The naked truth about Net neutrality,

and why Congress should stay away from it.

With the Internet becoming a commodity and with the emergence of new services, mainly television over the Internet, there is nervousness among businesses and the public, as we are entering unregulated territory. Everybody involved is trying to take the best position for exploring new opportunities.

Calling for increased government regulation is natural in such times. Businesses, by lobbying for legislation that is favorable to them, can get preferable placement on the market so that later they do not need to work as hard to overcome competition. At the same time, when new technologies are coming to the market, the public might be confused and concerned that major players might have unfair advantage, prompting a demand for increased government regulation.

Anxiety is a bad advisor. The term “Net neutrality” is unfortunate and misleading. The naked truth is that the dominant business model today of the broadband Internet service delivery is not adequate for the way the service is being used now by most subscribers, and this discrepancy will be growing. In other words, the way Internet service providers charge their customers does not reflect the cost of providing the service and does not reflect the way the public uses the Internet.

Let us explain this dilemma by using as an example a basic DSL service from AT&T, offering a connection speed of 1.5 Mbps for about $20 per month. A traditional T-1 line is still priced around $500 per month, and offers looking the same speed of 1.5 Mbps. One can suspect that somewhere in between there are some assumptions that allow the telephone company to offer an individual subscriber a service for $20 that otherwise costs $500.

In the commercial T-1 service, the provider guarantees continuous symmetrical transmissions speed of 1.5 Mbps. In DSL service, there is the assumption that an average individual user browses Internet occasionally, and requires the full speed only usually for a split of a second here and there. Therefore, the connectivity of one commercial T-1 line can be sufficient to support many DSL subscribers, as they rarely would request the full bandwidth at the same moment. Rare cases of conflicting requests may occasionally lower the bandwidth available to the individual subscriber; however, if not too many subscribers are on a given circuit, it might not be noticeable. Up until recently, it was considered that one T-1 line could support up to 100 DSL customers with service at 1.5 Mbps. With graphic-intense web sites and more email traffic containing larger attachments, now experts say that one T-1 can support somewhere between 20 and 30 subscribers with a service at 1.5 Mbps. However, with more video transmissions over the Internet, where webcasts take about 300 kbps and full quality standard resolution video takes at least 1 Mbps, it is expected that backbone connectivity of T-1 might be able to support no more than three subscribers.

In extreme cases, one DSL subscriber downloading movies from companies like Movielink or CinemaNow for a prolonged period, takes almost full capacity of the T-1 line. Even if we assume that T-1 is highly overpriced, it still cost much more than $20 per month to provide.

In order to deal with situations like this, telephone companies want to charge companies like Movielink or CinemaNow additional fees for creating “hot lanes” allowing their customers to have uninterrupted transmission for the duration needed to complete a transaction. If this concept prevails, video service providers will shift their extra costs to their customers. In other words, for this additional charge, the DSL subscriber would be buying for a short duration of time a higher grade service from the ISP. However, the price of the service from the DSL service provider would not be increased formally.

One can easily foresee that this will not take long, and there will be millions of vendors providing a variety of services over the Internet that would require upgraded Internet connectivity. Implementing the solution suggested by telephone companies would create a system as simple as an astronomical model based on the assumption that the Sun circles the Earth. It does not take Copernicus to conclude that the current pricing model for broadband Internet connectivity needs to be revised. This is the tough business decision that telephone companies need to make themselves. The most active internet users might need to pay more for their service. Lobbying for “Net neutrality” boils down to an attempt to shift the responsibility for unavoidable price increase to the government.

Up until recently, the biggest challenge for the ISPs was building networks capable to handle high transmission speeds. However, with continuous improvements, speeds in the range of 10 – 50 Mbps are just around the corner. For the traditional light Internet user, there is no meaningful difference between the speed of 1 Mbps and 50 Mbps. For the Internet users that transmit a great deal of video and other data, the high speed is needed, but it is a secondary cost factor from the perspective of the Internet service provider. The amount of data transmitted becomes the main factor. At that level, Internet service is more like a water, gas, or electricity supply. We expect certain water pressure, certain gas pressure, or certain voltage. However, we are charged for water, gas, or electricity actually consumed. Therefore, we have to realize that the currently dominant pricing structure for broadband Internet service does not reflect the physical aspects of the way the service is delivered. As a result, the committed speed cannot be delivered. The simplest way out of this situation is by accepting that the amount of data transmitted should be a factor in the service price.

In my opinion, the simplest way out of this dilemma is by putting a cap limiting amount of data transmitted during the billing period at the basic service fee. Data transmitted above that service level, should be charged extra. Within this model, moderate Internet users still would be able to enjoy their low-priced service. It is my personal believe that if left alone, Internet-related businesses would eventually evolve into a solution of this kind; fair and simple. Maybe someone will come up with even a better system. However, it is up to the marketplace to decide it. Congress has nothing to do here.

On the TelcomNext show in Las Vegas in March 2006, John Chambres, President and CEO of Cisco Systems, gave a very inspiring speech about how overwhelmingly connectivity will change our lives in the near future. In his opinion, the cost of networking will follow Moore’s Law. In other words, with every year, for the same amount of dollars, we will be able to download and upload much more data. We may see prices for the high-speed internet connectivity falling soon the same way as prices of long distance and cellular calls have fallen. We have to have the wisdom and patience to let the marketplace work its magic. Even Congress cannot legislate tomorrow’s prices today.