Monday, June 12, 2006

Net Neutrality: The Subtext

Net neutrality is seriously on the ropes—the House of Representatives defeated amendments to the Communications Opportunity, Promotion, and Enhancement (COPE) Act that would preserve equal access to services on the Internet. However, the real issue isn’t whether the telcos and cable MSOs will exercise their power to discriminate against individual Internet content and service providers, but rather which content and service providers they’ll discriminate against. Somewhat surprisingly, I think that they’ll all discriminate against the same ones: VoIP and IPTV (video) providers.

It’s fairly obvious as to why the telcos want to make VoIP providers go away: Companies like Vonage and 8x8 offer comparable service to the telcos for half the price, and Skype and its ilk are largely free. Plain Old Telephone Service (POTS) has been on the decline for years, but it still represents a “cash cow” for AT&T and Verizon that neither company wants to see taken to slaughter any time soon. What’s more surprising is that the cable MSOs also want to kill VoIP competitors. The reason is that the cable operators are depending on revenues from local and long distance telephone service to help pay off their investments in two-way digital infrastructure. In my neck of the woods, Comcast is selling its VoIP service for $39.99/month, compared with Vonage at $24.95/month. All other things being equal, the quality of the two services should be just about the same, so why would anyone pay $15/month more for Comcast? How about if Comcast subscribers using Vonage get such a slow class of service that their phones are all but unusable?

The other field of potential carnage is IPTV. Again, it’s obvious why the MSOs would want to discriminate against video providers—they’re direct competitors for subscribers’ eyeballs. Cable subscribers who are watching third-party IPTV services aren’t watching cable television. Advertisers can’t reach them, so the cable operators will lose local advertising revenue. And, if cable subscribers watch enough third-party IPTV, they may not want to subscribe to premium cable channels. However, if the MSOs drop the available bandwidth for competitive IPTV services, their programs will look less like television and more like bad streaming video. For their part, the telcos have built their broadband business plans on IPTV services, so it’s counterproductive for them to allow competitors to have equal access to their subscribers.

The bottom line is that the loss of net neutrality isn’t going to hurt everyone--just those companies that compete with offerings from the MSOs and telcos. Text-based services such as search are probably pretty safe, but video and voice services from the likes of Google and MSN are definitely at risk. If this plays out as I think it might, the real issue will ultimately be revealed to be not net neutrality, but rather, restraint of trade. The telcos in particular have argued that they should be unregulated, but the protection they’ve had against most antitrust regulation for more than 100 years has been based on their willingness to accept government regulation in return for a monopoly on phone service in each market. When the regulation goes away, so should the protection. Of course, neither the telcos nor the MSOs have anything to fear from the Bush Administration’s Justice Department, but that could change fairly abruptly in 2008. In any event, I think that the true battlefield going forward will be antitrust, not net neutrality.
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