After a quiet period both in Europe and in North America, the Net Neutrality debate has flared up again at the same time in both regions. The reasons are different, and the outcomes look to be different too, but the confusion around the topic and the way it's covered by the mainstream press is unfortunately all too familiar. In this article, I will try to expose the situation as clearly as possible and highlight how Europe and the US are taking different paths to tackle it.
First, let's expose a few myths around this debate, arguments that we keep hearing but have simply no basis in facts:
The cost of internet traffic is not killing any telecom or cable operator: regulators in Europe have examined this cost in detail, and come to the conclusion (in various countries and through various methods) that the cost of internet transit for an ADSL 2+ subscriber is on average 0,15€ per month. With an ARPU of around 40€ in the European countries where broadband is the cheapest, that's less than half a percent of ARPU. No one dies from such homeopathic costs. I'm not aware of similar studies in the US, but since transit costs are cheaper there and ARPUs are much higher, I suspect it's even less of a problem.
Online Service Providers (OSPs) do not ride the ISPs networks for free: at least not any more than ISPs ride the OSPs networks for free. The internet access purchased by end-users is an end-to-end transaction to any content, service or user online, and most of that is not on the ISPs network. The investment to make that available worldwide (hosting, routing and long-distance networks) is borne by the OSPs, and it's massive as well.
A financial contribution by OSPs, were it justified, would not change investment strategies in the access: ISPs argue that they cannot invest in access if the OSPs don't pitch in. That's absurd for two reasons: the first is that OSPs actually make a lot less money than ISPs do. According to data collected by Accenture, Comcast made $788 annual ARPU in 2013 of which 41% is margin, ie. $323 p.a. That same year Google made $45 in annual ARPU, of which 25% is margin. That's $11 p.a. In other words, Google is making 3,5% of the profit per customer that Comcast is making. It makes no sense to imagine Google (or any other OSP) financing Comcast's network upgrades. But even if it were, the amount that OSPs could legitimately contribute would increase ISP ARPU by a few % points, which doesn't make any difference in network investment strategies.
So having clarified these points, what is it that we're talking about?
Despite assertions by telecom lobbyists to the contrary, there is no problem, no impending doom. In Europe, despite a number of governments pushing to the contrary the parliament has voted in a provision last month that ensures a true net neutral environment. It has, in fact, gone beyond what many thought was possible from an elected body in that it closed one of the loopholes that operators were using to deliver discriminated services: until now, the fact that operators were prioritizing their own services over competing OSP services was tolerated. If the vote makes it into law as such, that will no longer be the case (but there are still a couple of legislative steps for that to happen, and since the final say will be from the new EU Parliament, it's hard to anticipate which way that will go.
In contrast, the US FCC, having seen the unstable framework it put in place in 2010 to protect Net Neutrality (with many loopholes and special provisions) shot down in court, has announced a new framework that would allow the establishment of internet fast lanes. In other words, OSPs would be allowed to pay for a better delivery of their traffic over the ISPs network. Or, framed differently, ISPs would be allowed to force OSPs into paying for decent delivery. The FCC originally talked only of fast lanes, but fast lanes imply slow lanes, of course. The danger to the internet ecosystem as a whole and to start-ups in particular is that it would burden them with traffic costs early on, and probably doom them to unprofitability.
FCC Chairman Tom Wheeler has verbally backed down from those statements, but it's extremely unclear now what the FCC will propose. Net Neutrality activists insist that Internet traffic should be treated as common carriage, just like phone communications, snail mail and other services are. It would solve the issue in the US in a much neater way than the way Europe has approached it, but does Wheeler have the courage to go against the telco and cableco lobbyists?
So we're in the eye of the storm on both sides, for different reasons and seemingly headed in different directions. Things are even more confused by the Comcast/Netflix deal, which despite appearances is both not about Net Neutrality and problematic.
It's not about Net Neutrality because it's about content caching, not about prioritizing traffic. As part of that deal Netflix traffic is dealt with exactly the same as any other traffic over Comcasts' network. But since Netflix is now caching its content directly inside Comcast's network, a customer's request has a lot fewer hops to go through to reach its destination, and the quality is therefore better. Previously, Netflix traffic requests had to go through a peering link between Comcast and Level 3 to reach the Netflix servers hosted in Level 3's network.
The reason it's problematic is Comcast's near monopoly position. In a competitive landscape, no ISP would dream of deliberately under provision a peering or transit link in the hope of pushing an OSP to pay for in-network caching: the risk of seeing customers flee to a better service provider would be too great. Except that Comcast runs no such risk in most of its territory. The alternative in most of Comcasts' coverage area is some form of AT&T DSL at a tenth of the bandwidth for the same price. There's no risk to Comcast to degrade quality of service for end-users to hurt Netflix's business model to the point where Netflix has no choice but to pay. I'm not saying they do, but they sure can, and at no risk to themselves. It's called abuse of a dominant position, and it's a well know regulatory issue.
Still, the Comcast/Netflix precedent shouldn't inform the Net Neutrality debate, it should inform the lack of access competition debate in the US. It's a different story, and one that would need some clarification too, I suspect, but that'll be a topic for another day.