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Source link: http://archive.mises.org/5712/does-one-price-fit-all-politics-buffets-and-scarcity/

Does One Price Fit All? Politics, Buffets, and Scarcity

October 4, 2006 by

Proponents of net neutrality are aghast today, upon learning two separate revelations.

The first involves the Norwegian Broadcasting Company (NRK), a large broadcasting conglomerate and NextGenTel, a network service provider. This past June, NextGenTel apparently wanted to charge customers such as NRK, a premium rate based upon the bandwidth they used – i.e., NGT would prioritize traffic based upon variable pricing. And although the story is not entirely clear how regulated the marketplace is, public outcry resulted in a redaction of this new policy — which net neutrality proponents now consider a victory.

The other story takes place in the computer entertainment world of hard-core gamers. A new connection service from GameRail, an ISP, has been unveiled and will be deployed across 7 large cities in the coming months. In short, in exchange for a relatively higher price, the ISP will offer gamers access to relatively low-latency pipes (or “tubes”). And according to comments on Digg – many of whom promote net neutrality – this consumer-demanded service is simply irresponsible, unethical and down-right criminal.

What proponents of net neutrality fail to see is that while the electrons along the wires and photons throughout the fibers may all technically contain the same “product,” the transportation mechanism (the medium) through which they travel is a finite resource.

Why are these proponents not boycotting and picketing USPS, FedEx or UPS for their variable pricing? After all, each of these firms charge different prices to travel the same exact route at different speeds, which is exactly what an ISP does.

The moral of this story ties into a recent piece from economist Michael Munger. He notes that, “For political decisions, ‘good’ simply means what most people think is good, and everyone has to accept the same thing. In markets, the good is decided by individuals, and we each get what we choose.”

Fortunately for consumers, ISPs can still discriminate and charge varying rates dependent on how each of us chooses to use the service. For those who want to download or stream large files, they will simply have to pay more than those who use it less. It is not criminal, it is simply a matter of supply and demand.

See also: Who Owns The Internet?
More on network nationalization: 1 2 3 4 5

{ 12 comments }

Nick Bradley October 5, 2006 at 6:21 am

I have been wondering why in the world ISP price structures are indifferent to how much you actually use the service. It encourages people to overuse “bandwidth commons”. Look at this example:

Jane uses her cable internet access to check her email quickly, read some newspaper articles, and surf the web once in a while. She downloads about 200MB a month, uploads very little, and pays $50.00 a month for the service.

Next door, Bobby, a teenager, uses his cable internet access to play online games, surf the internet, check email, and downloads massive quantities of Audio and Video BitTorrent Files (which represents 70% of all online traffic). Bobby downloads 20GB a month and uploads 2GB a month for $50.00 a month.

So, Bobby uses 10x the bandwidth of Jane, but they pay the same price. How on earth is the ISP going to decide where to put new lines in and how to finance them. Let’s take a look at an alternative pricing structure:

The company provides users with 500MB of download bandwidth and 100MB of upload bandwidth for $25.00 a month. The ISP then charges $0.01 for every 5MB somebody goes over the 500MB limit of downloads and $0.01 for every 1MB the use goes over uploads.
At the end of the day, Jane only pays $25.00 a month, while Bobby pays $83.00 a month. Since the ISP is making a killing on Bobby’s massive consumption of bandwidth, the ISP decides to upgrad Boby’s node so that have can download MORE data at a faster rate than before. He now downloads 30GB a month and uploads 3GB a month, paying $109.00 a month. Everbody else on Bobby’s node also benefits because they now recieve a faster connection, and may be even tempted to download more.

A “build bandwidth to demand” pricing system is such a perfect business model, I am stunned as to why virtually ZERO ISPs use this system. Is it because most of the broadband ISPs are also monopolies (like cable) or there are arcane regulations on the proivision of internet service.

Masklinn October 5, 2006 at 8:39 am

NextGenTel apparently wanted to charge customers such as NRK, a premium rate based upon the bandwidth they used

Wrong, they wanted to charge providers a premium rate upon which the speed at which their customers could access them. This is not an issue of total bandwidth (quite a lot of prople, especially in europe, have quotas and such), this is extorsion: “if you don’t pay, your website will be slow as molasses”.

Websites and content providers are not ISP’s customers. Not these ISPs anyway, they have their own ISPs (yes, google pays for it’s bandwidth just like everyone else on the planet), or they are their own ISPs.

Why are these proponents not boycotting and picketing USPS, FedEx or UPS for their variable pricing? After all, each of these firms charge different prices to travel the same exact route at different speeds, which is exactly what an ISP does.

I don’t know, maybe because traffic shaping / prioritization has no hardware basis, is done mostly in software (or by dedicated hardware) and is done solely with the goal of getting more money?

USPS, FedEx or US can use variable princing because them sending their packets by road, train or plane doesn’t cost the same thing. They charge different price for different routes, because even when the travel’s the same the medium isn’t. In the case of internet traffic shaping, the travel’s the same, the medium’s the same, ISPs just want to make more money out of it and add stufff (software and hardware) to generate the means of the price difference.

Fortunately for consumers, ISPs can still discriminate and charge varying rates dependent on how each of us chooses to use the service. For those who want to download or stream large files, they will simply have to pay more than those who use it less.

Uh? There is no link whatsoever between this and the issues of net neutrality. Net neutrality isn’t about how the consumer choses to use the service, it’s about cherry-picking which services the consumer has access to based on how much said service accept to pay. It does definitely not benefit the consumer. Quite the opposite in fact.

I have been wondering why in the world ISP price structures are indifferent to how much you actually use the service. It encourages people to overuse “bandwidth commons”. Look at this example:

  1. Your example has no frigging relation whatsoever with the issues of net neutrality, please shut up.
  2. Quota systems (limited total amount of bandwidth over given periods of time) already exist and are widely used, you virtually can’t find a quota-less ISP in Belgium (that’s in europe by the way) for example. Again, this has no relation with net neutrality nor with the linked articles, you don’t have a point and you merely show that your understanding of the net is about as good as Ted Steven’s.

Yancey Ward October 5, 2006 at 9:39 am

The proponents of net neutrality have a very basic motivation- the desire to have something while forcing someone else to pay for it.

Vince Daliessio October 5, 2006 at 10:18 am

Masklinn;

“Net neutrality isn’t about how the consumer choses to use the service, it’s about cherry-picking which services the consumer has access to based on how much said service accept to pay. It does definitely not benefit the consumer.”

I see your point, however in a free market, a provider that starts shifting traffic to sites that do not pay up to a “gluenet” will very quickly get dropped for providers which do not do such nefarious things. The market works, IF WE LET IT.

Where this intersects with “net neutrality” is if advocates of a regulatory solution get their way, it will preserve in amber the dominance of the big telcos who will without fail, once their positions are cemented (and the threat of competition snuffed out), engage in EXACTLY the kind of behavior we are seeking to avoid.

Haven’t you neutrality-niks learned their lessons from the 100+ year-old monopoly in POTS?

iceberg October 5, 2006 at 11:27 am

Why are these proponents not boycotting and picketing USPS, FedEx or UPS for their variable pricing? After all, each of these firms charge different prices to travel the same exact route at different speeds, which is exactly what an ISP does.

Tim, please don’t feed them any more ideas!!!

Curt Howland October 5, 2006 at 3:17 pm

Vince, this has already happened. Unfortunately, since it happened about 10 years ago, no one alive today remembers it.

After the NSF threw open the routing tables, and anyone could peer with anyone else, there was a period of uncertainty where us “engineer” types turned up peering pretty much to anyone we could. What traffic traversed _your_ pipe was either requested by, or requested from, your customers. Your customers, your business model, your problem.

Then some suits realized that they weren’t making any money on “peering”. So in about 1996, various nefarious types started putting pressure where they could in order to establish a “pay to peer” situation. Some, like AlterNet, never learned and quickly went out of business. The rest realized that when their own customers could not get to some site, they treated it like a network failure.

Customers expect to be able to get to every site, and site owners expect to be able to get to every customer. So while it was painful, the suits eventually went back into their trees and spent their time throwing dung at each other as they were doing before.

But history repeats, and here we are again. The extortion will not work, because customers (hosting and access) will treat this extortion as a network failure and go somewhere that works better. A content provider only has to list on its site those ISPs and backbone providers who have tried the extortion to create a serious backlash among that ISPs customers.

Yes, the market will work if it is allowed to work. Imposing one view, even if it’s called “neutrality”, by government intervention, will only cause more problems that cannot be solved without yet more government intervention.

Gee, where have I heard that before?

averros October 5, 2006 at 4:43 pm

Some, like AlterNet, never learned and quickly went out of business.

Heh. Tell that to Rick Adams, who got $400m (if my memory serves me right) for it.

AlterNet is still alive as a part of MCI (ex Worldcom), AS701.

The “pay to peer” was, basically, a recognition that in a peering arrangement of two networks of significantly different sizes, the bigger network carries packets for a longer way and to a larger number of possible destinations. Meaning that the costs of end-to-end carriage are split unequally between the larger and the smaller ISPs, with smaller ISP paying the smaller portion of the costs.

Refusing to carry someone else’s traffic is not extortion, it is a perfectly good business decision. The damage from such refusal works both ways, btw, as large ISPs who tried to play that game too enthusiastically, quickly learned. So it all went back to no-cost BLIAs between large backbones, with second tier paying transit costs to the large ones.

I agree that the government intervention is the last thing we need. Unfortunately, the government regulation was successfully used by the last-mile carriers to strangle competition, so the cycle of intervention making need for more intervention is repeated.

To really fix the problem the power of local governments to restrict build-up of last-mile infrastructure should be abolished. Then it’ll take a decade for new entrants to build a truly competitive marketplace for Internet access.

Tim Swanson October 5, 2006 at 4:51 pm

Hey, uhh Maklinn, if you actually clicked those links you will see that the title of each of them had the words “Network Neutrality” in them and they reference the regulatory policy extensively.

Net neutrality is all about property and who can decide what they want with it: i.e., do the property owners get to decide how to throttle/tier the bandwidth, or do the politicians.

Furthermore, the author of the first post notes that, “The CEO of NextGenTel, Morten Ã…gnes tells the Norwegian newspaper Aftenposten that they will give priority to the content providers that pay for better bandwidth.”

There is absolutely nothing wrong with that as it will all be spelled out in the contract. And if you don’t agree to the terms of the contract, you use a different provider (see Freedom of Contract).

Also, one more note, the management team at GameRail has essentially put together one gigantic peering agreement catered to these hard core Counter Strike-types. For more on contracts and peering see here: http://www.wired.com/news/technology/internet/0,71012-0.html?tw=rss.index

Oh and if net neutrality-types of legislation are passed, everyone’s ability to “free speech” will be negatively impacted. So your desire for me to “shut up” might one day happen; see: http://www.mercurynews.com/mld/mercurynews/business/technology/14781013.htm

Nick Bradley October 5, 2006 at 8:19 pm

Tim Swanson,

I found a very interesting statistic at NetCompetition.org:

“5% of Net users use 51% of the bandwidth and 25% use 85% overall, per Time Warner Cable; Net neutrality average pricing is reverse Robin Hood: average users must subsidize bandwidth hogs.”

So, in my view, we need even further deregulation to remove any common carrier reagulations, etc. that encourage ISPs to charge flat rates. Further innovation will result if ISPs “charge by the byte”.

Vanmind October 5, 2006 at 10:56 pm

From that mercurynews.com piece linked above:

“Telecom and cable companies will never have the leverage that content companies fear, because content is king, not pipes. It is content that customers care about, not wires. Network operators won’t ever be able to use content as leverage to block..”

Right on. Bandwidth providers would have used such leverage already if they were able.

Curt Howland October 6, 2006 at 2:25 pm

“The “pay to peer” was, basically, a recognition that in a peering arrangement of two networks of significantly different sizes, the bigger network carries packets for a longer way and to a larger number of possible destinations.”

So the suits tried to say, but they are still wrong. The larger network (such as I was building/running) is also capable of putting servers and customer circuits closer to the peering points, so packets are carried through much shorter latencies and fewer hops, and the “burden of delivery” is placed upon the smaller or regional ISP that cannot afford the capital equipment required for such efficiencies. Trust me, I built good!

“Meaning that the costs of end-to-end carriage are split unequally between the larger and the smaller ISPs, with smaller ISP paying the smaller portion of the costs.”

If I peer with you, regardless of my network size or speed every packet has to be carried by both of us, both ways. Each carrier has to build a system that can manage the traffic to and from their customers, because all traffic is just that: Either generated by, or requested by, their own customers.

If there is an “inequality” in their networks, it is because no two individuals, no two networks, are identical. It is natural for there to be differences, and up to the individual to improve or live with it.

Anything else is subsidizing inefficiency.

“A.S.701″ and “Part of MCI”…

Yep. After they were bought, their policies were corrected. MCI (and Worldcomm) operations were always pleasures to deal with, technically astute and interested in making things work, right from the beginning of the 1992/93 dispora.

Which has nothing what so ever to do with “transit” (the carrying of packets neither generated by, nor destined for, a direct customer), a service which has always come with a price-tag and rightly so.

averros October 7, 2006 at 2:11 am

Trust me, I built good!

I have no doubt. BTW, AS1239 is my baby, and, yes, we met each other:) And I still remember peering debates circa 1996.

Now, to make things clear – take a village ISP, which drags packet across the street to a NAP, and a global ISP, which takes these same packets and deliver them to the other end of the planet. The per-packet cost, if those ISPs use the same technology and engineering savvy, are clearly bigger for the global ISP.

That’s why large ISP is right to ask smaller ISP to pay for transit – not in a sense of having moral right (both small ISP and large ISP may ask for payment… the question will the other side agree to pay?), but in a sense of correct expectation that this will request will be met.

The fact that large ISP can afford better engineers and more advanced technology does not change that basic fact. If smaller ISPs cannot compete, that’s the problem for their investors, but not a problem for the market.

After they were bought, their policies were corrected.

AlterNet was profitable (that’s why Rick was able to sell that for that much – UUNET Tech. wasn’t a big company, I used to work for them in 91-92). MCI/Worlcom wasn’t profitable at all.

(And, BTW, MCI didn’t have an IP backbone until 92 – so I think your recollection of their “diaspora” is off by 3 or 4 years).

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