Roycroft Study, "Economic Analysis of Network Netrality"

Roycroft Consulting has just released a study of the detrimental economic impacts of not maintaining Network Neutrality. Documenting myriad areas where consumers will lose if network owners are allowed to discriminate at will, the report includes real-world examples of network discrimination:

...in 2005 Vonage, a provider of Internet telephone service over broadband access facilities, complained to the FCC that Madison
River Telephone Company had blocked ports used for VoIP applications, effectively disabling consumers’ ability to utilize VoIP. On March 3, 2005, the FCC approved a settlement agreement in which Madison River agreed to pay the U.S. Treasury a fine of $15,000, and to no longer block VoIP ports. Sabotaging non-cooperative competitors by excluding them from the “fast lane,” or extorting rents, while favored affiliates and partners are given advantages, are consequences which must be anticipated from telephone and cable companies who demand the right to discriminate and exclude. [Report Page 7]

as well as warnings about the impact this type of discrimination would have on innovation and the freedom to utilize broadband access as we see fit. As Roycroft quotes from Verizon Wireless' Acceptible Use Policy:

Unlimited NationalAccess/BroadbandAccess services cannot be used (1) for uploading, downloading or streaming of movies, music or games, (2) with server devices or with host computer applications, including, but not limited to, Web camera posts or broadcasts, automatic data feeds, Voice over IP (VoIP), automated machine-tomachine connections, or peer-to-peer (P2P) file sharing, or (3) as a substitute or backup for private lines or dedicated data connections. NationalAccess/BroadbandAccess is for individual use only and is not for resale. We reserve right to limit throughput or amount of data transferred, deny or terminate service, without notice, to anyone we believe is using NationalAccess or BroadbandAccess in any manner prohibited above or whose usage adversely impacts our network or service levels. Verizon Wireless reserves the right to protect its network from harm, which may impact legitimate data flows. [Report Page 7-8]

The real-world impacts, were this type of Acceptible Use Policy extended to the Internet more broadly (instead of just 3G services) are fairly clear-cut. As Roycroft explains:

The fact that Verizon’s 3G wireless broadband service has usage restrictions associated with uploading, streaming, VoIP, or peer-to-peer will hinder innovation in these areas. If these types of restrictions were placed more broadly on network users, due to the rise of “differentiated” last-mile networks, the impact on innovation would be pronounced. If, for example, end-users have limited upload capabilities or cannot use a service for streaming, then the incentive and ability to innovate in these areas is greatly reduced. Similar restrictions have been introduced on an intermittent basis whenever the principle of network neutrality has been relaxed. The threat that network operators may introduce such restrictions on an intermittent basis also pollutes the open environment for innovation on the Internet. [Report Page 8]

Roycroft also points out the dangers of "vertical integration" to diversity of content -- and issue we have seen ad nauseum during the media conglomerization processes of the last 25 years:

With vertical integration the owners of last-mile broadband
facilities could acquire providers of Internet content, services, and applications, and sell consumers bundles of e-mail services, search engine capability, and e-commerce—similar to the bundling strategies pursued by telephone and cable companies with voice and video services that they currently offer. Such a transformation would rob consumers of their ability to choose, and diminish the benefits of competition which are currently available to users of Internet content, services, and applications.

Roycroft also points out that this conglomerization both far from done and is quite likely to hit the wireless market particularly hard (something I pointed out back in 2004 in my chapter in the book, "The Future of Media"):

Due to the FCC’s elimination of restrictions on the amount of spectrum that can be controlled by a firm in a specific market area, major mergers of wireless firms have occurred. AT&T (the long distance provider and CLEC) spun off its wireless operations in 2001. AT&T wireless was then acquired by Cingular Wireless (jointly owned by the SBC and BellSouth, [who are now also merging]) in 2004. Voicestream wireless merged with Omnipoint Communications and Aerial Communications in 2000. Voicestream was later acquired by Deutsche Telecom and now operates under the T-Mobile name. In 2005 Sprint combined its wireless operations with the wireless operations of Nextel. Also in 2005, Western Wireless was acquired by the wireless and local exchange operator Alltel. Based on the evaluation of wireless markets in 2006, some industry observers indicate that the wireless market may still be “too crowded,” and point to the likelihood of further consolidation.27 The consolidation in the wireless industry points to an emerging oligopoly market in wireless, with the two largest wireless firms (Cingular and Verizon Wireless) being owned by two of the three remaining RBOCs. [Report Page 12]

And with fiber, this phenomenon may be even worse -- since a home only needs a single fiber line, whichever company builds a Fiber-to-the-Home system will have a straglehold on that local market, thus allowing a company to determine pricing and service quality without much fear of competition. One of my favorite offerings from the report is the fact that network discrimination has already been tried (and failed spectacularly) previously:

It is notable that network differentiation has already been tried by consumers in the narrow-band dial-up world, and consumers overwhelmingly rejected that approach to the provision of electronic information and communication services once the open-access Internet, built on a foundation of policies that promoted network neutrality, became available. At one time firms like America Online, GEnie, Delphi, Prodigy, and Compuserve offered consumers proprietary data processing and data communication services over incompatible and noninterconnected networks. This approach to selling data services ultimately faded as the public Internet became available. Most of the firms that pursued the network differentiation business model no longer exist, and those that do survive have combined Internet access with their proprietary offerings.

Consumers have already voted with their feet away from the proprietary data network model, once given the opportunity to consume electronic data and communication services in an open-access environment. The reason for this exhibited consumer sentiment is the same in the broadband world as it was in the dial-up world—consumers place a high value on services based on policies which encourage protocol standardization, interoperability, and network effects. It is only now, because of telecommunications policy reversals that enable the owners of last-mile broadband facilities to leverage market power in last-mile broadband markets, that the inferior market offering of restricted access to Internet services could be forced on the consuming public. [Report Pages 14-15]

What is important to remember is that network discrimination all but necessitates the creation of proprietary (rather than open) networking protocols. And these protocols will inevitably fail to create the innovative open environment we take for granted on the Internet today. If Network Neutrality isn't protected, we all but guarantee that households across the United States will receive worse services for higher prices.