Posts tagged ‘Don Beaudreaux’

A Net Neutrality Parable

I have been frustrated trying to explain to folks why net neutrality is anything but neutral, in fact tilting the playing to the advantage of large content providers.  I thought I would take a lesson from Don Boudreaux, who has spent a lot of time thinking about economics education.  He often works by analogy -- sometimes these analogies work for me and sometimes they don't, but they seem a good way to reach people perhaps when traditional arguments have not worked.

Let's consider two cities we will call Gotham and Metropolis.   One day a private road builder proposes the first major highway between the two cities.  The citizens cheer, but the government places one caveat on them -- the builders must be neutral to all traffic.  Every entity (individuals, corporations, public agencies) should each pay the same fixed amount each year for use of the road and everyone should get equal access to the road, no matter how much they use it.

Things start out pretty much as expected.  The company sets the access charge at $10 a year, and lots of entities pay to put their one or two vehicles on the road from time to time.  The road is a great time saver and the capacity of two lanes in each direction is more than enough for easy, fast travel.

This new road and the faster transportation it allows spawns a number of entrepreneurs who find new uses for the road.  In particular, two companies create new logistics services that cause at first dozens, then hundreds, and then thousands of their trucks to hit the road between the two cities.  Soon, more than half the vehicles on the road are from these two companies, and another 25% of the vehicles on the road are from perhaps a dozen smaller imitators.  But each of these companies, despite using orders of magnitude more of the road's capacity than any other individual, still pay the same flat $10 for access to all their vehicles.   These trucking companies continue to add new services -- such as high demand logistics (HD for short) -- that put more and more trucks on the highway. Traffic explodes.  It turns out that these trucking companies have ways to compress their loads into fewer trucks with little loss to their quality of service, but why bother?  They are not paying for the capacity they are using, so why conserve?

But the resulting congestion from these few companies' trucks is slowing everyone else down.  Congestion reigns.  Instead of blaming the trucking companies, everyone demands the road company add more capacity, which they do.  They spend huge amounts of money to accommodate the traffic from these few companies, but due to neutrality rules the costs get paid by everyone, and the annual fee goes up to $15, $20, then $25.  Finally, a few people begin to observe that their access fees have doubled and tripled all to support vehicles from just a few entities.  Proposals come forward:  Can't these trucks be limited to certain lanes to keep them out of the way of other traffic?  Can't they be limited at certain times of day?  Can't the road company charge them per vehicle, rather than a flat fee, so they pay their fair share of the expansion costs?  Can't the road company give them incentives to compress their loads into fewer trucks?  Can't the trucking companies make a contribution to the capital fund to expand the road?

But nothing happens, because of road neutrality.  The trucking companies repeatedly shout "road neutrality" and conduct a successful campaign to convince everyone else that road neutrality is really in their interest.  They try to scare individuals by saying that an end to road neutrality will cause certain drivers to be excluded just because the road company does not like them, when in fact no such proposal or issue has ever existed. Just to be sure, the trucking companies pack the regulatory boards with their cronies. 

I hope the analogy is, while not perfect, at least clear.  Google (via Youtube), Netflix, and Facebook account for over half the bandwidth used on the Internet.  They claim they are worried about ISP's filtering traffic based on political views, but no one has ever provided the smallest shred of evidence that this occurs (and it is incredibly hypocritical since Facebook and Google do exactly this within their platforms).  What they are really worried about is that someone might un-bundle your local Internet service, specifically splitting the high bandwidth using sites from the low.  An ISP might very rationally offer a much lower monthly rate to someone who accepted a plan that did not allow streaming video or which compressed streaming video to conserve bandwidth (oddly, while the Left supports net neutrality, they favor the opposite in cable TV, trying to force unbundling of sites that are cheap for cable companies to provide from those that are expensive (e.g. ESPN).  This is likely Google and Netflix's nightmare.

One way to think about this is a classic vertical supply chain fight.  Suppliers and their channel fight all the time to see who will reap the lion's share of the profits available from selling to the end consumer.  There is a certain amount to be made from selling an incremental streaming movie -- Netflix and your ISP both want a piece, Netflix for the content and the ISP for building the pipe.  In a free market, they would fight it out, and the accommodations between them would likely ebb and flow over time.  What net neutrality does is attempt to impose a resolution of this such that Google and Netflix get 100% of the revenue and the ISP is saddled with 100% of the cost to build the pipe.  Hardly "neutral".

Postscript:  Google is also worried than an ISP might hook up with, say, Netflix and offer Netflix for free to their low-bandwidth products sort of as a preferred provider.  Sort of exactly like what Google does with every one of its own services, given them preferred position in their search engine.  Hypocrites all.