Analysys Mason Limited 2014 April 2014

Net neutrality: still a long way from clarity

April 2014
Nico Flores
Recent developments on both sides of the Atlantic have given fresh impetus to an old debate: the commercial
relationship that should exist between online players and Internet service providers (ISPs). The debate looks set
to continue for the foreseeable future, with much at stake and heated arguments. The basic questions are,
appropriately, the object of public debate, but their resolution depends on more obscure details on which much
work remains to be done.
Recent developments have caused controversy
The following are just three major developments from the past few months.
In the USA, in January an appeals court ruled that the Federal Communications Commission (FCC) lacks
the authority to require ISPs to observe its now-defunct Open Internet Order, which banned ISPs from
blocking online providers or discriminating between them when prioritising traffic.
Also in the USA, in February Netflix and Comcast signed an agreement whereby the two companies will
interconnect directly to each other, and Netflix will be provided with enough bandwidth to ensure that its
customers get a good quality of experience, following several months of reports of poor download speeds.
The commercial details have not been disclosed, but it is widely assumed that Netflix is paying Comcast for
this.
In early April, the European Parliament approved in the first reading a set of net neutrality provisions that,
if enacted, will ban ISPs from blocking or discriminating among content providers. The new rules also
restrict the types of specialised services that ISPs can offer to businesses needing to reach consumers with
quality-of-service technologies, such as live TV, telemedicine or teleconferencing, and require that these be
kept separate from the Internet at a technical level.
The debate is far from over. In the USA, the Comcast/Netflix deal generated a public war of words between
both sides about who should pay for network upgrades and whether ISPs interconnection agreements should be
subject to regulation. Meanwhile in Europe, the ink had barely dried on the new proposed regulation text before
telecoms association ETNO had called for the new provisions to be revised by the Council of Ministers later this
year, arguing that the new rules undermine investment and innovation in networks. Given how much is at stake,
and the public debate largely focused on rights, we can expect the controversy to continue for the foreseeable
future.
Many of the key questions about net neutrality remain open
Based on our work in this area, we can make three observations about what lies ahead.
The meaning of net neutrality is all about the details: The concept of an open Internet elicits near-
universal support in principle from citizens, regulators and ISPs, but what it means in practice is far from
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Analysys Mason Limited 2014 April 2014
universally clear and much depends on this. For example, what (if anything) does a ban on
discrimination in retail Internet access services imply for ISPs wholesale interconnection arrangements,
or for their provision of specialised services? The answers to these questions will have a direct impact on
ISPs business models and ultimately on the future evolution of the telecoms value chain.
The need for regulation to deliver net neutrality is still in debate: Opponents of net neutrality often
argue that the Internet is likely to remain sufficiently neutral without the need for regulatory intervention.
The argument is that operators will be disciplined by their subscribers, who can vote with their feet and
switch providers if their ISP visibly discriminated against key online services (arguably, this might apply
more in Europe than in the USA, given the different levels of competition in retail broadband service).
However, this is only speculation; in an alternative scenario, the Internet might evolve to a model similar to
pay TV, in which carriage negotiations lead to confidential commercial agreements between the parties,
occasional blackouts and a different set of content offerings available through each operator. We simply
do not know, because this is an empirical question. Whether through formal legislation or regulation,
through merger conditions imposed on large operators, or through less-formal statements of policy or intent,
policy makers and regulators have exercised at least a degree of public intervention on net neutrality
throughout much of the Internets commercial history.
The aims of net neutrality per se are also disputed: Before asking whether intervention is needed in
order to protect net neutrality, regulators and policy makers need to ask whether net neutrality is worth
protecting, and if so, why. Rhetorically unappealing as it may be, discrimination is essential to a wide
variety of business models across the economy in which players can freely choose with whom to transact,
and on what terms. Some forms of discrimination are standard practice for online players for example,
the question of which apps are available in the various connected TV platforms is often a matter of private
negotiations and yet this is rarely considered to be a problem. Barring issues of market power, the case
against discrimination is not automatic. An ability to discriminate by ISPs may be a driver of innovation in
the telecoms sector even if it is true that as its proponents argue net neutrality can drive innovation in
the online sector, or facilitate media plurality. Many of the key questions relate to industrial and cultural
policy; they lack right or wrong answers but rather call for difficult trade-offs that are ultimately political
and that different countries may approach in different ways.
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During the past few years we have been working with policy makers, regulators and industry stakeholders on
these and other related questions. The development of the networks, services and commercial relationships
means that the full constellation of issues and their relationships is only gradually coming into view, and it may
be some time before the analysis reaches the level of sophistication that today exists in other areas of telecoms.
In the meantime, it will be a period of intense debate for policy experts, and of unavoidable uncertainty for
industry players and investors. For more information please contact Nico.Flores@analsysysmason.com or
David.Abecassis@analysysmason.com.