Net Neutrality: Will Netflix destroy the Internet?

Net Neutrality: Will Netflix destroy the Internet?

Summary: The FCC is slated to make some decisions on the issue on net neutrality on December 21. Given a looming video-inspired bandwidth crunch, it's important those rules are less about "rights" than economics.

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A recent article in Bloomberg Businessweek got me thinking about the subject of "net neutrality." The issue boils down to whether providers of Internet access (fixed-line phone networks, cable networks, mobile phone networks) should have the right to prioritize - or even block - traffic for certain services on their network. The fear is that carriers will have a strong incentive to hinder competitors to services they provide themselves, thus leveraging their control over the pipes into consumers homes to drive usages levels of those services. Phone companies might try to block VOIP traffic, or else hinder video traffic from Netflix, in order to protect revenues for their own Pay TV offering.

Of course, there are less overt ways to favor one's own offerings over that of a competitor. Comcast recently increased what L3 pays to send additional data over its network. L3, as it turns out, is now Netflix' chosen content delivery network. Comcast has also expressed a desire to institute bandwidth caps at some point, though has backed off near-term plans due to the negative publicity the declarations generated.

The problem for Comcast is one of vested interest. They have strong incentives to raise prices and institute caps that limit competition to their own fixed-line video services. This is what raises the hackles of net neutrality advocates, as it enables carriers to favor their own services without anything so obvious as slowing down packets from Netflix.

Preventing gatekeepers from using their power to lock-out competitors is certainly a noble goal. Even Ronald Reagan, a man touted by many on the right as a paragon of free market virtue, opted to turn oil pipeline companies - which are, in essence, the gatekeeper to oil consumers all across the United States - into "common carriers."  This created an open market for oil over privately owned, but highly regulated, transmission pipes.

On the other hand, carriers have to generate a return on investment in order to continue to upgrade their networks. This may become a problem quite soon, if a Juniper Networks report is a fair approximation of reality.

Quoting "Will Video Kill the Internet, Too," from the Dec. 6 issue of Bloomberg Businessweek:

The report predicts that carriers such as AT&T and Comcast will see Internet revenues grow by 5 percent a year through 2020. Meanwhile, traffic will surge by 27 percent annually, and carriers will need to increase their investments by 20 percent a year to keep up with demand. By this math, the carrier's business models break down in 2014, when the total investment needed exceeds revenue growth.

By 2014, video will account for more than 90% of Internet traffic. As Michael Hatfield, founder of Cyan Optics, noted in the article, "this is the most dramatic change in the network that has ever occurred."

By way of context, Juniper Networks is a vendor of networking equipment, and thus would stand to gain a lot from carriers convinced they had to buy large stacks of equipment to keep up with galloping bandwidth demand. On the other hand, the fact that Juniper Networks has an interest in painting the issue in the darkest colors doesn't mean they aren't identifying a real problem. An explosion in bandwidth demand is still very real, whether or not the economic tipping point happens in 2014, 2017 or 2020.

This has obvious ramifications to Netflix, a company whose future growth is linked to its fast-growing video streaming service. It also has ramifications for companies like Google (with Google TV) or Microsoft, who is currently in negotiations to roll out an Internet TV service for its XBOX Live and Media Center products. It also would affect me, personally, as I am one of those "cord cutters" who gave up subscription cable services in favor of video streamed over the Internet to my television (in my case, by way of my XBOX 360).

I still on occasion watch some of the over-the-air HD channels in Los Angeles, though I use Netflix's on-demand video streaming service much more frequently. When Hulu finally comes to the XBOX, I am likely to pay the subscription fee, as it has the advantage of offering a number of shows the day after they are broadcast. On demand TV works perfectly for a guy who spends all day programming, most of the evening chasing his 17-month old daughter, and then has only an hour or two later in the evening to do other things.

In the past, I have vacillated somewhat in my stance on net neutrality. My instincts run in favor of the principles espoused by net neutrality advocates, because it is a valid economic objective to avoid media oligopolies (which is really a duopoly in many places in the US, split as it is between cable operators and, increasingly, phone networks). Just as it's good that oil pipelines are prevented from playing the role of highly-profitable gatekeeper to the transmission of oil, it would be spectacular if I could pick and choose my source of media "a la carte" from thousands of providers around the world. Net neutrality would help to ensure that future materialized.

On the other hand, my economics side is very aware of the incentives principle, and network providers need profits to incentivize them to grow the network to support a video streaming future. Net neutrality advocate Google seems to concede that point, at least in part. The overload point has already been reached for mobile networks, which is the reason they proposed to exempt mobile networks from net neutrality mandates. Knowing where their "bread is buttered," however, they insisted in full-on net neutrality for fixed-line providers, an argument that furthers their goal of developing into an Internet video service based around YouTube, and is easier to make now while carrier economics are still sound.

Net neutrality advocates often speak of the right of consumers to access any Internet service they want without interference by carriers. Those on the other side speak of property rights, and the incentives needed to build the network to support more data.

I hate the language of rights, favoring a more goal-oriented approach. The goal should be to maximize choice AND maintain incentives, something that is only possible if the people making the decisions aren't trapped by the black-and-white language of "rights."

It is good to have lots of choice in terms of media services. It is also good to maintain the profits necessary to incentivize carriers to build out their network.

We are heading towards a world of bandwidth caps on even fixed-line networks, barring the development of some amazing new technology that will make streamed video take up less bandwidth, or widen the pipe faster and at less cost. If we want to ensure that competitors to carrier-offered video services are on an even playing field, then the only option is through OVERSIGHT and REGULATION.

Regulation...a dirty word to many, but so very fundamental to the proper functioning of capitalism. That, to my mind, is the biggest problem I have with some libertarians (to say "all" is unfair, as on a continuum, I can be said to share many of their views). They are like people who fixate on the engine in a car, ignoring completely that an engine on blocks doesn't do a whole heck of a lot.

Government provides the structure within which economic activity takes place. Part of that structure is rules that will attempt to maximize service choice given the constraints of a market that doesn't lend itself to hundreds of competitors naturally.

The FCC is set to vote on net neutrality rules on Dec. 21. Given the looming bandwidth crunch, it is likely to be one of their more important decisions in quite awhile.

Topics: Mobility, Browser, Microsoft, Networking

John Carroll

About John Carroll

John Carroll has delivered his opinion on ZDNet since the last millennium. Since May 2008, he is no longer a Microsoft employee. He is currently working at a unified messaging-related startup.

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  • RE: Will Netflix destroy the Internet?

    John, thanks for a very detailed and balanced analysis of a contentious and politically polarizing issue.
    Churlish
    • Balanced except for...

      @Churlish <br>a direct comparison of a 5% revenue increase vs a 20% increase in infrastructure investment seems balanced, but it isn't. One would have to consider how much is this infrastructure investment to start with. Increasing bandwidth is sometimes as "simple" as replacing a router with a better router and entails a far smaller expense that putting the original lines in place.<br><br>For example: If infrastructure investment currently involves spending 5% of their gross revenue and that cost goes up 20%, then 20% of 5% is an actual bottom line impact of 1%. In the face of a 5% revenue increase, that is still a net increase of 4%. <br><br>So, the article didn't include enough information to truly be "balanced".
      RedVeg
      • RE: Will Netflix destroy the Internet?

        @RedVeg and if you take cranberries and stew them like applesauce, they taste much more like prunes than rhubarb does! heres the thing, its their responsibility to figure out how to make money off their investment, its obvious they will raise prices as one of the ways to do this, but I have no sympathy for them, the fact of the matter is the US rates 18th in the world in internet speeds, the Czech republic, and Romania are ahead of us, (and 15 other countries obviously) so if they can't even compete with those countries I dont feel sorry for them...
        nickdangerthirdi@...
      • RE: Will Netflix destroy the Internet?

        @RedVeg

        That is a very salient point. I've been on both sides of the equation in my professional career and as with most things the answer isn't simple. And what's certain is that the all the major players will maneuver to get the bet deal they can for their piece of the value chain.
        zdnet-gregc
    • RE: Will Netflix destroy the Internet?

      @Churlish, et.al.<br>I've probably been enjoying a free ride by streaming Netflix movies (though I do pay for higher internet speed to make sure it works). I tend to come down pro-neutrality, but more because I'd like to prevent giving government tools to restrict free speech (my nightmare scenario - party in power makes deal with carrier quasi-monopoly to make sure social networks with opposing opinions are suppressed. a.k.a. "you quash our opposition and we affirm your monopoly"). Furthermore, consider the result of short-sighted economic arguments. While I have three possible carriers (AT&T DSL, AT&T Uverse, and Clear) only Uverse is realistically capable of supporting video streaming and they are trying to develop their own on-demand service. For this reason, I'd prefer the "monitor usage and bill" approach over sanctioning the restriction of traffic. From a historical perspective, we would expect that neutrality, while it might lead to near-term bandwidth shortage, would spur development of higher speed infrastructure and more efficient transmission. That would be a better long-term result.
      JimboNobody
      • RE: Will Netflix destroy the Internet?

        @JimboNobody
        If you pay for your internet connection you aren't getting a free ride.
        Less likely that Government will restrict free speech and more likely that companies will restrict what comes over the infrastructure based on their profit margin. Companies are not governed by the first amendment of free speech. Only congress is prohibited from abridging the freedom of speech, or of the press; -- corporations have no such restriction..
        jimb01
      • RE: Will Netflix destroy the Internet?

        @JimboNobody I tried netflix, living in Alaska it doesnt work very well. We overload the internet connection with the lower 48 every day when the youngsters get home from school. Also Netflix does not have very many movies to watch online and there mail service doesnt work either as you can only get about 3 movies a week from them.
        gswank54@...
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  • It's not that the ISPs want to make money that bothers me

    It's that they are trying to send the bill to the wrong party. Netflix does not create the traffic, they create the content. The ISP's users create the traffic. They are the ones who need to be billed, and they need to be billed fairly. <br><br>Internet providers are the ONLY utility company (and yes, that's exactly what they are) that does not bill on a usage basis. The water company bills by the gallon, the electric company bills by the watt/hour, the phone company bills by the minute (and they bill the party who MAKES the call, not the one who receives it). Why would an ISP not bill by the gigabyte? That is the most fair way to bill a customer, because the more gigabytes you download, the more traffic you create, and thus the more you tax the infrastructure.
    Michael Kelly
    • 100% agreement..

      @Michael Kelly.. people are saying that his is difficult, but this is not difficult at all.. lol.. this is incredibly simple actually.. if an ISP's customer is not paying what it cost to service them you charge them more.. it's that simple.. but ISPs don't want to look like the bad guy and potentially lose customers so they seek to hid those cost or off load them to unsuspecting content providers.. this is just crazy.. makes no sense at all..
      doctorSpoc
      • They also gouge light users

        @doctorSpoc
        Not only do they want to offload onto content providers, but when they charge a flat monthly fee, they also force light users to subsidize the bandwidth hogs.
        shawkins
      • RE: Will Netflix destroy the Internet?

        @doctorSpoc - Excatly!

        Apple and AT&T learned that the unlimited model was unsustainable and switched to the tiered pricing model. Why wouldn't that work for land line users?

        Of course, the tiered pricing model needs to be reasonable when one goes over. We certainly don't want the "anything over your limit will be charged at 100 dollars per byte" type of model.

        Here's my proposal in an example... You pay for tier X at P dollars per month. The next tier is Y at Q dollars per month. If you go over your limit but still within the limit of tier Y, you get charged extra for twice (or three times) the difference between Q and P.

        What if you are just over by 1KB for the month? It seems unfair to pay all that much. We can have a price per MB over you limit.

        Then you take the smaller of the two prices and that's what you pay this month.

        See, it's really simple!
        billcheng
      • RE: Will Netflix destroy the Internet?

        @doctorSpoc

        There are a lot of problems with your idea and the ones commenting on them.

        Currently, you pay approximately 1 to 5 cents per Gigabyte on a land line service. On the other hand, inside the United States ONLY, you're paying $10/Gigabyte for mobile browsing. Like was pointed out earlier, we have the 18th fastest internet with the HIGHEST PRICES. A lot more people are so-called "light" user, and so the tiered option doesn't help the ISP. The problem is that the "light" users are starting to use the internet more, and the model of "well, we can just use their bandwidth sold to multiple people" isn't working anymore. The businesses didn't invest while they had money and now it's coming back to bite them in the rear. That is NOT the end user's fault. It is ridiculous to think that they are going to raise their prices because they didn't invest like everyone else did. That would be like a car manufacturer realizing that their car doesn't get as good of gas mileage as advertised, and thus charging you each month to increase your gas mileage to what they PROMISED and you signed a contract to. Currently, they sell more bandwidth than they have. This means they are LITERALLY selling nothing to some people. The consumer getting screwed by that is utterly ridiculous.

        That being said, the government only screws things up when they step in. It's the companies' fault that this is happening, but there's no one to stop it.
        evilkillerwhale@...
    • Also agree

      @Michael Kelly I'd love to see the ISPs tell people where they can shove their entitlement.
      ericesque
    • RE: Will Netflix destroy the Internet?

      @Michael Kelly <br><br>I would agree to that with a few clarifications. An ISP is not a utility company like the Electric, Gas, and Water Companies. Also in those cases you are using a physical resource that in some cases can be replenished but not always instantly. If the ISPs want to change their billing model then that is fine but so far it appears they are focusing on only certain services like Netflix in this case. For years ISPs have been advertising unlimited internet for a set price and now all of a sudden they want to change that and it is really coming off like greed because they feel they are losing revenue from their TV broadcast services. There are poorer foreign countries that have a better internet access model than we do with much higher speeds and cheaper prices.

      Edit: One last thing all these other companies that have metered services have ways for the customer to measure the amount they use with meters installed in their home for the Gas, Electric, and Water. The phone/cell phone companies do the same but in most cases the meter is on the phone. How is a consumer to compare their usage to what the ISP says they are using? Are they going to install a meter between their modem and your computer?
      bobiroc
      • RE: Will Netflix destroy the Internet?

        @bobiroc

        You are right, the ISP is more like a phone company in that regard. Which is still considered a utility. And the phone company does not bill a person who receives a long distance call, they bill the person who initiates it unless all parties waive that.

        I say if Netflix chooses to be like an 800 number and pay the toll charges and Comcast can arrange a method of tracking that, then by all means they should go that route. That way Comcast's customers can stream all they want and not have to track their GBs, Comcast gets paid for its services, and Netflix looks golden to the customer because it's footing the bill for the GBs.

        But otherwise it is the end user who initiates the transaction, and like a long distance phone call, they should pay for it. For a phone call you pay per minute, for internet you should pay per GB. Keep in mind that both parties do pay for the initial connection even now, the same way the receiver of a phone call has to pay a phone bill to even receive a call. It should not be forced upon an unwilling party. If an unwilling party is willing to lose traffic because the people connecting to it do not want to pay for the downloads, that should be their business. But I as a customer am not even given that choice to pay for a download if we go by the model of a server having to pay to connect to another ISP. In the end the customer will pay anyway, but without net neutrality the customer will not even get the choice to pay for what they want. And that is wrong.
        Michael Kelly
      • RE: Will Netflix destroy the Internet?

        @bobiroc

        But an ISP is not a utility so you have to be careful when comparing them to one. In fact if you have a VOIP system like that from your cable company or Vonage it is also not considered a utility. Only old fashioned analog land lines are when it comes to phones.

        I am all for getting fair compensation for services so don't get me wrong but having friends and family that work for AT&T and Comcast they all tell me that their internet is almost pure profit so it makes me wonder why they want to charge just for people that stream media. What's next, extra surcharges for online gamers or people that download a lot? Where does it end and how do they accurately monitor and bill their customers. Working in IT I know you can detect and monitor internet traffic based on it's content using things like Application Signature detection and packet detection and you can throttle using things like QOS and what not. But how to do you give that information to the customers and prove that it is accurate and what grounds can they dispute that? Like I mentioned before the Gas, Electric, and Water companies have meters that can be monitored and checked by the customers. I mean if you wanted to check your water meter if it was accurate you check the meter for its value and then take a 1 gallon pitcher and fill it with water and see if the meter moved 1 gallon right? With internet it is not that easy and what kinds of devices or software are the ISPs going to make their customers install to show their usage or are they just going to have to wait for the bill at the end of the month? It all gets very complicated especially from a service (NOT A UTILITY) that many tell me has a pretty low overhead because all they are doing is providing a pipe for the content and not responsible for creating or delivering it. I think the real reason is that services like HULU, Netflix and others that deliver movies and TV are cutting into the cable companies revenue because they can watch their shows via the internet and they lose that potential revenue. Not sure if that really justifies extra compensation to the Cable Companies or ISPs.
        bobiroc
      • RE: Will Netflix destroy the Internet?

        @bobiroc
        there is software that any user can download to their machine that will measure the in traffic and the out traffic of a system, hell I'm sure your standard router does this already. All one would have to do is measure the amount of out traffic one is generateing and cross reference that with the per Gb rate they currently have, just like you can check your own gas or electric meter.
        KBot