iPhone Politics: Why U.S. Wireless Carriers May WANT to Encourage Network Congestion

Contributed by Thomas G. Hagan

Data Hogs? What Data Hogs?

Whenever confusion runs rampant, and an otherwise smart company (in this case, Verizon Wireless) does things that seem contrary to its own interests, it's time to step back and look to see who benefits from the confusion, and just where the interest of that smart company actually lies.

Such is the case these days with "Net Neutrality" and the question of "all you can eat" pricing for cell phone subscriptions. And “data hogs” using up all available bandwidth.

It was Ivan Seidenberg himself, then and now CEO of Verizon Communications, who said years ago that one consequence of working in a highly regulated industry is that the normal rules of the free market don't apply. Instead of trying for market share by appealing to customers or decreasing costs, management talent is diverted to extracting the best possible deal from the regulators. He pointed out that this distorts the behavior of such companies, including those in his industry. Meaning that they are led to do things contrary to what one would normally expect — they sometimes behave in ways that seem against the interests of either themselves or their customers.

With that in mind, let's look at what's happening. Right now the phone and cable companies are engaged in a struggle to handle surging demand for bandwidth, particularly downloading of videos from the Web, both for wireless and wired connections. A recent statistic said that Netflix downloads alone now account for 20% of all Web traffic. Accommodating this demand will entail more capital expense for both wired and wireless connections to the Web, substantial for both, but much much larger for wireless. And, of course, that Capex must ultimately come out of carrier revenues, and they must meanwhile earn a reasonable return on any funds they use.

At the same time, companies such as Google, Netflix, Amazon, Facebook and others have arisen and taken a big share of the customers' wallet for the Web content they sell, directly and indirectly, all of which is delivered by the carriers.

The carriers want a bigger share of the total paid out by the consumer. They want a piece of the content revenues, not just the data communications revenues.

Given their power as real or quasi-monopolies, they can extract this from the big content suppliers. But they can make such moves only with the consent of their regulators. So, for them, it is important to pressure those regulators into allowing such arrangements.

Some people are opposed to allowing the carriers and the big content providers to strike deals that would preclude participation by smaller independent content providers. They are insisting on "Net Neutrality" that would provide a level playing field for all content providers. If traffic is a problem for the carriers, they say, let the free market solve it by having end-users pay for the bandwidth they consume, not by permitting revenue-sharing deals between the carriers and the big providers.

The carriers oppose this constraint and can make their case directly to the regulators, of course. But it’s much better if they can get the public aroused and noisily side with them in the dispute.

How to do that? First, by insuring everyone is confused as to the very meaning of "Net Neutrality." Make them think that everyone advocating it is pushing for "free Internet access for all." Even confuse the meaning of "on ramp" and "off ramp" to the Internet. Confuse concern for Net Neutrality with concern for the "digital divide" keeping some off the Internet, either because they can't afford to pay an ISP or because they live in an unserved rural area. Avoid a simple discussion of whether the user or the originator should pay for carriage of content delivered to the user. This confusion will help garner public support for arrangements that some fear will squeeze out small and independent content providers.

But that's not all that can be done. One thing bound to arouse a noisy public outcry is delivering poor service. One way to do that is not to charge "data hogs" for the bandwidth they consume while downloading video. Thus, offering an "all you can eat" plan, with a flat price per month no matter how much users download, is bound to result in poor QoS as fast-rising video content consumes more and more of the available capacity. This would never be a desirable path if the business objective is to please the customer. But unhappy customers screaming about poor service might be exactly what's needed to get the regulators to let you do what you want: get a bigger share of the total price those customers are paying for the services you deliver—get permission to charge the content providers a percentage of the revenues they receive for Netflix videos, iTunes downloads, and advertising on Youtube videos.

How might I believe that this is what Verizon, Comcast, and others are doing now? Because I heard directly from Ivan Seidenberg himself that this is how they would behave.