Monday, February 27, 2006

"Neutrality and municipalities"

Ed Gubbins, a seasoned telecom reporter, had a piece a bit back that's worth looking over. The story, Neutrality and municipalities, looks at the net neutrality debate with an eye toward its effect on the development of municipal broadband. Overall it's pretty fair though it does have a pretty serious conceptual flaw. The article confuses "net neutrality" --the question of whether certain content providers should be allowed to be favored over others by the owners of the pipe that comes into your home-- with "structural separation" --question of whether the owners of the pipe should be allowed to provide content at all. The current net neutrality debate was set off when ATT & BellSouth chairmen asserted a right to charge content providers like search engines (Google, Yahoo) and VOIP (net phone providers like Vonage) special fees for better-than-best-effort service. No one is suggesting that BellSouth not be allowed to sell phone service or Cox no longer sell cable! That would be structural separation. All that is being suggested for private providers is that they not be allowed to favor certain providers (including themselves) over others on the Internet side of their networks.

So setting up an implicit equivalence between the structural separation issue that's been active in municipal debates and the newer net neutrality debate involving the phone companies is pretty profoundly unfair to municipalities since it sets up dual standards for public and private providers with the public providers seemingly being held to a radically higher standard.

In one place the author shows that he does posses an understanding of the difference between the two ways of encouraging competitive services:
...even wholesale municipal network models don't necessitate net neutrality. It's conceivable, at least in theory, that municipalities could seek to defray part of the cost of their broadband networks by following AT&T's lead, charging content providers for premium use of networks. Baller acknowledged this strategy was possible but said he hadn't heard of any municipalities discussing or considering it.
He's right, but needs to make the contrary explicit as well: a retail model like LUS' (and BellSouth's and Cox's) can still embrace the sort of net neutrality that phone companies want to kill. --If the company involved is willing to do so. The example Gubbins could have used was Lafayette. LUS has declared a policy of IP (Internet Protocol) neutrality. It declared early in the fight that it wouldn't block ports. Packet prioritization --which is what is at stake in the net neutrality debates the phone companies have started--really doesn't make sense in LUS' context. Such issues only arise when local congestion makes makes providing a special "fast lane" for priviledged content noticeably faster for consumers (otherwise content providers would have no reason to pay the extra freight charge). LUS' fiber to the home network simply won't have the sorts of local congestion issues that make prioritization appear useful.

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But now back to the article itself. The main thrust of the piece is to wonder whether the concerns raised by the phone companies'' declared intent to begin charging extra to improve the speed of some products will make the municipal alternative more attractive.

The story does a good job of dealing with some of the real-world constraints on the practical application of structural separation to municipal broadband projects; after discussing the large scale, wholesale, Utopia model in Utah:
But the Utopia model isn't for every town. One of the rare qualities that accounts for its success, Baller said, is the scale it achieved by harnessing the collective scale of 11 cities. As the network promises to ultimately reach more than 450,000 customers, service providers are confident they'll make a profit, even if they have to split the market several ways. Some other cities that tried to replicate the wholesale network model haven't been able to pull it off because their modest populations don't hold the same enticement for service providers. For example, even with a population of more than 100,000, Lafayette, La., couldn't make wholesale economics work, Baller said, nor could Bristol, Va. Both were forced to adopt retail models for their muni networks. In Grant County, Wash., where the law prohibits municipalities from offering retail service, a wholesale municipal network took on 35 service providers, which fractured the market too much to make it lucrative for them.
It's nice to see an actual, empirically-based analysis of the real economics that are at issue in the wholesale model (even if it is unfortunately confused with network neutrality).

4 comments:

Mike Stagg said...

John,

I think there is, in fact, a fundamental flaw in Baller's premise that Lafayette could not make the wholesale model work. In fact, the business plan developed for the LUS Fiber to the Premises project says the venture can be profitable with market penetration rates in the low 30 percent range.

So, LUS could open their network to other providers and still cover their costs.

The real problem is that there is a fundamental contradiction involved with companies trying to be both wholesalers AND retailers, which is what would happen if LUS opened its network.

This problem became apparent when the RBOC phone companies were ordered to open their networks to competitors. They could never quite bring themselves to treat the competitive local exchange carriers (who wanted to use the RBOC networks) as customers while still viewing them as competitors.

This contradiction is, I think, inherent in any venture where content providers are also network owners. I think this is the real problem at the heart of the fight for network neutrality.

That is, I don't believe network owners who are content providers (phone companies who want to deliver video, and cable companiew that already do, and even municipally-owned networks who are also selling cable and phone service) can bring themselves to treat the content of other providers the same as they treat their 'own' content. There are powerful economic incentives (i.e., profits) for them to give priority to their content over those of other providers.

Ultimately, true network neurtrality can only come if the network provider is NOT a competitor to other network users. That means network owners as infrastructure/access providers only. That means structural separation of the infrastructure part of cable and phone companies from the content provision part.

The idea of charging premium prices for content providers won't correct the situation because network owners will still have overwhelming incentives to give their own services (content) network priority.

Municipal networks that also provide retail services might be able to deal with this contradiction better, but there is nothing in their histories to provide much in the way of assurance. LUS, for instance, is an electric, water and waste water utility that has monopoly status. Their entire DNA (like the RBOCs and the cable companies) is oriented around the notion of being in monopoly status.

I agree that the munis are likely to be more responsive to local interests (if the interests are articulate and persistent), but their community roots don't exempt them from having to deal with the fundamental contradiction that comes with being a network owner that is also a content provider.

Anonymous said...

THat makes a lot of sense. It sounds like you are saying the muni's may have a inherent bias toward themselves just like Bell did with the other content providers using their infrastructure. Are you suggesting that LUS consider opening their infrastructure and getting out of content or just forget about an open structure and focusing on retail sales of content? Or try to overcome the inherit nature of the contridiction you speak of.

Also, which structure do you think best for Lafayette?

Mike Stagg said...

I believe ANY network owner that is also in the content provision business is going to have to confront the conflicting interests of other content providers IF it is going to sell access to its network to other providers. It is the conflict of trying to be both a retailer and a wholesaler at the same time. The Bells have provent themselves unwilling/unable to do so. Cable companies were always unwilling. The munis don't have a single business model, so there is no 'muni standard' to characterize or judge.

LUS has a business plan that is both opened and closed. It is closed to the extent that it will not, for instance, sell access to its network to another video provider (like a cable company or a telephone company that wanted to reach potential customers in Lafayette). It's high-speed Internet pipe, however, will be open to any and all content providers so that anything that moves over the Internet will be able to move over the LUS network. LUS has promised that they will not close ports on their network gateway, so LUS Media customers will be able to use, say, IP-based telephony services from Vonage. Or, download movies from something like the Real/Starz deal, or the next iteration of NetFlix.

I believe the LUS approach is the best available to ensure that they will be able to win the customer base they'll need to cover the costs of the project, ensure the ability of the network to be upgraded in order to keep pace with network technology, and ensure Lafayette remains a community on the leading edge of communications technology.

I believe the LUS approach is the best approach for Lafayette.

Anonymous said...

Is there a reason we would not want it open to other cable and telephone providers? Maybe you could explain a little more about what will be closed. Would that not mean more consumer choice? Is there a difference between this business model and what the incumbants like Bell and Cox do?