ABI Technology & Intellectual Property Committee Newsletter

ABI Committee News

Net Neutrality Promotes New Technology through Competition

Net neutrality is a term coined by the telecommunications industry to refer to the use of the Internet in delivering a variety of communications media such as voice (VoIP), video and music. The FCC is poised to determine (or not determine) the regulatory treatment of the Internet in a variety of pending proposed rulemaking and forbearance dockets. The outcome of these proceedings may well predict the next wave of winners and losers in telecommunications arena and, correspondingly, the next candidates for corporate reorganization. Two prominent, yet polar-opposite, experts in the area sound off on the policy arguments and give us their list of companies that will thrive or flounder in a neutral Internet world.

Net neutrality is the concept that all suppliers of content over the Internet would be treated equally by the companies that control the gateways to the Internet. This debate concerns both what we think of as Internet “content” – music, movies, media as well as the VoIP alternative to traditional phone service. Today, using Skype, Vonage or other services, a phone call can be placed from one computer to another without touching the PSTN (public switched telephone network). But if a phone call is made from one server in Washington, D.C., to another server in Austin, Texas, that then calls a local number in Austin to complete, it traverses the network of Southwestern Bell n/k/a AT&T. Can or should the incumbent phone company be permitted to interfere with or discriminate against a call that originates from a local ISP to stifle competition? Similarly, video content can be downloaded by customers of cable broadband providers such as Comcast and can use new technology to peek inside packets traversing its network and sidetrack video content of its competitors in favor of its own content. Net neutrality regulation would require that network providers manage their networks in a way that was not discriminatory or anti-competitive.

The advent of the Internet created the potential for a nearly perfect competitive environment. Competition, however, can only thrive in a system that treats all competitors fairly. Innovators need to be able to interpret with certainty the underlying precepts of the law so they can focus their efforts in such a way that they will not risk losing their investment to anti-competitive conduct. To understand the importance of competition for innovation, one only needs to remember the nation’s phone system as it existed a mere 30 years ago. Theodore Vail was the architect of the Bell monopoly and was successful at selling protectionist economic theory as policy. In a very early ad in 1908, AT&T stated that “The Bell system was founded on broad lines of ‘One System,’ ‘One Policy’ and ‘Universal Service’ on the idea that no aggregation of isolated independent systems not under common control, however well built or equipped, could give the country the service…. ” Vail’s Universal Service concept gave AT&T stewardship of common control and common purpose for “the” communications network. In essence, AT&T was allowed to set the technical rules on how to build, model and run the U.S. communications infrastructure – recovering all of that capital expenditure from a captive public through very high rates approved by regulators.

It was not that long ago that we could only rent phones from the AT&T store and they cost a comparative fortune. There was no call-waiting, no call-forwarding or three-way calling, and you were pretty excited to get a touchtone phone instead of a rotary dial. The justification for this was that AT&T argued to regulators that other phone technology would be incompatible with the telephone network. Once deregulation and government-enforced competition started to take hold, we could then go to Target and buy a $7 flip phone instead of the $60 Princess phone at the AT&T phone store: Competition leads to lower prices and better technology.

Deregulation of the phone system also leads to better customer service. On the comedy show “Rowan and Martin’s Laugh In,” Lily Tomlin’s phone operator character demonstrated what happens when there is no competition. After berating customers and eavesdropping on private conversations, the punch line was always “We don’t care. We don’t have to. We’re the phone company.”

This bit of economic history is important because incumbents are asking us to repeat it. This time it is not through traditional regulatory barriers to competition, but the obverse – allowing content and protocol discrimination at the gateways to the Internet with no regulatory oversight. The forum for Net Neutrality is, for now, the FCC. Through a variety of forbearance filings and proposed rulemakings, incumbents and competitors are seeking clarification of the rules of the road. To date, the FCC has been schizophrenic in its response. For those observing from the peanut gallery, the result of this schizophrenia is less technology and less competition. Take the evolution of VoIP regulation. In 2004, the FCC ruled that states could not regulate interconnected VoIP because VoIP was not tied to geographic locations. This had the effect of stripping or greatly diminishing the rights of CLECs under the Telecommunications Act of 1996, particularly under §251/252 of that Act. In 2005, the Supreme Court upheld a ruling by the FCC that cable services were not telecommunications services and could not be regulated. This sent a message to gateway and pipeline providers that they could keep competitors off of their networks in favor of their own content and services with impunity. Antitrust, you say? Again, look at the Supreme Court’s decision in Trinko and decide whether interconnected VoIP providers could survive motions to dismiss.

Economic theory dictates that Net Neutrality would geometrically increase the value of the Internet to society. Part of this conclusion follows from the very nature of the Internet versus the phone system.

The Internet’s user-centric and application-agnostic design diametrically opposes Theodore Vail’s concept of centralized-control, Universal Service-based communications — and the way the FCC has historically viewed communications. Under Vail’s theory of traditional telephone regulation, no aggregation of isolated independent systems not under common control, however well built or equipped, could best give the country “Universal” access. This theory, in regulatory practice, proved to be very lucrative for AT&T, but very bad for consumers.

Economists are fascinated by the growth of the Internet and its capacity to create social value. These economic theories postulate that the value of a communications network is greater when it is connected to another network and so on. Metcalfe’s law is the expression of network value measured in the number of networks connected. Because Metcalfe's law implies that value grows faster than does the (linear) number of a network's access points, merely interconnecting two independent networks creates value that substantially exceeds the original value of the unconnected networks.

Law:

Sarnoff

Metcalfe

GFN (Reed)

Optional Transactions

Tune In Broadcast

Connect Peers

Join/Create Groups

Examples

OnSale,
Remote Access

Yahoo! Classifieds, EMail

eBay,
Chat Rooms

Value of N member net

N

N2

2N

Combined Value of N, M member nets

N + M

N2 + M2 + 2NM

2N x 2M

Under Metcalfe’s law of economic theory, the value of the Internet under the Incumbents view of Net Neutrality is n*n-1. David Reed questioned Metcalfe’s law as excluding the power of group forming networks or GFN. “Networks that support the construction of communicating groups create value that scales exponentially with network size, i.e., much more rapidly than Metcalfe's square law.”

The Internet is based on the exact opposite postulate as AT&T’s concept of a Universal Service Network. The Internet is purposefully designed to avoid central control; its operative principle is simply to move packets from user to user. It has no physical area of interest, and it has no limitation on its use. It, by design, has no analog of PSTN “intelligence.” Its design allows the edge to innovate and control the use of the network. “Net Neutrality” creates the environment for a GFN-type Internet that has no limits to its growth or potential value. Net neutrality, then, is central to maximizing the value of the Internet—and competition and technology along with it.

If the FCC rules against Net Neutrality or if it fails to take any regulatory action against Internet gatekeepers that act in an anticompetitive manner, the net result will be economically negative for society as well as inhibitive of technological innovation. In the VoIP area, innovators and technologies that would be negatively impacted today include:

• Jingle/XMPP (the Google telephony protocol)
• Skype
• MGCP
• TAPI
• JTAPI
• SIGTRAN
• GlobalCall
• ECTF S.100
• ActiveX
• SGCP
• MEGACO/H.248
• Dialogic R4
• Skinny
• Worldcall Call Protocol
• SIP
• H.323
• TruPhone
• Mig33

In addition, VoIP providers and VoIP-centric CLECs would be negatively affected. Winners in the VoIP Net Neutrality debate would be the incumbent LECs, the traditional long- distance providers (who themselves use VoIP to save costs) and the cable broadband providers. Voice is but one application that can be discriminated against without “net neutral” management of the Internet.

On the Internet, the winners and losers would be split between content/application providers and gateway and pipeline providers. Content/application providers would become more independent of infrastructure constraints under a Net Neutrality regime. The resulting proliferation of content and applications would mean that intelligent search engines such as Google would be in even higher demand. Gateway and pipeline providers, stripped of their ability to monopolize infrastructure in an anticompetitive manner, would lose value in a Net Neutrality system. But the most important winner under Net Neutrality is society. Technological innovation and competition will result in more connectivity, content and communications in the economic image of Reed’s Law, thus creating greater utility at a lower cost to the public as a whole. In this instance, at least from an economic perspective for the public, there is only one right answer. That answer is not to allow the existing incumbent network owners any right to discriminate against new technologies and applications that they cannot control.