Unbundle Omnibus

My esteemed co-blogger forwards the proposition that the institutional bottleneck in ISP is right-of-way: (regulated) legacy utilities collude with local authorities to protect access rents, and that’s the only way Comcast can get away with extorting Netflix.

This is a manifestly plausible claim. As Mr. Blackstone notes in the Updates section, unbundling has been a boon to consumers in the places it’s been implemented. The organizational design that was optimal in the infancy of many industries, when regulations were first adopted is unlikely to stand the test of time. Regulatory lock-in tends to ossify the organization of firms, as the tale told by American heavy manufacturing can attest.

Elsewhere, I’ve suggested that this phenomenon has started to catch up even with relatively stable utility providers. Smart grid tech and the sharing economy of power generation is confronted with a utility Janus that on the one hand boasts decades of practical experience, but with the other hand keeps a death grip on the political rents it has extracted and will be loath to release.

AB’s proposal just so happens to fit mine pretty well. Consumers benefit from load sharing, particularly as the start-up costs of rooftop solar drop. But the marginal value pricing of the grid itself could be difficult for consumers to easily grasp. Right now, I pay my “electricity” bill to the firm responsible for both power generation and transmission. If I suddenly began to receive a separate bill for the coal I’m burning and for the wires carrying the current I consume, I might chafe a little. However, recall that here at Sweet Talk, we cherish the power of rhetoric, which implies that we’re open to changing the rhetoric of power. I’d probably be more alert to my marginal consumption if I had one check going to the relatively fixed costs of the entire right of way: power distribution, communications, gas, water, whatever; and other checks going piecemeal to the good people who pull natural gas from the ground, churn windmills, maintain protocols, whatever. Recall the purpose of price: to send signals back and forth between producers and consumers. A separated right-of-way goes a long way towards removing the noise from that signal.

Also, from a political economy perspective, we know that one way to overcome a transitional gains trap is to just rip the bandage off all at once. If you’re going to break local right-of-way monopolies, doing it all at once will block incumbents from wasting resources trying to protect their fiefdoms.

Net neutrality? Competition? Free enterprise? All of the above!

UPDATES: There’s been good discussion on Twitter regarding this post. I have added updates at the end.


Net Neutrality is great, but there’s an achievable policy that’s even better. Get the solution that provides consumer protection AND entrepreneurial innovation AND good Netflix download rates.


What’s going on?

The news of the day is that President Obama has announced that the FCC should reclassify Internet service providers (like Comcast, Time Warner, and Google Fiber) from “information services” to “common carriers”, essentially transforming them into something more like a utility (like your local Gas & Electric Company) than the competitive business you know today. The FCC is an independent agency, so Obama’s announcement isn’t policy, but of course the President’s words have weight and meaning.

The Problems

Of course, some readers are already scoffing. “Competitive business? What competition? Most local ISP markets are one-provider affairs. There’s no competition from the user’s perspective.” And that’s of course correct. I, myself, have the “choice” of Comcast or paying the same amount of money to AT&T for 1/5th the speed. Some choice, right? Real competition, eh? Hardly.

And precisely because many Americans are in the same situation as I, the suggestion that the government will regulate these carriers for basic fairness and non-discrimination of service has been met with a fair amount of good cheer. And understandably so! The recent dust-up between Netflix and the ISP companies is fresh in everyone’s mind, and it seems patently unfair that services selected by the consumer (Netflix) should be choked off by the middle-man in order to extract additional profit for said middle-man, when the consumer has already paid for both the service (Netflix) and the freight (the cable bill). From the consumer’s point of view, it’s as if the US Postal Service slowed down delivery of Amazon’s boxes (despite postage already being paid) until an additional payment was made by Amazon. It’s no better than banditry, or extortion. Bad Comcast! Naughty!

Obama’s announcement was not met with universal acclaim however. Without going full retard, there’s concern that innovation will slow down, or that once a local ISP becomes a regulated utility company, they’ll become even more in bed with the government spying apparatus than the phone companies are. And I think both fears are well founded.

Regarding innovation, let’s remember that AT&T was a regulated utility for decades and while this resulted in the whole nation getting phone services (yay!), it also produced high prices and stagnant feature development for decades. (Boo!) Many of you reading this were probably born (or at least, making the majority of your phone calls) in the post-Ma Bell Era, and so I’ll remind you that long distance calling used to be crazy-expensive, and features like voicemail and three-way calling weren’t rolled out until the local phone loop was unbundled and local phone companies had to compete for the consumer’s business.

Competition and innovation is good. Having “one” Internet utility could produce a lack of discrimination in the present (yay!), but it could also produce a lack of innovation and feature development in the long term (boo!). If this latter problem could be prevented, we should prevent it, right?

And as for the concern that a regulated company could become a point of control for the FBI or the NSA to spy on all Americans, I don’t think anyone reading this should take this threat lightly. We all live now in the post-Snowden Era, and we see the headlines about how the FBI wants a back door into every phone and mobile device. The government does not prioritize our privacy. If we can arrange our affairs such that all Americans have a choice of ISP, and they can choose the one that respects our privacy the most (within the law, but not an inch more), we should do that, right?

And competition between ISPs would have one further salutary effect, which brings us back to Netflix. If the average American had several ISPs to choose from, and switching between them was relatively painless, do you think those ISPs would intentionally degrade service in order to extract payments from Netflix or whoever? Not likely! Because they’d know that if they did this their customers would all just leave for the ISP that wasn’t doing it. Market competition, when combined with clear consumer information and meaningful power to switch and choose, is both a source of discipline against douchebag behaviour and an incentive to innovate better service and greater features over time.

Natural Monopoly 

But can there actually be competition between ISPs, or is internet service a natural monopoly? It almost seems like “common sense” that if someone is running a pipe to your house (whether that pipe is for cars (roads are sort of like a pipe), natural gas, water, sewage, telephone service, or electricity, then it makes more sense to make that one pipe be a common carrier than to pay for the cost of two pipes and make them compete with each other. The basic logic of natural monopolies is that the “one pipe as common carrier” route is always more efficient.

However, let’s recall, one of those things I just mentioned (telephones) was successfully made competitive at one point. And it’s possible to make internet service competitive as well without paying a significant penalty. The logic is as follows-

  • Most of the cost of internet service deployment isn’t the wire – it’s securing the rights of way for poles and underground pipes.
  • Wires and optical fiber are small. They’re not like a road or sewer where you can only fit one between houses.
  • Wires and optical fibers are relatively cheap. You can buy Cat6 cable by the spool for the cost of one month’s cable bill.
  • TCP/IP traffic (the computer protocol used to route internet traffic) can route around obstacles much faster and cheaply than water, roads, gas, or sewer. This means internet networks don’t need to be as efficiently laid out as a water main; they can wander if necessary.

Taken together, the above points lead to a possible solution where competition between internet service providers provide the consumer protections we all crave, while also keeping prices low and innovation high.

The Local Utility Problem

When Google Fiber enters (or considers entering) a market they provide a checklist to the city that wants their service. One of the three main points they emphasize is “access to infrastructure”. Putting up poles and buying rights of way is expensive, and it’s also unnecessary between the local electric and gas companies have already done this. If Google Fiber can run its little cable over those poles, then for the reasons I laid out in the previous section deployment can happen quickly and cheaply, and residents gain access to 1 Gb/s internet speeds for less than the price of a 50 Mb/s cable modem connection.

And that’s a key part of what’s holding back American internet deployment. Everyone knows Comcast conspires to keep prices high (and they do, and that’s crony capitalism at its worst), but what few Americans realize is that their local utility company is part of that conspiracy. The local utility companies, rather than acting as public services, act as profit maximisers, and they enter into exclusive contracts with Comcast, Time Warner, or [insert your local ISP monopoly here] in order to get a cut of the monopoly profits said ISP extracts from the end users. Your local ISP is no better than a police department that shortens yellow lights to increase ticket revenue, or engages in civil asset forefeiture. They’re not looking out for the public good – they’re just in it for the money and taking what they can get. They are betraying your public trust.

The Proposal

My proposal is fairly simple, and relies on a mix of civic organization and free market entrepreneurialism. The goal is to break the current monopoly on ISP service held by local cable companies in most of America, force the local utility companies to act in the public’s best interest, and bring some competition to the ISP business to keep prices low and innovation high.

Here it is:

Require that utility companies lease space on their poles to at least four ISPs, at cost.

(call it Pole Neutrality, or Open Leasing)

Wires are small and cheap. You can run a number of them on a utility pole. There’s no reason that a utility company should be allowed to offer “exclusive” rights to its poles to any internet service provider, nor, as a public utility, should they be acting as a profit maximiser. Their focus should be on maximising public access to a competitive market for internet service.

This proposal will all but guarantee ISP companies will not engage in the sort of strong-arm extortion that Comcast has forced on Netflix, when their customers can drop them for a real competitor at a moment’s notice. And if the ISP is that stupid, switching to a real competitor is easy.

This proposal will make sure that the ISP companies will not block access to popular websites or services (like VoIP calling), or charge extra for them, for the same reason as the above.

This proposal will ensure that competition between the four ISPs (or more, if the poles can handle it) will keep prices low and new features or speeds under regular development in order to attract and keep customers.

In Summary:

Consumer protection, Natural monopoly low costs, and entrepreneurial innovation, all in one short, simple legislative package.

Call your Federal and State representatives today.

UPDATES: I have received the following comments on Twitter, and would like to respond to some of them in longer form than Twitter allows.

My use of “utility poles” was not intended to imply this policy wouldn’t be helpful where methods other than “poles” are used. I meant it generically. Obviously where the wires are run through an underground conduit or some other means the same logic can apply. Cables are small. Anything you can send a technician into can hold many wires.

I only said Cat6 because that was the type of networking cable I am familiar with. I’m not a network engineer, and I don’t mean to gloss over the difficulty of running a network. Networking engineers certainly earn their salaries. But my general point remains, of the cost associated with deploying a wired network in suburban and urban environments, the material cost of the wire is small potatoes. It’s sort of like solar power – the cost of the solar panels is only a small fraction of the total installation costs, and those installations don’t even need to negotiate or acquire rights of way.

Indeed, this policy would probably not help rural areas too much at current network costs. But that’s true for electricity and traditional phone lines too. We achieved universal electrification and telephone service with a system of subsidies from urban to rural areas, and if we wanted to wire every farmhouse and cattle ranch with high-speed internet we would probably have to continue that practice. Either that or we just accept that rural areas will have to rely on future wireless connections, such as from a drone, balloon, aerostat, or satellite.

On the contrary, I think electricity rates would fall as the utility companies are able to spread their fixed operating costs around to more services.

Obviously there’s a great deal of variation in American infrastructure, from the old steam tunnels under New York City to the newly built exhurbs in Nevada and Arizona. Some areas will be better able to support this plan from Day 1. For the ones that cannot support it today, well, our government is currently paying (nearly) 0% interest on its bonds and the labor market is quite loose still. There’s no better time to invest in infrastructure.

Obviously any Federal funds that built out the capacity of local infrastructure to support competing data networks would have to be conditional on the local utility playing ball with the lease proposal.

What Tim is getting at here is unbundling. The best historical example of unbundling success in recent American history is no doubt the local loop unbundling that ushered in the era of competitive local phone service in the United States. This development lead to lower calling costs and feature innovation such as three-way calling. It allows for innovation at the service layer and in customer service and pricing. And it’s great. I’m a huge fan of unbundling and recommend it.

What unbundling doesn’t accomplish though is innovation at the physical network layer. The cables and switches and software that manages it all is just as important to innovate as the consumer-facing services and pricing plans. I don’t object to unbundling. In network areas where it’s not profitable to run more than one line (especially the more rural areas, as I discussed above) unbundling would be especially important for improving our network’s offerings. But I disagree with Tim that there isn’t an advantage to fostering physical network competition too. The recent innovations by Google Fiber are proof that innovation is still occurring in this market, and it would be foolish to assume this process of innovation has stopped.