I’m starting to think network operators should be allowed to charge content owners for carriage

Neelie Kroes, the European Commissioner responsible for the ‘digital agenda’ which includes broadband targets is considering allowing network operators to charge content owners to transmit content over their networks.  This would be an abandonment of the principles of net neutrality that have served us all well over the last 15-20 years, but I am starting to think it might give us the best chance of getting improved broadband speeds going forward, which is probably more important than anything else.  That said, it is also critically important that charges are regulated and we don’t end up with a two speed internet where wealthy companies are able to buy fast transit and cash strapped startups struggle.

Here are the facts as they look to me at the moment:

  • Faster broadband speeds are the over-riding objective
  • Significant investment in networks will be required to maintain and improve speeds
  • That investment needs to be funded somehow
  • Broadband providers aren’t able to charge consumers more
  • Therefore content owners are the next best place to turn

The best solution would be if the fourth bullet above was incorrect and broadband providers were able to charge consumers more for higher speed connections and fund their network capex that way, but I just don’t see it happening and time soon.  Part of the problem may be a failure of local competition (which is what proponents of net neutrality argue) but I think the bigger problem is that no-one has been able to explain clearly to consumers why they should pay up for extra bandwidth.  If there was an easy fix for these issues that would be the best way forward, but I haven’t heard of one.

The other important point here is that the net neutrality regime is already creaking at the edges as network operators shape traffic to limit services that are bandwidth hungry and/or compete with their other services – e.g. Skype over mobile.  It may be better to get it all into the open.

Finally, as I hinted in the first paragraph any charging regime would have to be regulated to avoid a two speed internet.  I don’t think the regulation needs to be complicated as charges could be directly linked to bandwidth, but the price per megabyte should be the same for everyone.  That wouldn’t be a problem for most startups as their traffic requirements are limited until they have proven success.

These are very much emerging thoughts, and the simple act of writing them down has been helpful, but I would love to hear other views.  Here is one counter view.

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  • Anonymous

    I am not sure I agree with all the premises; in particular “Broadband providers aren’t able to charge consumers more” and that “that no-one has been able to explain clearly to consumers why they should pay up for extra bandwidth”. Almost all mobile plans now have a cap on the amount of bandwidth that you can use – and the cap is tiny; a coupe of GB. Some networks have multiple plans for different bandwidth tiers; particularly for plans for ipads and laptops which consume the most data. It’s early days – but I think people understand the concept of bandwidth and paying for it; certainly anybody who has ever been abroad with a smartphone understands this concept very well. Not to mention understanding of this is growing in the home broadbrand market – where most domestic broadbrand accounts have bandwidth limiting.

    I am also not sure on the implementation of this fair “content distributor pays for mobile bandwidth” policy. Are you suggesting a standard bandwidth charge for mobile data that is billed to “content creators”. How do do you define who these are, or are you saying any website that pushes more than X data in a page? And if so, how does this billing work – does each company need to have a billing relationship with every single mobile operator on the planet (if every country took this approach?). Who sets the prices? Can a content operator refuse to send content to one operator?

    The only way this type of thing works is as a two tier internet – where the big companies that have the resources not only to pay but also to organise all the necessary billing with all the operators pay for bandwidth. Actually I don’t think this is necessary the end of the world; you could envisage a situation where consumers pay for X bandwidth for their phone – but certain large companies like youtube or netflix pay directly to the operators and the bandwidth used on these sites does then not count towards your personal allocation.

  • I think allowing network operators to charge a content provider is a complete and utter non starter. Way to complex to implement, shifts power further to the networks and is just another barrier to entry to starting and growing a business.

    As a VC why would you want to see an extra expense line in a start up’s budget which would only grow as it ramped up.

    I really don’t see why it’s that hard to explain to consumers why they need to pay more if they are using more bandwidth to stream tv, use Skype etc.

    The networks need to be tightly regulated. Look at the cost of roaming mobile calls, they would never have come down if the regulator had not stepped in. Just like they are going to have to step in with roaming data charges.

  • Thanks Chris.

    It is true that tiered broadband products exist, but I don’t think carriers are able to get enough out of the top payers to fund their capex. It is the Google’s of this world that are making the big profits after all (admittedly lots of reasons for that). That said the landscape is evolving rapidly.

    The mechanism I’m suggesting is that each website pays its hosting provider a fee sufficient to cover the costs of the bandwidth it is consuming and that is spread out across the all the networks that end up carrying the content. The key is that it needs to be more than today and the money needs to flow around the whole internet through updated peering arrangements. Does that make more sense?

  • Hi Richard – startups already pay for bandwidth, but right now the charges don’t truly reflect their traffic levels because the assumption of equal traffic that underpins peering arrangements no longer holds, at least if I understand it right. So my suggestion is that bandwidth hungry startups would pay more, but the real payers would only be businesses with lots of traction and they should be able to afford it.

    This situation isn’t ideal, but is better than seeing our broadband networks stagnate or decline due to under investment.

  • If you want to see a big infrastructure investment in the UK, Nic
    (which I also do) then I think the only way is with government
    involvement. Just like in Japan. Left to private companies to
    initiate it’s just not going to happen.

  • The government is broke though

  • in more ways than one!

  • in more ways than one!

  • Anonymous

    The mobile operators are, IMHO, a dumb utility like water or electricity. They should not be expecting abnormal profits like google. The problem is for the last decade they think they can make these sort of profits so have spent money on all sorts of wasteful activities not to mention a hugely strategic error in overpaying for the 3g licenses (which was of course a huge tax on innovation and one of the last governments more stupid mistakes). When they finally realize they are dumb pipes and act like a utility (three seems to understand this) they might be able to move money into building their network.

    If consumers really don’t value bandwidth/speed on mobile then there is no defacto reason why the market should provide is just because us geeks want it.
    ___

    I am not sure the 2nd point does make sense. Content creators already do pay for bandwidth to their hosting provider – but it’s the bandwidth for data that leaves their network to go to the next peer. There is no way for your hosting provider to definitely know that the end user even is a mobile device.

    Not to mention who would manage this system; it sounds like you are suggesting a global regulatory framework that prices bandwidth and relies upon the tens if not hundreds of thousands of hosting providers around the world to handle the billing. Even if this was a sensible approach I don’t think it is logistically feasible. How would these even work for something like P2P data (be it torrents or skype?).

    My guess is that in the UK a list of 10 websites account for 80% of mobile data. There is really no reason for a complicated system like you are suggesting – much easier to handle individual deals with these key companies which I presume in the UK would be youtube, facebook, iplayer, lovefilm, spotify and a few others if it was really felt necessary for producers to pay for bandwidth. My opinion is providing bandwidth is the reason d’etre for a mobile network; and if they can’t work out a way to cover their capital costs from their users to build a network they should loose the valuable spectrum and it be given to someone else (google?) who seem more than willing to invest in infrastructure.

  • Hi Chris -thanks for a helpful comment.

    A couple of responses:
    – I’m not only talking about mobile here, although that is perhaps the bigger part of the bandwidth requirement
    – I think that even if consumers aren’t willing to pay (enough) for extra bandwidth we will all be better off if the capacity is built – ie there is a market failure in this area, and regulation is a necessity
    – I’m stopping short of suggesting a solution, but some modification of the peering arrangements might be able to bring extra revenues to some carriers and finance network capex, particularly European operators who take much more traffic from the US than they send back

    And 3G licenses were a big mistake.

  • Anonymous

    I think people are paying for faster speed landline connections; I know quite a few people pumping up the cash for Virgin’s 50mb connections and Virgin are clearly investing significantly in this area; so there is public demand at reasonable prices.

    Now clearly there are problems in building networks to less urban areas – and I tend to think there is a role for government investment here; arguably high speed broadbrand is more economically important over the next 30 years than the transport network. There will be direct government payback as well; just the savings to the NHS from tele-medicine could alone cover the costs of building the network.

    The reason I focused on mobile is I don’t think there is any issue with bandwidth costs on the fixed line network; the issue here is building the network in the first place as opposed to capacity issues; so it’s a fixed cost problem not a variable. My understanding of the mobile network is there is a much more significant variable cost issue which is why I presumed you were talking about charging content producers some % of MC. There is less market failure here though because mobile networks do already charge some function of MC by limiting bandwidth.

    I think there is less public benefit for mobile bandwidth and government should get out of the way of what is a more “luxury bandwidth” and stick with helping build fixed line networks and WIFI to bridge the gaps.