Undercover Economist

Battle for the web’s ‘last mile’

The fact that a few large players have such influence over vital services should make us all queasy

The cable companies who own the wires that plug us into the internet – particularly the “last mile” along your street and into your house – have a great deal of market power. Small wonder, then, that the notion of “net neutrality” is appealing: the term is usually characterised as the idea that all data transmitted over the internet should be treated equally. After all, why should Google get a zippier connection than a small rival? Why should Netflix have to pay an additional fee to Big Cable when customers have already paid handsomely to be connected?

Advocates of net neutrality won a famous victory a few weeks ago, when the US Federal Communications Commission announced plans to regulate cable companies as utilities. The aim of this was to enforce net neutrality rules after a vibrant grass-roots campaign.

Small wonder that the campaign became so popular. The idea that cable companies could partition the internet into slow lanes and fast lanes is infuriating. Customers have already paid for access, and they don’t take kindly to the prospect of “throttling” – deliberately degrading a service to extort money from content providers.

This kind of product sabotage is far older than the internet itself. The French engineer and economist Jules Dupuit wrote back in 1849 that third-class railway carriages had no roofs, not to save money but to “prevent the passengers who can pay the second-class fare from travelling third class”. Throttling, 19th-century style.

But imagine that a law was introduced stipulating “railway neutrality” – that all passengers must be treated equally. That might not mean a better deal for poorer passengers. We might hope that everyone would ride in comfort at third-class prices, and that is not impossible. But a train company with a monopoly might prefer to operate only the first-class carriages at first-class prices. Poorer passengers would get no service at all. Product sabotage is infuriating but the alternative – a monopolist who screws every customer equally – is not necessarily preferable.

It is easy to think of outrageous scenarios in which a cable company might exploit market power – favouring campaign videos from politicians who do its bidding, or shutting down rivals who pose a competitive threat.

But it is also easy to think of good reasons to treat different kinds of content differently. An online back-up service for big data sets might prefer a discount for a connection that will run only at quieter times of day. Stream the World Cup final and you’ll want to guarantee uninterrupted coverage; sell the highlights as a download and you might accept a cheaper, more volatile connection if it saves money.

With a mandatory uniform price, the online back-up might be too expensive to operate, the live stream too slow to satisfy customers, and the video download getting a faster connection than it really needs. (There is a formal economic model of this effect courtesy of Benjamin Hermalin and Michael Katz but it seems intuitive to me.)

What about the idea that customers have already paid for their internet content, so cable companies shouldn’t be able to demand cash from content providers too? That is not how things work elsewhere. In a shopping mall, customers enter for free and retailers pay to be there. (They pay very different rents, too.) At an industry convention, both the delegates and the exhibitors will pay. There is nothing sacred about the idea that one side of the market pays nothing. Customers may even benefit if content providers must pay, since then the cable company might wish to slash prices to attract them and increase its leverage with the content providers.

Should all content providers be able to connect free of charge? This may not be the best rule for consumers nor the best way to promote innovation. The best defence of such a rule is that it seems to have worked well in the past and, with so much at stake, a change would be risky – not a terrible argument but hardly cast-iron.

Nevertheless I am grateful to the advocates of net neutrality, because they have brought into sharp focus the importance of market power on the internet – both of content providers such as Google and Facebook, and the cable companies who connect us to them. The ability to connect to the internet has become a basic part of living a full economic, social and political life. We use the internet to make our voices heard, to spend money, to access services, to find out the news, to connect with our friends. Increasingly our fridges, cars and pacemakers will use it too. The fact that a few very large players have such influence over such vital services should make us all queasy.

Fast lanes and slow lanes are a symptom of this market power but the underlying cause is much more important. The US needs more internet service providers, and the obvious way to get them is to force cable companies to unbundle the “last mile” and lease it to new entrants.

Alas, in the celebrated statement announcing a defence of net neutrality, the FCC also specifically ruled out taking that pro-competitive step. The share prices of cable companies? They went up.

Written for and first published at ft.com.