Monday, February 24, 2014

Why is Netflix paying Comcast?

Our group has been researching and thinking about Internet Economics for quite sometime now. Events are backing up our predictions, and they are not good for consumers.

Over 5 years ago, we published the following work, driven by at that time a PhD student of ours, Richard Ma

Richard T.B. Ma, Dahming Chiu, John C.S. Lui, Vishal Misra and Dan Rubenstein, On Cooperative Settlement Between Content, Transit and Eyeball Internet Service Providers, Proceedings of 2008 ACM Conference on Emerging network experiment and technology (CoNEXT 2008), Madrid, Spain, December, 2008

I am happy to answer any questions regarding the math/analysis in the paper, and the slides associated with the talk we gave are here, but in the next few lines I will try and explain the implications of the analysis.

We looked at the economic ecosystem of the Internet, using Shapley values, with cooperative game theory as the guiding principle. Our analysis revealed something interesting: it showed that the early Internet settlement model was stable and made sense. The Internet was composed of light email and web traffic between essentially symmetrical end points like educational and research institutions. ISPs were two kinds - eyeball and transit (or Tier-1). Transit ISPs provided global connectivity, and the eyeball ISPs bought bandwidth from transit ISPs. Consumers bought connectivity from the eyeball ISPs and interacted with each other, and buying bandwidth was natural. By doing bilateral settlements between the parties directly interacting, a stable solution can be arrived at. The solution lies in what is called in cooperative game theory as the core.

Things started to change when the Internet e-Commerce system started developing. Well known content providers started to emerge. The ISPs that sold bandwidth to content providers were classified as content ISPs, and CDNs can be thought of as another form of 
content ISPs. Now the Internet was generating two revenue streams - one that was provided by selling connectivity/bandwidth to the consumers and content providers, and the second was the revenue generated by the e-Commerce activities of content providers like Google, Amazon, eBay, Netflix. 

Our analysis showed that if the two revenue streams differed significantly in magnitude, then the current settlement model of the Internet was unstable. Specifically, no model that followed the simple customer-provider of bandwidth settlement model could lead to a stable solution and the solution was always outside the core. If the eCommerce revenue stream is much greater than the revenue stream from bandwidth connectivity, then the eyeball ISPs are in fact subsidizing the content providers. The eyeball ISPs should not be buying bandwidth from upstream providers, but should rather be selling access to the eyeballs that they are providing connectivity to. It predicted a reverse customer/provider relationship to emerge as well as paid-peering which is what the recent Netflix/Comcast arrangement is being called. 

If the converse is true, and the eyeball ISPs are generating a lot more revenue than the e-Commerce revenue, then again a stable solution lies in the settlement model where revenue is flowing to the content side of the equation. The eyeball ISPs should be paying the content providers to generate content, so they can sell connectivity to the consumers that want content. 

There is another form of asymmetry that makes the issue of asymmetry of revenue almost moot. And that is the asymmetry of market power, and it follows directly from our analysis. If there is no competition on the content side but there is competition on the eyeball side, then the content provider has the leverage to extract better terms for the eyeball ISP. If however, there is competition on the content side but not on the eyeball that increases the leverage that the eyeball side has on the content side. Consumers who have no choice for broadband ISPs are in some ways trapped and then it is rational for content providers to pay the eyeball providers to keep earning that revenue (which can then be passed back to the consumer of course). Consumers won't switch off broadband because Netflix is slow - there is Amazon, iTunes, Hulu just on the video side of things, and of course there is countless other "competition" that the Internet provides in the form of content. If the eyeball ISP is a monopoly, it will keep its business, Netflix performing well or not.

Our analysis predicted this, and since this is simply "paid peering", it is in no violation of network neutrality even if that concept existed and was backed by courts. This is the only way by which a solution ends up being in the core (i.e., it is stable).

The problem really is the monopoly that last mile providers have, and it cannot be fixed by regulation - only by competition. The possibility of competition in the broadband market in the US was further reduced by the announcement of the Time Warner "Cable" acquisition by Comcast "Cable". That was the subject of some follow on work that Richard and I did, and I have blogged about it here. It is also the issue that Susan Crawford has spoken about extensively, most notably in her book Captive Audience: The Telecom Industry & Monopoly Power in the New Gilded Age.

Sunday, February 16, 2014

The Public Option: Municipal Broadband Access

The recent announcement of the Comcast acquisition of Time Warner Cable has caused quite a furore. Consumer advocates are worried that it will cause problems, higher prices, bad performance etc. The issue is it will lead to the creation of a giant monopoly. Comcast argues that it is not a monopoly and as it is Time Warner and Comcast do not compete in any market so it should make no difference anyway. There are two issues here: (a) first is the question why have Time Warner and Comcast, two giant corporations not competed anywhere yet? and, (b) the second and more important issue is not that of competition for cable service, which ostensibly Dish Networks also provides, but for Broadband access, where 19 of the top 20 metropolitan areas in the US will have only one choice for wired Broadband.

The merger/acquisition is not between two Cable companies, but that of wired Broadband ISPs that are virtual monopolies.

Our work, Richard T. B. Ma and Vishal Misra, The Public Option: a Non-regulatory Alternative to Network NeutralityIEEE/ACM Transactions on Networking, 2013, proposed a non-regulatory option to Network Neutrality that works for consumers. A presentation based on the work is available here. We developed a realistic equilibrium model for congestion on the Internet, taking into account content bandwidth demand, user patience levels and the impact of protocols like TCP.

Our analysis showed that if the Internet provider is a monopoly, it can hurt consumers in many ways. If Network Neutrality is not in place, ISPs can create scenarios that hurt both consumers as well as content providers, with the remedy being paying more revenue to the ISP. This revenue can be collected directly from the broadband subscribers, or by the content providers in the style of AT&T sponsored data. In either case, the extra costs will be passed on to the consumer.

The alternative is true competition with multiple providers, where consumers have options that they can instantly switch to (and for our arguments, a month qualifies as instantly). In fact, our work shows that if true competition exists with multiple providers, network neutrality does not benefit consumers and there is a case to be made for non-neutral ISP services, one size does not fit all. But only if there is true competition. A way to get more competition at the eyeball level for consumers is via something like local loop unbundling (LLU). LLU operators are prevalent in Europe where the broadband market does have healthy competition and lower rates than the US.

The other option is what we call The Public Option. The Public Option is an ISP that voluntarily implements Network Neutrality. Our work shows that the presence of the Public Option is good for social welfare - ISPs can implement non network-neutral policies if they desire, but the consumers and content providers do not lose out.

One of the possibilities that we laid out in our paper was that The Public Option be implemented via municipal broadband.

Our proposal is almost exactly what Susan Crawford has been advocating, like the municipal broadband effort in Massachusetts. As she spoke about in a recent talk, the concept has shown to be viable economically in Stockholm, via the Stokab project. Google fiber, while attractive, isn't going to be a real option for 99% of the nation. It will show what true broadband access is capable of (which the rest of the world is learning much faster than the US), but Google will never become a FTTH ISP.  Local bodies can provide an alternative, and we think The Public Option via municipal broadband is the way to go.