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Wall Street Journal Straight Up

Net NeutralityLegislationThe Wall Street Journal has a great piece on Net Neutrality today (subscription required, sorry). I’ll tell you a bit about it and then get off the NN kick for the rest of the day.

Don’t kid yourself that the issue here is “censoring” the Web. The issue is Internet survival. AT&T talks about the coming Multimedia Explosion as new forms of video traffic rapidly overtake Web-surfing, file transfer and email as the prime users of backbone capacity. Literally, “net neutrality” would result in an increasingly unreliable Internet as more and more high-bandwidth applications contest for space on networks that nobody would have an incentive to expand.

This is a point that the net neutrality advocates can’t address. They say things like “the people pay for their connection, so that’s enough.” Here’s the trouble with that. Estimates currently put Verizon’s cost per acquired customer in the $3,000 to $5,000 range. That’s a huge sunk cost that has to be made up somewhere. That will either happen through charges to the customers, or charges to others for services delivered to their customers.

Now keep in mind the larger point that these are networks privately held by investors in these companies. They have the capital to invest in acquiring customers and building new infrastructure because their investors staked them expecting to eventually get something back in the form of higher share prices and dividends.

If economic limitations on what you can charge the customer for a line (who is going to be the first guy to sign up for service at $5,000? any takers?), and regulatory limitations that say you can’t charge for enhanced services or tiered access combine in the marketplace, the amount you would be likely to recoup is limited and the gains from investment become smaller. This disincentivizes development of new networks.

As the Journal points out:

The real issue is where will the big bucks come from to create an Internet capable of handling the services now envisioned, let alone those not yet dreamed up. BellSouth’s Chief Architect Henry Kafka told an audience in March that a typical broadband user today consumes about two gigabytes of data a month, at a network cost of $1. Once TV has gone high-definition and on-demand, a typical user will consume about 1,120 gigabytes a month at a cost of $560 (that’s in addition to the administrative, sales and service costs that today make up the lion’s share of the user’s bill). “Clearly that’s not what the average user is going to pay per month for their video service,” Mr. Kafka said. “That’s why we need help.”

Think back to the beginnings of radio and TV: Those business models would never have worked if consumers had had to foot the bill directly for programming. It’s clear today that giving consumers the kind of Internet that will support high-definition video and gaming will require the bill to be shared by companies with a stake in putting the new services in front of consumers.

(Disclaimer: While I work for the National Cable and Telecommunications Association, this post should in no way be construed as an official position of the Association. Thoughts in this space are mine and mine alone and do not reflect the views of my employer.)

Written by Michael Turk