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The Next Network Policy Battle

I’ve said it before, and I’ll say it again. The biggest threat to the Internet innovation ecosystem from network operators is not discrimination but terms of interconnection. Metered billing, bandwidth caps, and wholesale transit fees can all be implemented consistently with net neutrality rules. And in practice, net neutrality will be limited to “legal” content, meaning it won’t prevent greater involvement by service providers in copyright enforcement. All of this threatens the continued dynamism of the emerging Internet of video, mobile, social, devices, games, clouds, and big data. Winning the regulatory battle may actually increase the chances of losing the war.

So I’m quite worried by the push for content fees by European operators. Apparently Vivendi, Deutsche Telecom, and Alcatel-Lucent will release a report pushing this “solution” to concerns about slow deployment of next-generation broadband. It’s nothing new, and not unique to Europe, but I see the campaign coalescing in a powerful way. It was strongly in evidence at the OECD High-Level Meeting sessions in Paris that I led two weeks ago. Europe is where broadband competition at the retail level has prevented some of the problems we’ve had in the U.S. If the carrier, content, and equipment industries worldwide reach a consensus on a new business model for the Internet, we’re in trouble.

The freedom of not watching the clock is a very powerful thing. Social science research even suggests that it’s a reason why poor people don’t do as well in life: they are too busy keeping track of small costs that the rest of us ignore. It’s what made possible the rocketship growth of Internet access, mobile phone service, YouTube, Netflix, Gmail, Skype, and countless others. And it doesn’t just let the big guys get big; it lets the small guys get started without the high cost of buying in the club. It was written in a different context, but Josh Kopelman hit the nail on the head in a blog post four years ago. A simplistic economic analysis will tell you that metered charges maximize welfare for everyone, but human behavior and creativity don’t follow simplistic models.

So, what do we do? Heavy-handed price regulation isn’t a solution. Putting carriers in an economic straight-jacket isn’t the answer for many reasons, including the predictable ways they will respond. And operators should be free to innovate, manage their networks, and generate returns for their investors like everyone else. Better to achieve an equilibrium like the U.S. Internet backbone market had at key points in time. Competitive alternatives, systemic dependencies, mutually assured destruction, and cultural norms produced a workable interconnection regime without regulatory intervention… usually.

It’s easy to point to the old backbone market as an ideal, harder to dig into the details and understand how it really works, and harder still to give the broadband industry the characteristics that produced those positive results. That last one is what regulators should focus on. Alignment of incentives, largely driven by competition, is the only sustainable force to drive corporate behavior. It would be a shame to muzzle the Internet as an engine for growth just when the world economy needs it most.

By Kevin Werbach, Professor at the Wharton School and Organizer of the Supernova Conference

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