Media Wonk

The theory of net neutrality - June 28, 2007

I sometimes wonder whether those who oppose things like network neutrality regulation –or “urge caution” as the FTC staff did this week—on grounds that the alleged dangers of proprietary behavior by businesses remain too “hypothetical” or “theoretical” to be the basis of a rulemaking, have ever worked at a private-sector company.

I work for a large, publicly traded multinational company and we’d break up the furniture and sell it for firewood if we could get a price for it. That’s just the way companies behave. They monetize things. Anything. Right now. We’re trying to monetize your eyeballs as you read this.

To expect us not to act in a proprietary or discriminatory manner if we could figure out how to profit from it is to expect us to ignore the incentives that the market presents to us.

We have shareholders to satisfy and my bosses are paid on the bottom line. It’s just not going happen.

So why should I expect that network operators would not behave in a proprietary and discriminatory manner if market conditions were to favor it?

Network operators exist to make a profit from operating a network. Among the assets they exploit to generate that profit is their proprietary access to subscribers. When cable networks change hands, they’re valued on the basis of the number of subscribers they have.

There are two ways you can monetize subscriber relationships: You can sell more things to your subscribers, driving up your average revenue per subscriber (ARPU), and you can sell (or rent) your proprietary access to subscribers to third parties. Network operators can and will do both.

As far as the second option goes, discrimination is what makes it work. Access is only worth paying for if those who do not pay are discriminated against. To maintain a high price, the network operator must do everything possible to exclude non-monetized content from the network and maximize its proprietary hold on subscribers. Discrimination is the essence of the business model.

Operators today are still in the process of building out their networks, and are not yet in a position to discriminate effectively. But that’s not an argument for not regulating if the public policy goal is non-discrimination (which, of course, it may not be).

Simple business logic dictates that they discriminate to the extent they can. That’s not a value judgment, or a matter of ideology. It’s an acknowledgment that the people to run companies, like people who don’t run companies, respond to incentives.

Nothing theoretical about it.

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