IP Democracy: Big Bypass: Another Type of Convergence?

Recent posts by Michael Parekh (see here, here and here) and Om Malik (see here, here, here and here) on network neutrality, Internet-delivered video and the relationship between the two, remind me once again that, as a society, we face an important and as-yet-to-be-resolved conflict between two fundamentally different business models and, at least to some extent, the underlying values they reflect.

One model is based on the unrestricted end-to-end connectivity of the Internet, and is exemplified by companies like Google, Yahoo, eBay and Amazon (and legions of smaller players), and the services they provide. This model is also generally favored by municipal-broadband advocates. In my view, the values underlying this model are openness, accessibility, low barriers to entry, rapid innovation and information dissemination, meritocracy (all of which drive dynamic but potentially volatile markets). So far, the Internet model has yielded a wide range of business models, and an interesting and dynamic mix of altruistic social responsibility that can quickly generate great social good, matched by a Wild West libertarianism that tends to keep the door open to equally creative and fast-moving abuses like spam and viruses.

This Internet model is on a collision course with a more established model based largely on the near-monopoly business models enjoyed for decades by telcos and cable operators, who now share the broadband access market as competing duopolists. This model is built largely on the financial virtues of entrenched market power, which in turn supports relative predictability in terms of customers, revenues, cash flows, margins and other financial metrics. This, in turn, minimizes the risks associated with what can be very large capital investments in network construction and upgrades. To the extent this predictability is seriously disrupted, pipe-owners’ high-fixed-cost asset values suffer. Even with today’s modest disruption of that predictability, cable and telco stocks have not been faring well.

Another aspect of this conflict is that today’s access duopolists operate networks that, while evolving, are still not especially well-suited for the mass customization and democratization of media production and distribution that many believe is the logical evolution of the Internet model (and in Internet time an “evolution” can happen pretty darn fast).

And while some very smart cable and telco CTOs and CFOs are working hard to find financially viable and technically sound upgrade strategies to overcome the historical shortcomings of their networks, even these planned future upgrades tend to fall short of what is probably the ideal—an all-optical network delivering dedicated fiber to each premise, supplemented (for mobility and extremely low-density applications) by high-capacity next-generation wireless using a high-grade slice of spectrum—say, a portion of the broadcasters’ 700 MHz band that will become available not too far down the road.

After reading and writing about telemedicine last night and scanning a long Washington Monthly essay entitled “Let There Be Wi-Fi,” I’m struck again by how important these Internet-related issues are to the future evolution of our economy and society and to finding solutions to its mega-problems (e.g., healthcare, education, global competition, political corruption, to name just a few).

And, while I sympathize with cable and telco management that face financial pressures and more competition than they’ve ever faced before (two competitors is a lot more than one, which is a whole lot more than none, but its still pretty far from what Adam Smith had in mind when he talked about “free markets”), it seems a big mistake for us, as a society, to adopt policies geared mainly toward protection of incumbent business models, revenue streams and margins, if these policies put at risk in any significant way the incredible dynamism of the Internet, which has driven and continues to drive unprecedented innovation in response to genuine market demand and social needs.

Here’s where Robert Cringely’s series of “Google” posts come into play (see his first two posts here and here, and his most recent one, which focuses on video advertising, here). One of Cringely’s main points is that Google will move deeper and deeper into the “network infrastructure” business in order to weaken the control exerted by pipe-owners that may have increasing incentives and ability to favor their own services and financial interests through imposition of a two-tiered Internet structure.

A November post by Michael Parekh talks about the emerging “Big Bypass Battles” and the relationship between “Co-Pass” (a Yahoo strategy in dealing with telcos) and Bypass (which seems to be more of a focus for Google and Earthlink).

In a more recent post, Michael highlights the linkage between what’s happening this week at CES and the regulatory/business issues raised by duopoly ownership of access networks.

With all the focus over Google and Yahoo! focusing on Video (NY Times), AND the Wall Street Journal reporting on new video download services being introduced by Google at CES, (with similar offerings by all the GYMAAAE companies), it’s important to remember that there is another battle brewing behind the scenes. And it’s likely to really determine how successful these video offerings will be and how soon. And that’s the increasing efforts by the telco and cable companies to get both the content providers and potentially consumers to pay more for “higher quality broadband delivery” of these video streams.

Om Malik cites the WSJ story I discussed in a post last night. He also cites a podcast he did with Niall Kennedy on the subject of a “Two Tier Internet” (the audio is here and a transcript is here). As Om puts it:

The argument is that the phone companies are going to charge for better performance for say games, or movie downloads or software downloads. It is not a bad thought, though only in cases where latency is a big issue. The argument of better network performance, as many in the business would tell you, is a bit of chimera. Even if you buy into the argument, as a consumer, what I would like to see is that if incumbents charge for the network access, then they pass on those savings to consumers.

In the podcast, Om echoes Michael’s point that we are in a transitional period during which “business models and regulatory rules of the road are fought over, re-negotiated, and accepted by the content producers, distribution networks, and of course by consumers.”

…charge a premium from certain people who want better performance, that is fine. The minute they start imposing a toll tax, this quasi-toll tax for the access part of it, that is where things get a little complicated. That’s where, as a consumer, you have to stand up and scream, because why are you paying them fifty dollars when they define what you can see or what you can’t see? So we cross that bridge when we get to it. Right now everybody’s made threats, nobody’s followed through. So it’s something we have to watch very carefully.

I’d suggest that, even as the “convergence” on display at CES continues to unfold, another equally important form of convergence is also gaining momentum. To mangle Michael’s phrase, I’ll call it the “Big Bypass Private/Public Convergence.”

During the past few years, we’ve seen a growing interest in the idea of “municipal broadband” or “community Internet” among cities large and small, who see it as both a driver of healthy economic growth and a tool for supporting government functions, public safety, education, healthcare, traffic management and other “social goods.”

A new phase of the Community Internet movement is characterized by the emergence of “bypass” models largely funded by Internet-based companies like Google or Earthlink, but with the active cooperation of city governments and local communities.

A third and related force is the pushback by incumbents against Community Internet initiatives, which is putting pressure on cities to avoid putting taxpayers’ money at risk and to not get too directly involved in the provision of commercial services. This, in turn, seems likely to push the Community Internet movement in the direction of the Public/Private models proposed by Earthlink, Google and others.

These market and regulatory dynamics seem likely to encourage alliances in which local communities join forces with private Internet-based companies like Google and Earthlink to design, build and finance Big Bypass networks that are extremely high capacity, symmetrical and “open access” in design and, especially if Google is involved, that leverage the power of “intention-based commercial information” (i.e., targeted advertising) as a source of revenue to finance construction and maintenance of these networks.

So, while what Michael describes as “Co-Pass” deals are likely to continue between Internet players and pipe-owners (see reference to Movielink-BellSouth talks here), it seems likely that pressure will continue to build in the direction of Big Bypass Public/Private deals as well, especially as incumbents’ moves toward a two-tiered Internet clarify the difference between their vision of IP networks and the vision imbedded in the original design of the Internet.

Sometime in the next few months, a book will be published that lays out an argument and basic blueprint for construction and operation of publicly controlled “Internet public roads.” Having read drafts of the book, my guess is that it will intensify pressures already building toward a Big Bypass Public/Private Convergence and will help clarify a path of opportunity for that convergence to unfold in local communities, and to be accommodated and perhaps even encouraged by state and national policies.

This won’t and shouldn’t stop Co-Pass deals from moving forward, but it may help create Big Bypass network alternatives in more and more communities around the country. As this occurs, other communities, as well as state and national policymakers, will get to evaluate and compare the Two Tiered Network model and the various Bypass models taking root in some communities.

In terms of legislation, it seems to me that the safest route is to give both basic models enough breathing room to develop rather than to cobble together a complex set of rules that will invariably lead to years of lawsuits and shelved business plans waiting for lawsuits to be resolved.

To paraphrase Google, my advice to legislators is “don’t do evil, even if its well intended.” Let the Co-Pass deals get done on a Two Tiered Internet operated by cable and telco incumbents, but also let Big Bypass Public/Private deals get done around fiber networks, wireless and perhaps a swarm of ad-supported Google Cubes. And let investors place their bets, while letting local communities make collective decisions through a democratic political process. That’s what I call IP Democracy.

Posted by Mitch Shapiro on January 6, 2006 6:29 PM to IP Democracy