While the debate over network neutrality drones on between professors, theorists and policy wonks, the Internet marches on. Telephone, cable and Internet companies are waging war on each other, trading blows and counter-blows; bluffing spectrum bids; throttling peer traffic; forming new alliances; capping bandwidth usage.
The battle for the future of the Internet isn't being waged in Congress or at the FCC, but in the boardrooms of some of the world's most powerful companies. By the time lawmakers catch up, network neutrality will be like testimony at Microsoft's antitrust case - entertaining but irrelevant.
The tension in the market between telephone, cable and Internet companies has never been higher. The opening salvo came in November, 2005 when AT&T CEO Ed Whitacre said "What they [Google, Vonage, and other Internet companies] would like to do is to use my pipes free. But I ain't going to let them do that….Why should they be allowed to use my pipes?"
Looking back, one could guess that, regardless of whether AT&T actually intended to begin charging content providers for data carriage, he probably regretted making that statement. It had the effect of mobilizing opposition from academics, consumer advocates, some lawmakers, and most importantly, the increasingly well-capitalized Internet companies he was refferring to. Regardless, prioritizing traffic and charging for data carriage are old news. The market has moved on to much more innovative developments.
Since 2005, Google has presented the absolute best case study for what one of these Internet companies could do if 1) they felt threatened by remarks like those made by Verizon, 2) they had enough to gain by forcing broadband networks to be more open and 3) they had enough cash and resources to do something about it. It's been estimated that Google generates as much as $0.12 for every search performed, and that has been translated to as much as $1.00 per new broadband user per month. Given that Google - unlike broadband providers - has to invest almost nothing to service these new users, that creates a tangible incentive to increase the number of Internet users, and the rate at which such adoption occurs. They only have to meddle in the broadband market enough to promote abundance, and here are just a few tactics they've been using:
- Building a municipal Wi-Fi network to provide free access across their hometown of Mountain View, and bidding with EarthLink to do the same in San Francisco, which ultimately failed.
- Investing in O3b (other three billion) Networks to a constellation of 16 satellites to bring high-speed low-cost Internet connectivity to emerging nations located near the equator.
That's quite a list (I may have even forgotten one or two), and if nothing else, it proves that Google can walk and chew gun at the same time. What I think is most interesting is the response that has come from the telephone and cable companies. Sure, they have gone toe-to-toe on the lobbying front, issued papers, rebuttals and the like. But their actions in the marketplace seem to have been more defense than offense; throttling peer-to-peer traffic, placing bandwidth caps on their consumers. It's like they are trying to fight back by harming their very own customers. Said more plainly, it looks like they brough a knife to a gun-fight.
To be fair, telephone and cable companies face a huge dillema; the dumb pipe dillema. They no longer live in the days of captive portals, walled gardens and $1,000-per-MB SMS data plans. These days, the more and faster networks they build - and the more open they make them - the more cash they drive into the coffers of the Internet companies. And if they so much as hint at tactics that will defend their own content and services against those of Internet companies, they inevitably get hammered by regulators, consumer groups and so on.
When you step back from all the sparring, you have to wonder.. Who's interest will prevail? How far will each side go in playing offense or defense? How will new regulators maintain parity? Right now, it's hard not to give the edge to the Internet companies. The combined market cap of AT&T, Cablevision, Comcast, Qwest, Sprint-Nextel, Time Warner Cable and Verizon Communications is $380 billion. The combined market cap of Amazon, Apple, eBay, Google, Microsoft, Netflix and Yahoo is $630 billion. This simple analysis also does not count Intel, Facebook and other high-valued companies whose growth is throttled by scarcity in broadband, or increased by its abundance.
But, does market cap really matter in an argument like this about market strength? Well, if you analyze the cash and short-term assets of each category, you find it's even more dramatically in favor of the Internet companies. While telephone and cable companies market value depends on protecting scarcity, Internet companies' growth and therefore market value depends on promoting abundance. What's clear is that the Internet companies are amassing huge sums of cash to spend on this abundance - and Google is making it clear that they can meddle without ever building a single competing network.
Despite massive planned investments in building new networks, the telephone and cable companies seem to be struggling to even tread water on maintaining scarcity. Consumers want Moores Law-like economics with their broadband - double my speed next year and keep the price the same.
Those who argue that telephone and cable are locked into a cozy duopoly, trading subscribers back and forth over time - will probably be encouraged by the fact that this practice will likely be a death sentence going forward. The biggest threats to telephone and cable may not be each other.
In a future post, we'll dive into the various strategies that telephone and cable can and are adopting to deal with the long-term threat outlined above. Hint; these strategies don't include making brovado statements about anyone's use of their pipes.