Chris Savage on Two-Tiered Internet

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Chris Savage on Two-Tiered Internet

I subscribe to a telecom regulatory list CYBERTELECOM.ORG and there are some lively regulatory discussions that take place on this list around the clock. One of the current hot topics is how the LECs are after content providers to provide payment to be able to have access to quality connections to consumers. After all LECs and cable companies have monopoly positions and can get away with this pretty easily if the government doesn't intervene. Chris Savage did an amazing job discussing the two-tiered Internet and raises some excellent points. Take a read for yourself. Nice job Chris.

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Hello all,

This morning I saw my old colleague at Verizon, John Thorne, quoted in the paper Washington Post as saying that Google et al. were supposedly getting a "free lunch" on traffic to consumers. Basically in the lines of Whitacre from SBC/AT&T.

On the theory that "everything old is new again," this whole debate strikes me as relating to what used to be called "rate design." The context was an old-style cost-of-service rate case. Once it was determined that the company needed $XX million in total revenue, the question is, what services should have what prices in order to raise that revenue?

So look at Google: they're paying $8 zillion monthly not just for "cheap servers" (as John Thorne said) but also for upstream bandwidth to the Internet backbone. Maybe someone on-list knows what they buy and from whom, but my expectation is that they are paying boatloads of money for big, fat connectivity to the Internet all over the country (we'll leave the world out of it for the moment).

Ditto for Amazon, eBay, Yahoo, etc., etc. They are all paying lots of money already for big, fast pipes to "the Internet."

Now look at me. Always a sucker for instant gratification, I just bought Verizon's FiOS service for my house. 15 megabits/second downstream, 5 up. I've had it for a week, and it's great. Basically all major web location are just **THERE** -- essentially no discernable wait. My firm's web access portal loads slowly, but being on our IT committee I know that's because (a) it's running on a relatively old, relatively slow box and (b) it's sharing relatively constrained outbound connectivity.

But wait... If I'm paying for [x] bit rates upstream and downstream from my little old PC to "the Internet," and Google et al. are paying for [y] bit rates upstream and downstream from their monster servers to "the Internet," where's the alleged "free lunch"?

Suppose we make the heroic assumption that the commercial entities selling Google connectivity to the Internet are not, out of some deep charitable urge, selling Google that connectivity at below-cost rates. There's no reason to think that these rates are subsidized in any meaningful way.

Suppose also that we make the assumption that Verizon et al. recognize that they do face retail competition for Internet connectivity, mainly from cable ops but also from some others. So they feel constrained as to how much they can charge me and my fellow consumers, since if we don't like their price we can go somewhere else.

This implies that Verizon might not actually be making "enough" money on what they charge me for my service. Their stock price has certainly not indicated any sense on the part of the market that they are in great shape. And if we assume that their stock price is being **propped up** by the market (correctly, IMHO) placing a high value on still-burgeoning wireless services, it follows that the market thinks their landline business is not looking so hot. (Per the Wall Street Journal site, in the last year, VZN stock is down about 15%. NASDAQ is up about 7%, S%P 500 is up about 5%, and DJIA is about flat.)

So, this leads to two conclusions, for me:

(1) Verizon is probably fairly heavily subsidizing its end-user prices for Internet access. (Thanks for the free install, including digging up my lawn & nicely fixing it, for the fiber, and CAT-5-ing my house!) While this doubtless hurts their cable rivals, it hurts Verizon, too. And the market knows it.

(2) Verizon doesn't think it is going to be able to raise its end user rates any time soon. So if it is going to get itself out of the hole it is digging, it will have to find revenue from some other source **FOR THE SAME SERVICE IT IS PROVIDING TODAY.**

Hence the saber-rattling about charging Google et al. The CLEC access charge order from way back (2002?) made clear that even in a competitive retail market, someone selling "terminating" access to existing customers has an effective monopoly on those customers. That's why the FCC found it necessary to regulate (by capping) CLEC terminating access rates. Here Verizon is looking to initiate what amounts to "terminating access charges" on Google et al. -- the only "monopoly" play available where (a) end user Internet access is competitive and (b) Verizon doesn't control the prices Google et al. pay for their own access to the 'net.

Comments? Flaws in the picture? Additions/corrections?

Thanks,

Chris S.



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