IP Democracy: The Economic Costs and Benefits of Access Tiering

While reading Ken Belson’s piece in the New York Times, I was struck by one fundamental element of the tiered access/net neutrality debate—the issue of dominant market players vs. startups and small innovators and, more specifically, the financial barriers to entry created by tiered-access schemes that charge independent service providers fees for getting into the broadband “fast-lane.”

As Belson notes, and most would agree, broadband customers will ultimately pay for the cost of upgrading broadband networks. In a “tiered access” model, web-based service providers pay for “fast lane” access, then pass on that cost to their customers. And, of course, customers pay directly if network owners charge them for access to higher speed services, which is pretty much the way things work today.

So, if broadband customers end up paying the bill in either case, the main difference, as far as I can tell, is that “tiered access” schemes favored by some network owners will raise barriers to entry for new players that don’t have the customer and capital base of Internet giants like Google, Yahoo, Ebay, Amazon, Apple, News Corp., etc.

That brings the issue down to a pretty simple but important economic (and, ultimately, also political and social) policy question. Do we want the Internet to retain the low barriers to entry that have helped startups enter the market and offer new services, some of which may be the next Google, Yahoo or eBay? Or do we want the Internet to become burdened by increased barriers to entry that strongly favor large, established and well-capitalized companies?

I greatly admire today’s web giants, but I’d hate to see the door slam shut on whole new generations of potential future giants (or for that matter, companies that start small and remain small) that can’t afford the broadband Internet’s new price of admission, but would otherwise be able to deliver high quality service at data rates for which I’ve already paid as a user. In that world, we as Internet users no longer get to choose the service we use with the data rate we pay for. That choice would be made in large part by how steep the price of admission is set for service providers.

This raises the question of whether our economy and society will be stronger and healthier with policies that open markets to new players and new competition or with policies that favor corporate giants that have already captured dominant market shares and aggregated large pools of capital? I think the history of the Internet has so far shown the former to be the wiser choice, especially with regard to innovation.

And, since customers will ultimately pay the cost of network upgrades, I’ve yet to hear a convincing argument as to market efficiencies gained or other benefits of access-tiering schemes that offset the economic costs of increased entry barriers. Admittedly, there are potential benefits for those with market power, since they’d probably increase that market power further. But looking at it from the perspective of an Internet user and citizen, I don’t see that as a benefit.

Posted by Mitch Shapiro on March 6, 2006 8:00 PM to IP Democracy