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The net neutrality debate has been ongoing for many years, particularly in the US, and is a complex argument between operators, over-the-top (OTT) companies, civil libertarians and consumer rights groups. At the heart of the discussion is the creation of an open market in which customer service, innovation and of course financial return on investments are enabled at internet speeds. In this article (which will take you approximately 15 minutes to read) I explain the basic principles of net neutrality and then analyse what impact the recent FCC ruling could have on the innovation potential of the internet.

Although it was barely noticeable, a major event took place in the world of telecommunications on 11 June 2018. The event was the coming into force of the FCC’s repeal of the 2015 Act enforcing network neutrality in the USA. Over the last century there have been a small number of major events in US legislation that have had profound and fundamental impacts on communications and as communications is intrinsic to almost every form of human activity, these changes have profoundly affected all our lives. The effect of the repeal will be no different.

The first example of such a change, and one in which a form of network neutrality was first raised as an issue, was 100 years ago in a letter sent by AT&T to the US attorney general in what became known as the “Kingsbury Commitment”. In it AT&T stated that in exchange for not being broken up it would treat all phone calls equally. Although it seems basic today this agreement established telephony as a commodity available to all.

The second such cataclysmic event was the break-up of the Bell System in 1982. In that event AT&T relinquished control of the Regional Bell Operating Companies (RBOCs) that provided local telephone service in the US leaving AT&T to focus on long distance telephony. Also, the RBOCs were no longer obliged to use equipment from Western Electric which was an AT&T subsidiary. The effects of this break up were felt across the globe and created the telecommunications market we know today, consisting of privatised ex-state-owned operators known as PTTs (post, telegraph and telephone operators), private wireline or cable service providers, a large number of privately owned cellular operators, internet service providers, content providers and so on.

More recently, legislators and regulators have worked on how to apply the principles of “common carriage” established in the Kingsbury Commitment to the highly competitive global industry which operates and uses the internet. Network neutrality is a term coined by Prof. Tim Wu at Columbia University about 10 years ago and is the foundation for the success of the internet. The principle of net neutrality is that the companies that operate the internet – either providing access to it or transmitting data through it - are not allowed to differentiate between different packets of data. In other words, they are not allowed to block or throttle or offer paid for prioritised access to content or services. As such, it ensures that the internet isn’t dominated by large wealthy players to the detriment of smaller more innovative companies who cannot compete financially to ensure access. As a consequence, it is the foundation of innovation and competition between large and small on the internet and the event on 11 June fundamentally changes the prerequisites for this innovative and highly dynamic industry.

What has changed?

The discussion about net neutrality has been simmering for years and the legislation that came into force on 11 June is unlikely to be the last word on the issue. Although regulators in different countries have implemented net neutrality in different ways, in general their approach has been in favour of net neutrality.

Probably the strictest implementation is in the Netherlands. Some years ago KPN wanted to charge for internet calls (which competed with paid-for telephony) and instant messaging and hence would block users who didn’t pay. This prompted the Dutch regulator to impose some of the strictest net neutrality legislation.

The UK and the US have been more pragmatic. Whereas the UK took a hands-off leave it to market forces approach in the US the FCC published the “Open Internet Order” (pdf download) in February 2015 which classified broadband as a “common carrier” whilst exempting it from e.g. price controls. The regulation prevented Internet Service Providers from throttling or blocking traffic or from offering paid high Quality of Service (QoS) connectivity. This was enacted by classifying ISPs as Title II carriers under the Telecommunications Act of 1996 and provided the legal framework for treating ISPs as public utilities similarly to telephone, electricity and water.

A further regulation worth mentioning is in force in Latvia where the regulator stipulated “paid for fast lanes provided that sufficient capacity is available so that the availability and general quality of internet access are not impaired in a material manner”. This statement probably embodies the sentiment that most consumers support, namely that: provided the bigger players don’t squeeze out smaller players they could imagine paying for a better service.

On Monday the FCC’s “Restoring Internet Freedom Order” reclassifies the Internet as a Title I service and not as a common carrier. Carriers are now free to throttle, block or charge for the service they provide and hence it is now possible for operators to discriminate content. In practise this would allow carriers and ISPs to charge e.g. Netflix for distribution of their content and also would enable carriers to prioritise (provide a higher QoS) for those services. In many publications this is described as creating a “fast lane” for such services.

What will the impact be?

It is of course not inevitable that other countries will follow the America’s lead. Or at least not immediately. However, considering the huge financial, cultural and other influences that America has on the rest of the world it is likely that over time the changes enacted on Monday will in one way or another feed through to the rest of the world.

In the discussion on net neutrality and in the telecommunications market in general there are a number of constituencies: consumers, operators/ISPs, vendors, innovators and OTT operators. Important participants amongst OTTs are so-called platform operators and they and the internet have a special symbiotic relationship. A platform in this sense is defined as a service/product which gains in value to the individual as more people use the platform. Facebook is perhaps the classic example. If you were the only person on Facebook it wouldn’t be much use to you. However as more and more of your friends and acquaintances use it the more people you can connect and socialise with. With correct management such platforms become self-accelerating and other less competitive platforms fall by the wayside – MySpace is a relevant example.

Each of these constituencies will be impacted differently by the end of network neutrality.

The consumer

The first such change that has already been introduced in some Asian and European countries may well be with zero rated services. With zero rating, operators allow access to certain services without charging for the data usage. Zero rating is particularly relevant to mobile operators who have limited volume subscriptions and would allow operators to give services to poorer customers for free and in the process, give a launch platform for new services. Critics claim it allows operators to pick winners and for this reason regulators in some countries have banned zero rating.

It is possible that consumers total communications and entertainment bills could also see a restructuring with fewer subscriptions to OTT services such as Netflix and Amazon Prime and more items being paid to the operator. Internet bills may start looking like a shopping list with an itemised section per service provider and free items for the operator’s own services. Smaller services will likely be relegated to a catch all box where it will be hard for them to differentiate themselves.

There is a real possibility that with the end of net neutrality consumers will see less service innovation as operators and the major OTTs reach symbiotic agreements relegating smaller innovators, and potentially even smaller operators, to less prominent and less well performing QoS and customer experience. As a consequence, it is possible that neither operators nor OTTs will have to innovate as much as they currently do in order to maintain a competitive advantage.

The Operator/ISP

Operators/ISPs have long argued for the end of net neutrality, not because of any libertarian ideal about providing an innovation playground, but to escape from being regulated as a utility. In other words, the end of net neutrality allows operators to prevent OTT players, such as platform providers, from providing competitive services and undermining their most important revenue streams.

Operators will be free to enter into agreements with platform and content providers to give them higher quality access to distribution. Operators would be free to build higher QoS infrastructure to carry Netflix streams and may also be free to charge them for their usage. A content company, like Netflix, could in turn use that infrastructure to ensure the best possible experience for their customers. In effect, a feedback loop is created controlling content/platform providers prolific use of internet capacity and encouraging them to use the capacity more efficiently than they do today. This would overcome one of operators’ main challenges at present which is that they bear the cost of providing the capacity that enables more and more people to consume third party content without sharing in the value generated. Hence there may possibly be a change in operators’ mindset of controlled investment and reducing the production cost of data towards network innovations which provide a superior level of experience to consumers and OTTs alike.

Alternatively, operators that offer their own internet services could throttle or even block competing services. This is highly likely on voice services. Operators are currently in a position in which they essentially have to offer flat rate voice calls in the form of a large number of free minutes for a flat monthly fee in order to compete with essentially free internet calls via Facetime and Skype for example.

This will undoubtedly have an impact on innovation as operators would be incentivised to steer investment towards higher paying services and infrastructure to the detriment of “free” service infrastructure, in turn creating a multi-speed internet as the provision of those high QOS services.

Content and platform providers - over-the-top players

Companies such as Facebook, Amazon, Apple, Netflix and Google are in the centre of the discussion on network neutrality. The services these companies provide are as we all know extremely popular – some claim to the point of being addictive and traffic to their sites dominates internet traffic. They drive service and technology innovation and in a short period of time have become the wealthiest and most powerful companies in the world as a result. It is already feared that their power is creating innovation “kill zones” in certain technology areas preventing small innovative companies from working in certain technology areas for fear of being outpaced by the FAANGs.

These companies with their market power have free reign to consume more network resource for the provision of their services without fear of control by operators/ISPs who are relegated to simply investing in additional network infrastructure to be able to reduce data production cost. In future they may have to be more careful as operators require payment for profligate use of network resources, particularly at peak times when the risk of congestion rises. At the same time OTTs have taken control of customer experience into their own hands. A few years ago, Google introduced the QUIC protocol which provides an encrypted tunnel for video content which ensures a high level of customer experience and prevents operators from being able to see what is being transported. The protocol ensures that sufficient content is streamed and buffered in the viewing device to ensure videos can be viewed without interruption and in the process removed the buffering symbol which was so common and caused so much frustration on mobile devices.

The new regulation fundamentally changes the relationship between OTTs and operators/ISPs. Platform providers in particular will be able to secure capacity and performance in cooperation with the operators/ISPs without having to develop specific enabling technologies. It is likely that these companies whose innovative mojo is already waning will feel even less competitive pressure from one another and from smaller more innovative companies and hence will provide less drive to the industry as a whole.

Technology and Innovators

What does all this mean for technology and service innovation in general? Innovation in this space moves quickly and has been accelerating in recent years. The network technologies required to differentiate QoS, such as Deep Packet Inspection and Policy Control, are well established as are protocols such as SIP, tunnelling protocols and VPNs. In fact, the development of the next generation of such protocols is well under way as vendors across the globe are looking to improve on standard TCP/IP with more efficient protocols better suited to mobility and video streaming and IOT devices with their tight power requirements. Currently the technologies in use in networks can be used for security purposes but not to distinguish between content types. Similarly, radio access technologies are focussed on reducing the cost of data connectivity with little consideration of QoS provision. Although 5G is described as having 3 levels of service quality – Enhanced Mobile Broadband (eMBB), Ultra Reliable Low Latency Communications (URLLC) and Massive Machine Type Communications (mMTC) - the initial focus has been on the 10-fold reduction in the production cost of eMBB data transport.

But in reality, we’re interested in service innovation. Until now operators have been regulated to the role of bit pipes forced by market pressure to invest in network infrastructure to enable superior experience of OTTs’ content. In future we will see a separation of high performance services provided by the operator by themselves or by the operator in conjunction with the OTT and best effort services able to use free capacity. Operators will be free to pursue the provision of their IoT based services, for example, which may be a necessity and some high-performance services such as connected cars or AR based services may be difficult to achieve without some form of network interworking.

For example, it is conceivable that a company such as Philips launches an IoT based Hue service providing a superior level of service for lighting than the currently “free” service that a customer receives when they buy a Hue light. Such a service might be like a data mobile virtual network operator (MVNO) and may well reduce the initial cost of the Hue light bulb whilst allowing more sophisticated lighting services as a result. Such a change might be a step in the direction of the future enterprise in which a product is managed by the producer throughout the entire product lifecycle from production through use to recycling.

But what about service innovators – small start-ups with great ideas about new services but which don’t have the power of operators or the OTTs? How will the next Facebook or Instagram be able to attract the market attention and hence investment which allows it to grow to its full potential? Whereas today an innovative start-up can launch itself on to the internet and with clever marketing to create the positive feedback loop necessary to become a platform giant in future such a company will have to align itself with a suitable larger player or try to fight from the “best effort” services box. This means that the big players will be able to pick and choose who they allow to succeed and who they will not encourage, which surely will act as a brake on service innovation.

The future

Whilst some claim that abandoning net neutrality would be abandoning a core human right – the right to impact and receive information without interference, perhaps not everything is doom and gloom. All systems exist in a state of equilibrium and the industry that builds and operates the internet and its associated technologies and services is no exception. When a change such as this comes along the system will adjust to a new equilibrium and it is imperative for us to ensure that the new equilibrium is at least as innovative and dynamic as the one we have experienced until now.

The repeal of net neutrality has given operators an opportunity and the incentive to compete more effectively with OTTs, to start to develop their own service innovation capabilities and ecosystems and launch IoT and high-performance services. This is an area in which operators have failed time and time again but perhaps they can now leverage new technologies such as 5G, AI and blockchain, as well as cooperate with smaller innovators to provide some differentiation to the monotonous cocktail of social networking, American TV shows and shopping that we are currently subjected to.

In conclusion, what we are seeing is not necessarily a restriction to the forces of innovation, but instead the opportunity for a realignment around operators/ISPs as centres of innovation rather than OTTs. Let’s hope they live up to the opportunity they have been given.

Sources and further reading

 

Author
Derek Long
Head of Telecoms and Mobile