Apr 11, 2015

Why Internet Should Not be Neutral ?

The chorus of 'open' , 'neutral' and 'free'  tend to capture the imagination of social media quite quickly. Back during my school and college days, there was this enormous campaign for 'free software' , without realizing what was 'free' in that context. Likewise , over the last month, the Net-Neutrality campaign has caught up the attention everyone . Much of this is misunderstood  & misinterpreted by the media.

The basic underlying question in this whole debate is - 'Can an internet service provider prioritize / de-prioritize certain content over the rest' ?  It is not easy to answer that unless you understand the underlying realities & implications.

There is this concept called price discrimination in Economics. It is all about pricing different consumers differently for the same service. In airline world, there are a number of different fare classes for the same sector. So, it is quite likely that the passenger sitting next to you has paid a totally different fare.  It is the dream of every business owner to do this in a perfect way - or achieve perfect price discrimination .  There is a different 'marginal utility' for any service from a customer's perspective. So, the price that he / she is willing to pay for a service could vary a lot.  So, if a producer can price the product correctly to each and every customer, he is maximizing his benefit or 'producer surplus'

Producer surplus is not just about maximizing producer's profit. It is an important component of a free-market mechanism. Adam Smith's 'invisible hand or self-directing market & unintended societal benefits cannot be achieved unless producers have a chance to maximize their surplus. Putting it in another way, unless producers are rewarded for their produce to the right level, they don't have any incentive to do more.

In a telecom/internet world, this is functioning more like a two-sided platform. There are two important players - end consumers & content/app/web providers.  ISP's like Airtel , Vodafone etc being the platform between them .

The argument put forward by proponents of net-neutrality is that if I have paid an amount for say 1GB of data, I get to decide which app / site I'm using - ISP's don't have any business to prioritize any of those.

Lets view the situation in a different way. Assume that there are only 3 applications - Facebook, Youtube, Ted  - that consume 100% of bandwidth . And lets assume that in a city, the overall customer base's bandwidth usage results in a bandwidth consumption of Youtube - 90%, Facebook - 9% and Ted - 1 %

Now, lets pick three consumers & their ideal or desired bandwidth usage profiles being
C1  ( FB - 90% , YT - 9 %  Ted - 1% )
C2  ( FB -10% , YT - 60% , Ted 30% )
C3  ( Ted - 90% , FB - 8 % , YT - 2 % )

For C3, the net-neutral world is a nightmare.  Owing to the   overall bandwidth usage distribution, his favorite content never gets delivered properly.  So, by paying an identical fare for the data plan, isn't he cross-subsidizing the population who are just hogging up the bandwidth by consuming FB & YTube?  Neither are C1 & C2 getting the ideal data consumption plans.

Can we imagine a system where C1, C2 & C3 are able to draw up a data plan based on their own bandwidth usage patterns ?  Essentially, we are talking about the so called 'anti-neutral world' here

From an ISP's perspective, this is all about creating certain priority lines and making each consumer & app provider or maker pay for the bandwidth usage as per their desired needs.  In a 'Net-Neutral' world, neither consumer , nor producer surplus is achieved - thereby making it an inefficient market infrastructure.

There is an underlying catch / danger here -  Can a company - say facebook -owing to their dominant market power buy the entire bandwidth capacity with Airtel and restrict the entire population to facebook only ?  I'd say, in  a monopolistic world, it would have been possible. But not in an ultra-competitive industry like telecom.

Would this lead to a world where, if you are a new App-maker, you would find it difficult to reach the consumers -  Maybe for a high bandwidth consuming application. But I'd say again that if your App is good, there would always be a segment of demand & that demand will find its way through the market

It is far better to live in an anti-neutral internet than in the present scheme of things where 90% of the available bandwidth is consumed by pirated movie downloads & streaming services without them paying their proportional bit for the bandwidth usage

For another interesting take, read Tim Harford's article on this http://timharford.com/2015/03/battle-for-the-webs-last-mile/