Just Say No(thing)

31 Comments

Months after he sparked off a debate over network neutrality, SBC/AT&T chairman and chief executive, Ed Whitacre, is again making threatening (and very confusing) noises. In a chat with the Financial Times he said:

“I think the content providers should be paying for the use of the network – obviously not the piece from the customer to the network, which has already been paid for by the customer in Internet access fees – but for accessing the so-called Internet cloud.”

This is a different tact from the first time around. He had originally complained that folks like Google and Yahoo were getting a free ride on their pipes, and should pay them. Well, consumers had paid for their DSL connections, many pointed out, a big brouhaha ensued. Techdirt weighs in on FT comments,

He’s actually suggesting that when we buy bandwidth, we’re just buying the bandwidth from the end-point to the backbone… and everything else is just free.

His latest comments however have me confused. So essentially what he is saying, no no not charge for the content that travels on the last mile, but charge on the long-haul and metro network. Given the pricing trends in that market, that’s not too much money. As a very smart man on a private mailing list points out, the Internet has pushed the cost to the edge, so how much money there is to be made by charging content providers for QoS?

I bet these issues (and comments) are going to become fodder for US Congress which is going to start taking a closer look at the Network Neutrality in coming months. The interesting part of the equation is that even businesses are feeling a little threatened by the RBOC posturing. James Blaszak, whose law firm, Levine, Blaszak, Block & Boothby, who works for large companies on telecom issues recently told eWeek:

“If I pay for the loop that gets me access to the network, why is it that someone who wants to send me something should also pay? What if they say, to get to your customers for you to sell your wares, we want a share of your revenues? Once you buy into the notion that the telephone companies should be able to charge entities other than those that are buying access to the Internet, I don’t know where you stop.”

31 Comments

Gary Wisniewski

Marat said… “Let me ask you to help me with understanding the Internet value chain, starting from Google as application provider down to me as consumer.”

Marat: your assumption about everybody being paid would be correct if Google was actually a content provider, or even if Google were indeed part of the value chain (meaning that all searched sites would receive a portion of Google’s revenue, which they don’t).

In terms of today’s retail Internet economic model, Google is an “attention provider”. People who buy ads on Google are purchasing attention, the scarce resource worth buying. Google and attention-buyers are an independent co-market. There is no method by which content providers (such as emusic, bloggers, or even Amazon) directly participate in the value chain through to the consumer. Financial relationships between the consumer and the product manufacturer are thus independent of the retail channel, just as in my “take a toaster for free” Walmart analogy.

Further, the current economic model assumes that (a) the consumer will pay their ISP for access and (b) build independent relationships with every product and service they buy. In the world of microchunked media this borders on the impossible. In addition, the advertising model, where every conceivable business uses advertising as their revenue base, is unlikely to build more than a few highly successful online product companies—only those (like Google and Amazon) who have access to consumer attention. Attention will become more and more expensive, cancelling any gains from advertising.

If you look at the “long tail” theory as a macro-model for the net, then assume that consumers will be downloading their majority of content from fragmented, barely-monetized sources, most of which will rely upon access to the consumer via ISPs who do not participate in any way in their revenue models. As VOD and other high-bandwidth services become more dominant, ISPs will realize that they control the most scarce resource: the consumer’s attention itself. Because of that, if they are left out of the value chain, their only choice is to exercise that control by limiting consumer attention to those content sources from which they can derive profit.

They also will continue to resort to regulation, politics, and traffic filtering. But, ultimately it’s important to realize that these are vital strategies for network access providers because the retail channel model for products on the internet does NOT presently function.

I am not particularly “on their side”, I am just observing an economic dysfunction, and seeing the natural tendency of commercial stakeholders to respond to it by using the leverage they have available to them.

Scott Berry

Matt,

Hate to burst your bubble, but the RBOCs have more leverage than you imagine.

Between market power, lobbying power, regulatory power, and plain old consumer inertia (I think there are STILL people on AT&T’s basic rate plan), that’s a lot of leverage.

Nor is there as much competition as you’d suspect. Sure, in some cities there are two internet access providers (DSL and Cable) but that’s not as universal as most think. And even where there is competition, it’s rare that both offer internet access at sufficient speeds for even poor video.

So if no one (or only the RBOC, once they install fiber) offers access fast enough for google’s services or other video, how is that competition? If the alternatives are extortive video or 385K internet access, what kind of choice is that?

Matt S.

mg’s extortion example only holds up in a market without competition. It’s the basic argument of socialism, that providers will screw over consumers.

And that’s true — in the absence of competition. In a competitive environment, the therapist just switches to Skype, Vonage, Yahoo IM, iChat, or a Sprint mobile phone, or a T-mobile, or a Verizon Wireless.

The RBOC does not have the leverage that you imagine.

The best way to ensure competition is to allow entrants to determine their own business models and their customers to decide what is worthwhile. Certainly some models will fail, while others succeed.

This is not a defense of RBOCs at all. If they decide to charge this way, one of two things will happen:

1) The customers (content providers) agree that it is worthwhile and pay for the service. The bandwidth providers invest to improve their network.

2) Customers decide that is not worth it and take their business elsewhere.

The RBOCs have traditionally enjoyed regulatory protection, sure. Perhaps we should look to move past that. The railroad analogy is a good one.

Let them charge what they want, and live or die by it.

Marat

Let me ask you to help me with understanding the Internet value chain, starting from Google as application provider down to me as consumer. I pay for access to my provider, the provider pays for bandwith to a wholesale carrier who in turn interconnects with a carrier that provides connectivity to Google paying for the service. Google collects money from ad shown to me. Everybody seems to be paid in this model. So what does Whitacre want to levy for if it’s already paid?

Gary Wisniewski

mg… Whether RBOCs are subsidized or not doesn’t really change the economic realities, and “tacit promises” of 15 years ago are never going to hold up as it becomes clear that the net is the fastest growing money conduit in the US.

Perhaps the subsidies are part of the reason why monetization schemes have been ignored by most of them. More likely, Web 1.0 didn’t create the compelling online business models we are predicting today, and telcos were the winners in round 1. I think they see the handwriting on the wall, now, especially when it comes to video (evidenced by Verizon’s recent motivations for 80% fibre reservations for video).

Short term confusion will abound. But, in the long run, it’s going to be hard to create a new monetization model that keeps the last-mile value chain happy unless they’re part of the monetization scheme.

Mull

MG, seems to me with DSL, FTTH, BPL, WiMax, and other coming technologies, consumers have a choice.

Wall Street is telling Verizon that they shouldn’t be putting money into the fiber to the home, yet they continue to improve their pipe. Shouldn’t they be able to benefit from this move?

mg

Gary,

Your retail analogy sounds pretty compelling, except for one major thing. Wal-Mart did not originate nor did it survive as a result of our government giving them an effective monopoly.

The access assets of the RBOCs are currently being subsidized and supported by government regulation and restrictions. (Witness how active the RBOCs are in preventing municipalities from building wi-fi networks BASED on a legal theory of proper jurisdiction.) These access assets were given those subsidies precisely because there was a tacit promise made that PROVIDING ACCESS would be largely independent of the APPLICATIONS developed utilizing the access. Suppose you were a successful therapist who could charge $2,500 per hour by providing advice over the phone. The RBOC sees your profit margin and decides that YOUR phone bill should be higher than everyone else.

That would clearly be an example of extortion, especially since most of those assets were built under monopoly protection from a regime financed by your tax dollars.

Gary Wisniewski

Whitacre’s comments reflect commercial realities of product distribution. So, yes, he sounds confused a bit, and the the idea that content producer should start paying is not only offensive to the idea of open networks, but seems ridiculous from an economic point of view.

Or is it??

Let’s think more generally of what SBC/AT&T provides. They provide their customers access to products and services. Their customers pay them for access to the products and services.

Just like Walmart.

Imagine that Walmart allowed anybody to put products in their stores, and did not mark-up the goods, but instead charged customers to enter the store and allowed anybody to walk out with whatever they wanted. They then left it up to the customer to figure out how to get in touch with the toaster manufacturer to pay for their new toaster. This is the business model of the Internet.

The more you think about typical retail value chains, the more and more curious my analogy becomes.

Of course Whitacre wants money from the content providers. JUST as Walmart wants MARGIN on the products they sell. The whole reason value chains exist is so that everybody along the chain PARTICIPATES in the revenue.

I think content providers and technologists better figure out how to satisfy people like Whitacre with business and revenue value chains that are more like retailing. That’s what the internet is. Content providers produce products, they ship them to an ISP, and ISP delivers them to the customer. Where’s the margin?

Unless the value chain works, content providers should, rightly, feel very afraid. Any retailer like Whitacre will try to pick the most profitable products to sell. If they’re not getting good margin from one content provider, they’ll try to drop that “product line” in favor of another.

Scott Berry

I’ve said this elsewhere, but I’ll note it here:

Whitacre is posturing for Wall Street. If he can’t show the financial types that his business (specifically, the huge FTTX investments) have a payback, AT&T’s credit rating will be even more in the toilet than it already is.

Don’t build fiber and the telcos eventually lose.

Build it, and they may go broke anyway (certainly faster if they have to pay more for capital). But it’s less of a sure thing.

So the game is to keep Wall St. investing money so The RBOCs can play through to the end. Hence the attempt to convince people they’ll get higher profits from this “double charging”.

rick

Are we headed for guarantee of service contracts like the providers?

Is this becoming more complicated than the healthcare industry?

Jesse Kopelman

In regards to Verizon earmarking 80% of their network for themselves — how is this a big deal? More than 90% of Comcast’s and other cable networks are taken up by video. The experts complaining about Verizon here are just being foolish. They are the same people who complain there is a wireless spectrum shortage when more than 50% of all licensed spectrum is currently unused.

rick

It’s not a competitive environment. It’s subject to government regulation to protect consumers.

Mull

MG, Intel’s chip doesn’t replace the computer sellers product. What is being asked is to allow others to replace the pipeowners product by using the pipeowners own equipment. Voice is trending to zero, I have heard here that internet access is trending to zero. Who is going to provide the pipe if there is no money to be made? The Bells are not the only ones worried about this based on
the Cable Digital News article in talking with Cable execs.

Keep in mind, in 7 to 10 years, chances are good that zero revenues will come from voice. What is going to support the lines?

The market can decide, you don’t like at&t, go with cable or DSL or WiMax or any other number of choices.

mg

Paul,

I don’t think you know what you’re writing about. You write:

I guess what he is complaining about now is that the charges levied on content providers are not as high as he would like them to be. What he fails to recognize is that the charges reflect competitive market conditions. So if Whitacre is unhappy about the pricing levels, what he is really saying is that he is unhappy about the level of competition for wholesale Internet connectivity. <<

Whitacre is unhappy about pricing at the ACCESS LAYER of the network and would like to institute a system whereby ISPs pay to terminate traffic to AT&T’s customers. The WHOLESALE part of the Internet is as cheap as can be. Take a look at the # of companies providing wholesale services that make no money. (For a list of such companies, read Om’s “Broadbandits”.)

As of now, the system has been set whereby customers can by unrestricted access from the access provider (i.e. the Bells and Cable). However, the consumer ALSO pays an INDEPENDENT toll (in the form of watching advertising or paying a subscription) to service providers providing APPLICATION, not merely ACCESS.

It would be like Intel seeing that people are making a lot of money running software on their chips and deciding that they should be given a “toll” for providing their microprocessing service, above and in addition to paying for the chip. In other words, Whitacre’s comments are tantamount to pure blackmail. The Bells had absolutely nothing to do with developing the valuable applications that people now use the Internet. Now, EX-POST, the Bells see how valuable these APPLICATIONS are, so they demand their “cut”. I call it extortion.

Bryan

Mull-

Yes, cell phone users do pay at both ends. And that is the way the internet currently works.

What they want to do is get a third payment from the middle. Which, to go with your cell phone analogy, would be like both ends paying for cell phone service, and then if you would like the ability for customers of another cell phone provider to call you, you have to pay THEIR provider an additional fee.

Mull

One other thought on people paying at both ends. Don’t cell phone users pay on both ends, as their calls are charged when both making and receiving calls? This is nothing new.

Paul Kouroupas

While Whitacre is not the most eloquent spokesperson, he has touched on an issue that the industry must grapple with. As more consumer adopt broadband and video applications become more prevalent, underlying network operators are going to have to invest in the capacity of the Internet and traffic management tools. This investment will need to be recovered or the Internet will resemble the rail system in the United States – slow, subject to frequent interruptions, and perpetually under-funded.

But the solution is not for a dominant provider of consumer Internet access to unilaterally erect toll booths. The industry must work together to develop the next-generation peering and interconnection arrangements that will support universal broadband and high-bandwidth applications in a manner that is economical for all components of the Internet, not just a few.

I suspect Whitacre’s comments are also partly a result of ignorance. After all, he is a Bell head, not a Net head. His original statement in November ignored the fact that consumers pay handsomely (relative to the rest of the world) for their access to the Internet and application and service providers (collectively referred to as content providers) pay as well for hosting and connectivity. His more recent remarks at least acknowledge that the consumer pays. I guess what he is complaining about now is that the charges levied on content providers are not as high as he would like them to be. What he fails to recognize is that the charges reflect competitive market conditions. So if Whitacre is unhappy about the pricing levels, what he is really saying is that he is unhappy about the level of competition for wholesale Internet connectivity. Coming from the once (and perhaps future) monopoly Bell system, this sentiment is understandable.

The solution, however, lies not in Washington, but in the marketplace. Content providers can readily see where Whitacre is heading with this and have organized themselves in Washington. The better course would be to organize themselves in the marketplace for surely they will hang separately if they do not hang together and in any event are no match for the combined political and legal resources of the Bell companies. Whitacre has fired a shot across the bow of the content providers. The content provider’s greatest weapons are their product and their business savvy. They should use these to respond and work with other industry participants to establish the business relationships that will keep the Internet a rich, robust, and dynamic medium for everyone.

Mull

Bandwidth issues have nothing to do with VoIP. Voice is trending to zero or free, so who really cares about that. VoIP takes up very little space, so its not a bandwidth issue. The whole argument of pipes is coming. How can the pipe owners make money off of the future services that will be offered over their pipes.

Broadband is the future, Verizon’s fiber to the home shows that, but the must ensure that the other services that are delivered can be monitized, because if all content trends to zero, then their investment is a waste.

We have seen the advertising model cracking, 450 channels, too many choices, TiVo America, well, advertising paid for the content. Advertising stopped supporting content, and we end up with channels full of Law and Order and cheap reality shows.

Something has to pay for the investment in pipes and content.

DG Lewis

Re: Rick’s comment on the BW article: Does anyone know exactly what the “documents filed with the FCC” are?

rick

Voip is not much bandwith compared to video. I can see where there could be a change in supply and demand for bandwith as traffic patterns change with time, due to new media transfers.

The pipes have to compensate and adjust their infastructure and billing accordingly, but as a manner of economics, not a matter of fact. i.e. let the market dictate the price based on competitive measures. Oh, I forgot, these are near monopolies.

John Allsopp

I keep thinking this is all about VOIP, no? I mean, text, even lots of it doesn’t suck bandwidth like voice. So why the steadfast avoidance of mentioning actual bandwidth hoggers? Surely nothing to do with a use of these pipes which strikes at the core of the AT&T’s business?

They want to price VOIP out of business, well, all but their own.

j

Daniel Spisak

Whitacre is just being a grumpy nut if you ask me. The days of Ma Bell charging whatever it wanted because it was the only play in town are long over. Whitacre is really going to have to give up on this idea of trying to find the right weasel words to try and justify the creation of arbitrary fees for content providers.

To put this into terms the guy would understand, basically he is saying that if I made a phone call from myself to a service like Moviephone that the Moviephone people need to pay N times + 1 transit fees, where N = the number of telco networks Moviephone wants to be able to serve customer phone calls through in addition to paying whomever they already get phone service through.

As you can see from my example, if any Telco tried to propose this madness for voice calls you would hear people screaming bloody murder.

This blatant grab for money needs to be stopped ASAP before the fools in Congress somehow get the idea in their head that Whitacre’s position is A-OK once those checks to the lobbists in DC cash in.

Comments are closed.