Is Net Neutrality Trying to Mutate into an Economic Entitlement?

Published January 13, 2014

Net neutrality activist opposition to AT&T’s new Sponsored Data offering exposes that the purpose of “net neutrality/open Internet” is not just about protecting consumers and free speech, or preventing anti-competitive behavior.

Those calling for an FCC investigation of AT&T’s Sponsored Data are trying to mutate the “net neutrality/open Internet” debate to also be about whether or not there should be permanent economic entitlements, i.e. downstream “zero-price” subsidies, for edge websites and applications – to “subsidize creativity” and start-up innovation via an explicit FCC ban on network termination charges.

Translation:  all websites and applications should be entitled, by “open Internet” network design, to no cost Internet distribution/access to consumers forever, regardless of the costs that their services cause everyone else to pay for.

That previously-rejected Title II broadband approach effectively would have the FCC mandate that consumers must permanently subsidize the video streaming of over-the-top (OTT) video streamers, like Netflix and Google-YouTube, which together consume half of the Internet’s downstream bandwidth per Sandvine.

 [For more on the thinking behind this mutating view of net neutrality, see Professor Tim Wu’s 2009 paper: “Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality.”]

The mutation of the debate is evident in the over-the-top criticism of AT&T’s Sponsored Data offering — which obviously is not an actual violation of mainstream freedom-defined net neutrality or the FCC’s open Internet rules – but only a perceived violation of hoped-for Title II reclassified common-carrier-defined net neutrality.

Concerning AT&T’s voluntary Sponsored Data offering, a content seller now has an additional option to market their content to consumers by paying for the downstream bandwidth that their content consumes. In other words, “sponsored data” means the consumer is not “billed” for the sponsored bandwidth usage, the sponsor is “billed” for it.

Picking up part of a consumer’s tab to entice a consumer to try or use their product of service is marketing 101. It’s like free breakfast with a hotel room, or free financing with a new car. This consumer freebie practice is among the most normal, prevalent and effective marketing techniques in the economy today.

Importantly, AT&T’s Sponsored Data does not affect the speed of anyone’s delivery. It does not slow down, degrade, or impair anyone’s service and it does not block a consumer from accessing any legal content, application or device a consumer chooses. It isn’t discriminatory, because it’s totally voluntary. And it limits no one’s free speech.  

AT&T’s Sponsored Data only lowers the cost of delivery of sponsored content to the consumer. Consumers benefit. They are hurt in no way.

Moreover, this is not a “double dip.” It is a simple cost transfer from the buyer (the consumer’s bandwidth bill) to the seller (the sponsor’s bandwidth bill). Thus the bandwidth in question is not paid twice; it is just paid by someone else than the consumer.

This is a two-sided market like a traditional newspaper, where both a consumer and a seller can pay for part of the cost of delivery of the content to the consumer. It is one of the great benefits, efficiencies, synergies and innovations of a market economy over a regulated one, because it enables and incentivizes more people to cover the cost of the broadband infrastructure from which they all benefit.

Now consider the highly-successful, effective pilot of “sponsored data” in the marketplace used by tens of millions of Americans for the last six-years without activists objecting it was a violation of net neutrality or an open Internet.   

To promote its business, Amazon offers free delivery for physical goods ordered over Amazon, and equivalently offers free downstream delivery of its digital content to Kindle readers. Amazon has proved over the last six years that offering free downstream bandwidth delivery to Kindles stimulated more sales of both Kindle devices and e-book digital content.

Why has it been perfectly OK for Amazon to do this for six years, but now that AT&T is offering this exact same sponsored data opportunity to other businesses, it somehow isn’t?

So what is really going on here? Their response makes no sense unless there is another agenda.

Net neutrality activists are actively trying to move the goalposts – again – this time to Title II common-carrier-defined net neutrality. The net neutrality debate will no longer be just about free speech or no anti-competitive discrimination, blocking, degrading or impairing of bandwidth. They are now trying to make it about Professor Wu’s utopian “subsidizing creativity through network design,” i.e. formally requiring everyone to economically subsidize “edge creators” by imposing a common carrier price ban on termination fees.

Simply, what they want is that edge entities — which send their content downstream to the consumer — should NEVER have to pay for that downstream bandwidth. To achieve their utopian ideal of perfect creative egalitarianism on the Internet, activists want the FCC to have Title II common-carrier pricing authority so it can mandate an absolute ban on anybody paying specifically for downstream traffic.

Why activists are freaking out about AT&T’s Sponsored Data is that it defiles their utopian ideal of perfect Internet egalitarianism of universal, unlimited, free, downstream-bandwidth for edge creators.

In advancing their utopian ideal, if anyone is allowed to pay anything for downstream bandwidth, (even if it is the same speed and quality of everyone else’s bandwidth; is voluntary, it benefits the consumer; and is pro-competitive), it violates the egalitarian principle of “subsidizing creativity” via “zero-pricing.”

Free downstream bandwidth is necessary for “edge creators” to enjoy the exact same economics as broadband companies that have invested hundreds of billions of dollars to provide the very high-speed downstream bandwidth everyone uses. Simply net neutrality economic entitlements are about trying to eliminate any economic advantage of vertical integration of content distribution and ownership. That’s what activists mean when they say they don’t want the Internet model to be like cable model.

Activists covet duplicating the monopoly common carrier model for telephone, because it long enabled economic entitlements and wealth transfers outside of the normal legislative tax or appropriations processes. Historically, the monopoly common-carrier, telephone model ofstrict price regulation was quite effective in having urban consumers subsidize rural consumers and businesses subsidize consumers.

Free culture Net neutrality activists (Lessig, Wu, Crawford, et al) covet monopoly common carrier price regulation of broadband in order to mandate free downstream bandwidth, and to economically-destroy the capitalist media/cable companies that they loathe.

The monster political problem with the activists’ desired economic entitlement scheme is who subsidizes whom. For telephone service there was strong political consensus for implicit telephone subsidies where businesses and then more affluent urban consumers subsidized less fortunate rural consumers.

Perversely, net neutrality economic entitlements of zero pricing are upside-down, where activists expect consumers to subsidize corporate welfare for Netflix, Google-YouTube, and Amazon, all very profitable companies that obviously do not need subsidies.  

In sum, activists are trying to mutate the “net neutrality/open Internet” debate towards implicit economic entitlements. Their ultimate purpose is to destroy the offline media/cable model and replace with a utopian, Internet commons model.

The fatal flaw with their concept is that any such inherently uneconomic pricing scheme will naturally be gamed and manipulated by arbitrageurs. And by far the biggest arbitrageurs and beneficiaries of free downstream bandwidth are Netflix and Google-YouTube.

While there remains strong consensus for freedom-defined net neutrality where Internet users should be able to access the legal content and applications of their choice, there is little appetite for official corporate welfare for Netflix and Google-YouTube – which together devour half of all Internet downstream bandwidth in the U.S.

[First published at the Precursor Blog.]