Ofcom Describes Net Neutrality Policies

A new position paper by U.K. regulator Ofcom on network neutrality relies heavily on competition to maintain an open Internet access business, while at the same time generally allowing Internet service providers to use network management tools so long as they are transparent about such practices.

At the same time, Ofcom says it will watch for any signs that “best effort” Internet access, which does not allow any packet prioritization, does not coexist with any managed services ISPs may offer.

In fact, the Ofcom rules are less restrictive than current U.S. rules, which do not allow any packet prioritization on fixed networks, at all. What Ofcom does seem to warn against is forms of management that have the business result of favoring an ISP's own services, over competing services offered by other contestants.

Mobile and fixed network operators can meet new demand for high-speed Internet access either by investing in new capacity and partially by rationing existing capacity, in part by using traffic management tools,  Ofcom says in a new position paper explaining its thinking on network neutrality policy.

“The question is not whether traffic management is acceptable in principle, but whether
particular approaches to traffic management cause concern,” Ofcom says. The U.K. communications regulator rightly notes that just two broad forms of Internet traffic management exist, either a “best effort” approach that simply randomly slows down under load, or some form of “managed” access that could include priorities for delay-sensitive or higher value traffic.

Ofcom generally argues that access providers can do quite a lot where it comes to traffic management, so long as they are transparent about it and communicate those practices to end users. There is an expectation that users will have access to all lawful applications, of course.

While recognizing that best-effort and managed services will coexist, Ofcom says it would consider intervening if the amount of “managed” bandwidth jeopardized the amount of “best effort” access Ofcom considers key to continued innovation.

Likewise, Ofcom says it would be concerned if any particular management technique was applied in a way that harmed competitors to ISP-owned services. Ofcom network neutrality statement

Does Net Neutrality Create Incentives, or Not?

Net neutrality impact on revenue

"Policy advocates have been arguing about network neutrality for years. Some even argue that Internet access providers have less incentive to invest unless strong network neutrality rules are in place. 


Some might find that an odd argument, given the universal opposition to strong forms of network neutrality on the part of entities that actually own and operate access networks. Though service providers who operate networks nearly universally claim that incentives for investment are higher when there is freedom to create new services that prioritize packets in ways that enhance end user experience, some argue the reverse is true. 


Professors H. Kenneth Cheng, University of Florida Warrington College of Business Administration; Subhajyoti Bandyopadhyay, University of Florida Warrington College of Business Administration and Hong Guo, University of Notre Dame, argue that ISPs gain from encouraging "scarcity," which creates incentives for users to buy prioritization services. 


"We find that if the principle of net neutrality is abolished, the broadband service provider stands to gain from the arrangement, as a result of extracting the preferential access fees from content providers," they argue. 

"When compared to the baseline case under net neutrality, social welfare in the short run increases if one content provider pays for preferential treatment, but remains unchanged if both content providers pay," the professors argue. 

"Finally, we find that the incentive to expand infrastructure capacity for the broadband service provider and its optimal capacity choice under net neutrality are higher than those under the no net neutrality regime except in some specific cases," the professors say.  Consumer welfare under net neutrality rules

"Under net neutrality, the broadband service provider always invests in broadband infrastructure at the socially optimal level, but either under- or over-invests in infrastructure capacity in the absence of net neutrality," they maintain. 

But analysts at Frost & Sullivan argue that net neutrality has the potential to significantly discourage infrastructure investment. This is because investments in infrastructure are highly sensitive to expected subscriber revenue. Anything that reduces the expectation of such revenue streams can either delay or curtail such investments.

Operators would likely reduce investment due to the increased business risk, they argue. 

An operator denied the opportunity to generate service revenue would be forced to adopt other methods for covering deployment costs, Frost analysts argue. These could include simply passing along the costs to the consumer, creating service bundles that limit consumer choice or passing the cost along to content providers.

"To the extent that consumers were unwilling or unable to incur such costs, net neutrality could, ironically, have the effect of actually reducing broadband penetration," the analysts argue. 

Net neutrality acts like a tax on the Internet. It imposes overheads on network operators, which, in turn, decrease network investments, providing less opportunity, not only for the operators, but also for those that use the operators' networks as well. Net neutrality reduces investment


Frank Gallaher, Stifel Nicolaus analyst, warned of just that outcome in 2009. At least some other policy advocates are too sanguine about the impact on investment if harsh new rules are enacted, he argued. 


Likewise, Matt Niehaus, Battery Ventures analyst, warned in 2009 that telecom investment capital has been declining over the past 10 quarters. The capital flight is caused in large part because of a perception that there is too much competition in telecoms, and therefore further investment is less likely to provide an adequate return on capital investment.

 "It's a perception in Wall Street, there's too much competition, and therefore it's difficult for entities to obtain a great return, " he says.

  "One of the things that worries me, is you can execute very well, and the problem is you may do all those things right, yet it's not clear you will be rewarded on the back end for it," Niehaus says.

But S. Derek Turner, Free Press research director, says carrier investment decisions are driven by a variety of factors, but regulation plays only a minor role.

"In general, firms’ investment decisions are driven primarily by six factors: expectations about demand; supply costs; competition; interest rates; corporate taxes; and general economic confidence -- making the overall decision to invest a complex process that is highly dependent on the specific facts of a given market," says Turner. "It is simply wrong to suggest that network neutrality, or any other regulation, will automatically deter investment."


Carriers worry about investment climate

CTIA Backs Net Neutrality Rules

CTIA-the Wireless Association, a trade group that represents wireless carriers, filed a motion in federal court supporting the Federal Communications Commission's net neutrality regulations. CTIA backs net neutrality rules: 


Four public interest groups, including Free Press, have sued the FCC, arguing that the agency's net neutrality rules do not go far enough. 

The CTIA filing might strike some as odd, to the extent that the industry group is supporting mandatory "best effort only" broadband access. Sometimes, half a loaf is better than no loaf. The rules allow mobile service providers greater freedom to manage their networks, in principle also preserving the ability to create quality of service mechanisms. 


Even for service providers that operate both fixed and mobile networks, freedom for the strategic mobile business means it is an acceptable compromise to give up the ability to create quality of service mechanisms for fixed line broadband access. 


Of course, there already is a challenge to all of the rules, filed by Verizon Wireless, so fixed-line interests are not completely sacrificed as a result of CTIA support for the net neutrality rules. 


For some, net neutrality is about denying ISPs the legal right to create new revenue-generating products that create quality of service mechanisms, as this is said to create a "two tier" Internet. Sometimes people mistakenly believe it is about "content blocking." 


In the former case, if there are restraint of trade issues, they can be dealt with by the Federal Trade Commission. There is a legitimate concern that ISPs might favor their own services over rival services by applying QoS only to "owned" services, not to all services willing to pay for such QoS. But many would note that other remedies already exist for such situations. 


In the latter case, the FCC and all ISPs already have agreed that consumers have the right to access all lawful content. 


For others it is about both consumer choice and network management, in the former case the right of a consumer to buy services that optimize voice, video or gaming experiences, in the latter case the simple necessity of managing a shared resource. In either case, anti-competitive conduct can be restrained by either effective market competition or the FTC.