Net Neutrality, Natural Monopolies and the Future of the Internet

A US Appeals Court struck down the FCC’s Net Neutrality requirements in a decision released on January 14th.  One month later, Comcast announced their desire to acquire Time Warner.  The LA Times coverage of this shows key characteristics of the companies involved. At the $ level, their market value, 2013 revenues and 2013 profits are: Comcast: $144 / 65 / 6.7 billion; Time Warner: $37 / 22 / 2 billion. These are not the key numbers.  Consider Comcast’s revenue sources: (in billions) Theme Parks 2.2; Broadcast 7.2, Film 5.5, Cable networks 9.2 and the Cable/Phone/Internet “last mile” 42 billion.

How do these two things relate? The now deprecated FCC requirement was :”Wireline or fixed broadband providers may not block lawful content, applications, services, or non-harmful devices. Mobile broadband providers may not block lawful websites, or block applications that compete with their voice or video telephony services.  … Fixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic.”

Verizon’s objection to this was based (in part) on the bandwidth domination of services like NetFlix (32%) and YouTube (19%)  — Clearly there is a significant usage transformation as new technologies emerge … the web, then video streaming, and business built on these. The future for education (Udacity,, et al), gaming (Mindcraft, World of Warcraft) and future virtual reality environment will push this even further. And one can gain some sympathy for the companies trying to provide the bandwidth to support this.

But, here’s the rub. Reverse the FCC wording (which is what the court allows) and see how it reads: “Wireline or fixed broadband providers may block lawful content, applications, services, or non-harmful devices. Mobile broadband providers may block lawful websites, or block applications that compete with their voice or video telephony services.” — now go back and look at the businesses of companies like ComCast and Time Warner —- Movies, TV shows, …. what is called “content”, and now they can block access to competing content.

The rationale for the FCC involvement was the “Common Carrier” clause of the  U.S. Constitution and various Telecommuncations laws that acknowledged that the telephone lines, then Cable TV and finally some aspects of the Internet were “Common Carriers”. Other common carriers include the US Highway system, something more in line with the world view of the 1780’s when the constitution was written.  Associated with this are natural monopolies.  It does not make sense to have a dozen competing highway systems with tolls and blockades to prevent Coke trucks from using one, while allowing Pepsi to use that road.  This same situation exists historically in terms of delivering telephone service to all residences, not just the profitable ones. (Think rural areas where residences can be miles apart, or mountain canyons which limit viable density.)  In addition to providing AT&T (and a few other suppliers) a monopoly for phone service, the FCC prohibited them from providing services where this would be an unfair advantage.

All of this is out the window now, at least for the U.S. Internet.  A supplier can exclude access to web sites based on competition, or their political preferences.  Perhaps they can also be selective at a finer level, blocking some content while allowing other content.  “You really shouldn’t be reading this blog, so we won’t let you read that entry, but the next one is ok“.There are places in the world where either governmental controls or other vested interests may already have such control, but it is not consistent with the U.S self image.

Part of the problem is that natural monopolies still exist.  Fiber to the home is an excellent way to get high bandwidth, and a medium that can expand in bandwidth significantly. Running two fibers to the home is overkill (although a logical extension of the Phone and Cable connections.)  Access for right-of-ways precludes new suppliers in this market — in most cities it is phone, power, cable TV and the city itself … which is why some cities are starting to build fiber infrastructure.  Education, health care and other services may be of sufficient value to warrant public infrastructure.  Certainly exclusive controls by the ISP’s could lead to pressure for such and investment.

Wireless is a second natural monopoly.  You need towers-antenna sites and frequencies vary. Some are line of sight, others can interfere with in-premises devices, or with each other.  And of course many segments of the spectrum are already allocated.  So it is unclear that it is possible to have a truly competitive wireless environment either.  And all of that depends on having the bandwidth to provide for NetFlix 3.0 and other next generation services.

It will be interesting to see how the U.S. Moves forward with this new implicit Internet model.



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