Thursday, October 29, 2009

The Net Neutrality Bus

Don't get me wrong. I love my cheap Internet line. I pay less than $100/month for 6Mbps downstream Internet speeds and cable TV service and it's great. I don't know what I would do without it. It would be even better if it were less expensive. But I realize that it's not as simple as that. There's an economic equation that dictates much of what happens in the market. Or at least it probably should. Here's an analogy:

You decide you want to get into the transportation industry. Living in a small town, you spend $100,000 buying a small bus. It carries 40 people. You have a route that you've mapped out that takes roughly one hour to traverse and covers most of the town. There is perhaps one other person in town that has been making a living in the same business. If you can make eight trips a day and carry 40 people each time, charging each a quarter, you can make 80 dollars a day. Not including fuel, maintenance, insurance and other expenses, it would take 250 weeks of 5 business days, or almost 5 years, to pay off the bus. You decide that you want to pay off the bus faster so that you can invest in a better bus that carries more people. So you decide to create a special, express bus service. It stops at half of the bus stops and generally the bus is half full but it gets people to work much faster. You charge $2.00 for it. The benefit? Your passengers get to work 45 minutes earlier, giving them an advantage over others who take the regular bus. If the first two trips of each day are express trips, and each express trip can carry only 20 people due to the quicker routes that have fewer stops, then for those trips, You'll make 4 times more than a normal trip. The net? You pay off the bus in 2.7 years rather than 5. That means the new bus can be purchased that much faster and hopefully you'll be able to carry more people on one trip.

But wait. Since you are one of only two bus companies in town, the city commission steps in. Since people are dependent upon your bus service and some can't afford to pay $2.00, they tell you that you can't charge different people different rates for the ride, even if they can afford it. You are excluding some people who can't pay $2.00 and still need to take the bus since you now make fewer trips at the quarter price.

You keep your rates the same then and you use the same bus for almost 5 years, with no opportunity to obtain a bigger, faster one that carries more people.

You are happy about this. Or are you?

3 comments:

  1. Net neutrality isn't about the end user being charged for special access. That is already in place and generally agreed should be in place. You're paying additional for additional bandwidth. I deem it's important enough to have 5 Mb/s to the backbone, so I pay for that ability. That 5 Mb/s are earmarked for me, whether the rest of their network is flooded or not.

    However, in your analogy, net neutrality would be like telling businesses that you aren't going to stop in front of them with your express bus unless they start paying you a per user fee to do so. The end users then have to look for other ways to get to businesses that won't pay.

    Of course, those fees will get passed on to the end user in the form of higher prices from the business.

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  2. Gonna jump around a bit with my response. I apologize for that.

    I'm not sure I agree with your first paragraph that it is not about being charged for special access. Although there are more authoritative sources see this wikipedia article: http://en.wikipedia.org/wiki/Network_neutrality. In general the FCC has already mandated that access to the Internet not be blocked or slowed. See this: http://www.worldlawdirect.com/forum/internet-law/29660-t-googles-call-blocking-violates-fccs-internet-policy-statement.html. Also I would recommend looking up the Comcast case and a number of others.

    Secondly, even if this were about "not stopping" at a given stop with my express bus, I'm not sure I understand what's wrong with that. Don't airlines only fly to cities where they can make a profit? What would be the purpose of requiring cabs to stop in rural areas where there are no passengers? Likewise why shouldn't buses be incented to stop where there is money to be made, rather than at some arbitrary location that someone else picks?

    The charges you and I pay for Internet service amounts to an access charge because the cost of the network itself won't be recouped for many, many years. After all we are paying maybe $50.00/month for switches and fiber that cost tens of millions up front. Internet bandwidth is used up quite rapidly with applications like video, necessitating more network investments to carry more traffic.

    Say we lease on a two-bedroom apartment, does that monthly payment mean we should be able to move into a four-bedroom unit for the same price if the landlord decides to build new units because families are getting larger?

    I know I've used lots of analogies here, but I think these are valid comparisons where we have certain expectations for what we are getting for what we pay for. I'm not sure people understand networks and network costs in the same way.

    Hope this clarifies.

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  3. Let's try a different analogy: I own a delivery company...Imagine that you pay money to receive packages at your home. $10 per month for best efforts delivery, $20/month for 3 day guaranteed, or $30 for guaranteed overnight. You no longer have to pay per package for delivery--it is unlimited at the speed you purchased.

    I, as the owner of my delivery service, assume that there will be a certain level of demand based upon experience that will drive how many trucks I buy, how many people I employ, etc.

    Now, let's say that a fancy new company comes along and decides to start making widgets that EVERYONE must have, and they want them everyday. Let's also say that I don't add any customers during this period. My revenue from my customers is exactly the same here, but my cost to deliver the service has just increased significantly because of demand. If I can't adjust my prices, then I have to adjust my service levels. If I can't do either, then I'll go out of business.

    This is what net neutrality boils down to: The companies generating the products that create the demand are not the companies that have to maintain the delivery mechanism. They are paying to push their product out the door and get it to the street, but they are not paying for it to be delivered. That is picked up by the end user through the fees paid to the delivery company. When the delivery company becomes handcuffed on how much they can charge, or how they deliver the goods, then it becomes a very dicey situation.

    The regulation aspect of net neutrality does do just that: It handcuffs the last-mile providers of internet access to provide high quality, low cost solutions despite how much content is created in the form of video or other high-bandwidth applications. If everyone decides they want to watch "The Office" on Hulu at the exact same time, it would buckle the ISPs providing the access--Who is harmed in this situation? The ISP and their relationship with the customer--Not the provider of content...

    Just my 2 cents.

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