As I have been posting, I realized there was this huge piece missing from understanding of Net Neutrality for folks. That is essentially the CAPEX (Capital Expenditure) spending at the ISPs. One of the most important things for us as users is that the ISPs continue to invest to upgrade their networks. Under no changes that have been proposed is there a mandatory spending requirement for an ISP.
This leads back a long way on the Telco Side to the days of the “Rate Base”. When AT&T was the largest incumbent telephone company (pre-1984 breakup), it was treated as a Utility. What this means was that AT&T received a fixed rate of return based on the cost for it to build and operate its network. The cost of the capital involved in this was called the “Rate Base”. The state Public Utility Commissions (PUCs) had the job to make sure that the Telcos did not spend more than was required to deliver service. If they did, prices could be inflated.
Now carriers work on a “Rate Cap” basis for voice. This means they can charge no more than a specific amount for service. What that means on the voice side is that the right number to spend on the network is $0. Every dollar spent is a dollar not earned. One of the challenges around what might happen is that Rate Caps might be put in for Internet Services. Nobody wants that. This would create a chill in spending and make our service quality decrease over time.
The problem is how to navigate these waters so that the network value chain works for Consumers and for the ISPs. There is no regulation that makes ISPs add capacity to their networks. Today it is all about competition. The problem is how we talk about Internet Service. I live in a Comcast property and they talk about their service in a way where they promote the maximum downstream bit rate. This is, of course, not the only part of the network. One of the ad compares the service to U-Verse and talks about how U-verse can have much slower speeds in some cases. Of course, what is not discussed is under what conditions that Comcast Xfinity can have much lower speeds. Both are possible, depending on actual network conditions.
We never talk about those conditions and how they might impact the delivery of your Netflix services. The big problem with this is the parts of the network where these impacts are have no impact on the maximum downstream bit rate of your ISP. So upgrading these facilities today gets the ISP no more money. From their perspective, you are asking them to spend a lot of money to enable the business of a 3rd party (Netflix) for no additional revenue.
So, what we need to do is figure out a value model and regulatory model that encourages everyone to invest. Just slapping on Title II with little further thought will do the exact opposite, it will cut spending. Again, from their perspective the right amount to spend is $0. We don’t want that. Netflix doesn’t want that. In fact, the ISPs don’t want that. So before we go too far, let’s make sure we understand what we want and don’t get caught up by demagogues.
Have a great weekend. No post next Friday!
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