Net neutrality is really just a fight over money
By Rob Cox and Robert Cyran
It’s easy to frame the debate over net neutrality as an ideological battle between forces who want unfettered Internet access and those who would prevent it. Actually, like most good fights, it’s largely a dispute over money. Some pretty basic numbers illustrate the point — and provide an idea of where the debate should logically wind up.
There are two broad constituencies facing off in this quarrel. On the one side are providers of Web access. Call them the Pipes. They include telecoms giants AT&T and Verizon, who have a combined 142 million wireless customers and provide fiber and DSL connections to more homes than anyone else. Alongside them are the cable operators, led by Comcast and Time Warner Cable, who together reach into 30 million American homes.
In the other corner are those firms that benefit most from surging traffic on the Internet — call them the Swipes. In this camp are Apple, Google, Cisco and Microsoft. Their businesses — whether selling search advertising, routers to channel data or snazzy mobile devices — demand ever-larger amounts of bandwidth to grow.
But the economics are incredibly skewed. The Pipes bear the price of building the infrastructure on which all these Web businesses depend. That’s reflected starkly on their balance sheets. The four biggest Pipes have combined net debt of around $143 billion. Last year alone they spent $42 billion on capital expenditure.
As for the four horsemen of the Swipes, they have a combined net cash pile of around $140 billion. Last year they spent $4.9 billion on capex — a tenth of the amount the big four Pipes shelled out on erecting new cell towers, buying routers and extending fiber-optic cables.
The switch to mobile devices such as the iPad and Android-powered handsets will aggravate this divide. Cell networks were designed for short and infrequent calls. Customers use these gadgets longer, more frequently and download more data. If people used wireless connections in the same way they use their broadband connections, operators would need 10 times as many base stations, according to Sanford Bernstein research.
The introduction of variable pricing, or charging customers based on the data they consume, will help pay for the needed gear. But it means the already unpopular Pipes will stick their customers with far larger bills — a recipe for political interference. Meantime, the Swipes would continue to carry away what the telecom operators see as a disproportionate chunk of the benefits.
Some of the Swipes realize this imbalance isn’t sustainable. Witness Google’s decision this week to issue a shared statement of principles with Verizon to protect “the future openness of the Internet and encouraging the rapid deployment of broadband.” Of course, there’s no assurance the principles will be accepted by regulators, Congress, other companies or consumer groups. But the proposal shows how much of the Pipes-and-Swipes dispute centers on economics.
Wired networks are largely built out, and need relatively modest capital expenditure. So the proposal gives the Swipes what they want for existing Internet services — carriers can’t favor, or charge premiums, for transmitting one sort of data traffic over another. Wireless networks, on the other hand, need huge investment and face capacity constraints. The Pipes get something they like here. Traffic on these networks would remain largely unregulated, and carriers can charge more for carrying services such as streaming video.
Google, once the leading proponent of strict net neutrality, may have recognized the symbiotic relationship that exists between its business and the Pipes. Not all its peers will follow suit. Facebook is already challenging the Google-Verizon detente. But over time it’s hard to see this as anything more than a negotiating stance.
Already it is clear that demand for bandwidth is outpacing supply. If this persists, it will act as a drag on growth for the Swipes. They could take matters into their own hands by, say, buying one of the Pipes or sharing more of their revenue with them.
The better financial option, though, is to expand the size of the profit pie. And that is why the Swipes and the Pipes will increasingly find a middle ground like the one staked out by Google and Verizon. Call it a net neutral zone.