internet in terms consistent with their legacy business model. Indeed, IMS will only have value to them if Internet Discrimination is legal.

The Lesson of Unbundled Network Elements

Network Neutrality advocates should learn from history about how the carriers work. Take, for example, their persistent campaign to neutralize the idea of Unbundled Network Elements (UNEs). UNEs were created under the Telecom Act of 1996 to enable new competition. Specifically, the problem UNEs were created to solve was that a new Competitive Local Exchange Company (CLEC) or facilities-based Internet Service Provider (ISP) that wanted its own network would need a massive chunk of capital, then a period of network construction, before seeing revenue dollar #1. So UNE rules were introduced whereby incumbent telcos (ILECs) would make elements of their network (elements such as local loop, switching, etc.) available to new CLECs at prices that would allow these new companies to offer services and earn revenues from them.

The theory was that new CLECs would build their own physical network facilities gradually as business revenues grew. The ILECs owed their success to their privileged role as a monopoly with guaranteed profits because they provided a public good, rather than to technological superiority or competitive prowess. So the framers of the 1996 Act saw UNEs as a reasonable way to re-distribute that public good to introduce competition.

The ILECs saw UNEs differently. UNEs were against their interests. UNEs enabled their competitors. Thus the ILECs framed UNE's as an unfair taking of their private property. And they behaved accordingly.

The ILEC influence on initial UNE rules was so heavy that even AT&T, then a long-distance-only company, was not able to launch a viable UNE- based local telephony business. The conditions under which the ILECs were to offer UNEs (known in the trade as "necessary and impair") were sufficiently ambiguous as to be subject to endless litigation. An ILEC could simply out- lawyer, out-appeal and out-wait new entrants. Hundreds of small CLECs (here CLEC includes facilities-based Internet Service Providers, or ISPs) sprang up between 1996 and 2000 planning to use UNEs to offer network services and grow. Virtually all of them went out of business over the following few years as the entire UNE concept was worn away by a constant trickle of seemingly minor technical FCC and court decisions.

The ILECs survived even as they continued to complain that they were selling "their" network elements, "below cost." They had other fiscal troubles due to (a) the rapid adoption of dial-up Internet access, (b) the equally rapid abandonment of dial-up Internet access as customers switched to cable and then DSL too, (c) a parallel adoption and abandonment of fax machines, and (d) the rapid shift to mobile phones. The ILECs were left battered but standing. The CLECs were wiped out. In the end, some two trillion dollars in market capitalization was destroyed.

UNEs were not the only cause of the CLECs' demise, to be sure. Overspending, irrational exuberance, bad growth projections, ILEC-friendly regulators, incompetent management and even criminal behavior played a role. But the demise of UNEs was a major and under-recognized strategic means of influence.

In 2003, the FCC essentially eliminated UNE rules for broadband networks. The competition envisioned by the Telecom Act of 1996 was dead.

When Network Neutrality Dies

There is a clear parallel between UNEs and Network Neutrality. Like Network Neutrality, UNEs were envisioned as a fair, public-spirited means of ensuring competition. Both ideas are actively opposed by the telcos because they are contrary to their business interests. In other words, just as the telcos saw UNEs as using "their" infrastructure to enable their competitors, so do telcos and cablecos see Network Neutrality as enabling application providers to offer "their" applications. Like UNEs, Network Neutrality is, at inception, already a weak compromise, and like UNEs, we can be sure that the telcos will exploit every ambiguity, litigate every "and," "but" and comma, in every Network Neutrality rule and regulation, and will not rest until Network Neutrality has been rendered totally ineffective.

Then, just as the demise of UNEs spurred the collapse of the entire CLEC sector, so would the collapse of Network Neutrality gut the now- vibrant Internet applications sector. If Network Neutrality collapses -- and history teaches us that policy alone is not a strong enough bulwark against carriers defending their legacy -- our carrier will stand between us and our Internet searches, us and our private correspondence, us and our medical information, us and our travel plans, us and our financial transactions. When Network Neutrality goes, eBay, Amazon, Yahoo and Google will need to fight for their lives, and a thousand lesser- known apps and services, will be captured, neutered, destroyed or forced into some inaccessible corner. The walls enclosing quasi-public services like MySpace and FaceBook will grow higher. My blog and yours will be shoved into a "free speech zone" in some barbed-wire corner of the Internet.

The above scenario may not play out exactly like this, but the vector of carrier opposition to Network Neutrality is obvious. We can expect the carriers' push against Network Neutrality -- even after rules and regulations go into effect! -- will be relentless.

Making Network Neutrality Sustainable

If it is to succeed, the pro-Network Neutrality campaign must be as persistent and forward- looking as the carriers'.

I am skeptical about the long-term viability of simply prohibiting Internet Discrimination. The occurrence of discrimination might be hard to establish, and carriers might see penalties as just a cost of doing business. More likely, exigencies will arise -- terrorism, copyright violations, et cetera -- that are manipulated to make broad-daylight Internet Discrimination seem acceptable and moot even the strongest ex ante rules and deterring penalties. So whether or not we succeed in making Internet Discrimination illegal, we should also take initiatives like the following:

1) We should put the concept of structural separation back on the table! If 1.6 million save-the-Internet petitioners can understand Network Neutrality enough to realize it applies to them, they can understand the idea that NETWORK OPERATORS MUST NOT HAVE A FINANCIAL INTEREST IN THE APPLICATIONS THAT THEY CARRY. This is a bright line. It will be obvious if carriers cross it or obfuscate it. But instituting it will be a long- term, come-from-behind strategic effort. It should begin now.

2) We should expand the coalition of Internet customers to

  • all* users of the Internet. As Internet customers, Boeing

and GE and Monsanto, and the AFL-CIO and AARP and United Health Care, share more interests with citizen Internet users and Internet companies than they do with carriers. This too must be a long-term persistent effort.

3) We should clearly frame the current telco industry structure as monopolistic. After the mergers of MCI, AT&T and BellSouth, US telecom competition is all but dead. The only thing worse than a monopoly is an unregulated monopoly. Even worse is a monopoly that sees its business threatened by freedom, innovation, competition and technological progress afforded by an open, neutral Internet.

4) The Network Neutrality movement should frame its advocacy in Congress, at the FCC and in the States in terms of a national telecommunications policy to unify what now might seem to be independent projects, including advocacy of faster access at lower prices, community and municipal Internet access networks, progressive CALEA, 911 and universal service policies that are not weighted against new competitors, explicit and clear terms of service, regulations that permit using any device on mobile telephone networks, and the harmonization of U.S. spectrum policy with technological advances.

Dilemma: The Internet Connectivity Providers Are the Anti-Neuts

The largest providers of today's Internet infrastructure are also the strongest opponents of Network Neutrality. If their profit stream diminishes, which it must if the Internet is to remain neutral, stupid and open, then we weaken the infrastructure for that which we value. This is not a new thought, see The Paradox of the Best Network What is new is that the opposition of the telcos and cablecos has now crystallized in a full-on assault on the Internet's neutrality. Their end game is a corporatized Internet that stifles freedom, democracy and innovation incidental to reifying the telco-cableco business model. Ultimately, the vision of the Network Neutrality movement must encompass more than the circumscription of certain carrier behaviors; it must be structural.

We must resolve to persist until today's dinosaurs evolve into birds. That is, we must face the fact that if the Internet is to survive as a neutral network, sooner or later we will need Internet access without carriers as we know them today. So we need to decide whether we keep the neutral Internet or we keep today's carriers, because we won't be able to have both.

The author thanks Rob Berger, Mike Godwin, Peter Kaminski, Katrin Verclas, David Weinberger, Rick Whitt and Tim Wu for their comments on earlier drafts.


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