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Towards a two-tier Internet

In this week's podsession Om and I discuss network neutrality and the tolls paid by content networks to network providers to boost the performance of online applications. The telecom world is emboldened after the Supreme Court decision last summer in the case of National Cable & Telecommunications Association v. Brand X. The court ruled in favor of the carriers, allowing corporate discretion over access and use of their services.

Cable operators have already prioritized their own network data such as Internet telephony over the data of other services. Some telecommunications executives have even stated that large services such as Yahoo! or Google should pay for faster response times on their networks. Some customers have already noticed traffic shaping resulting in slow or no access to podcasts, and non-functional software phone clients such as Skype. Om and I address these issues and their affect on online businesses of all sizes in this week's podsession.

The audio recording of this week's session is 23 minutes and 14 seconds in length, a 10.8 MB download.

Transcript

Niall Kennedy:

I'm Niall Kennedy.

Om Malik:

And I'm Om Malik.

Niall:

And this is the Om and Niall Pod Sessions.

Om:

Hey Niall, how are you?

Niall:

I am doing well Om. It's the day after Christmas. It's been nice to relax for a couple days.

Om:

Did Santa bring anything for you?

Niall:

Yeah I got a few books, and a few DVDs. Mass consumption.

Om:

Ah, nice. I had to play my own Santa, so unfortunately I decided not to go for DVDs or books. Instead I decided to blow my money on other stuff.

Niall:

Well let's talk about what all geeks want for Christmas: more bandwidth and more access to all the things online.

Om:

Oh yeah. Well I wish we could get what we wanted. Yes, the world is rapidly changing on us broadband freaks.

Niall:

Yeah. So I wanna talk about network neutrality, two-tiered Internet and some of the other terms that are used to describe how carriers interact with inside operators and how that might impact Silicon Valley. So how did this issue first come about? When was the genesis of the idea of a two-tiered or priority Internet?

Om:

Oh, you know, between you and I and everybody who's listening, this has been the dream of carriers, the incumbent carriers for the longest time. You know the whole concept of Internet is something which goes against the grain of how the old-school telecoms worked. You know for the longest time, more than a century, they have made money by taking a call, which starts at one point, and terminating it in another point, and metering the call and making money off that. So that's the mindset for them; the whole concept of flat-rate consumption doesn't make sense. That's just the way they've done business. But the world is way different now. Somewhere down the line they will have to come to a compromise and, as consumers, we will have to come to a compromise. But when you look back how this whole thing was started to get traction, it was in the Brand X decision.

Niall:

All right, before we go into Brand X, I realize there might be a lot of people listening that have no idea what is a two-tiered Internet or traffic shaping. So to give a little bit of a background, the general idea behind the two-tiered Internet is being able to, on the service provider level, select certain services or certain websites to packet prioritize or be able to give better performance to a certain application or degrade performance of another, competing application, for the benefit of your own networks, your own pocketbooks. Some examples may be to just cut off Skype entirely to keep your own VoIP products alive and running, to drop iTunes Music Store or podcasts from your service to make sure your own music service is alive and well, or it could be someone working out a deal, for example a search engine, where a network operator could prioritize Yahoo! over Google some payments. That's what we're talking about: the ability to use traffic shaping or packet prioritization to build a different tier on the Internet and to control what services flow across the pipe.

Om:

Right. I would like to add a couple of clarifications. Don't expect the phone companies or cable companies to degrade somebody's service intentionally, because that is going to become a problem for them in Washington D.C. However, they can give priority to their own applications, or to their own partners. So think, "The enemy of my enemy is a friend of mine." It's sort of like that concept.

These guys are not that evil that they'd go out of the way and create problems for their rivals, but they will give priority to their own offerings, or their partners' offerings more so.

Niall:

What are some of the carrier offerings or partner offerings that you've seen already?

Om:

Right now we haven't seen much. We've heard sporadic complaints about shutting down Skype, and Vonage has some quality issues. Those are the early examples of when the incumbents get pretty serious about some of the new IP services. I think Skype has a legitimate problem in that sense. It consumes too much upstream bandwidth on people's computers. It actually has become a bit of a networking nightmare and has created a whole lot of security problems.

In the case of Vonage, nobody has explicitly degraded their performance except for a handful of smaller carriers. You'll find that suddenly AT&T Callvantage VoIP provides services that are much better sounding than Vonage, or you know the Comcast VoIP is going to sound much better than Vonage. It's because they're prioritizing their own traffic. They are managing the network to send traffic in a way in which you, the consumer, don't really feel that it's any different from your traditional phone service. That is why I expect this to roll out in video services. I think video over IP will be an area where they will try to clamp down on IP services. The same is going to happen in radio, online radio, and online music services.

Those are the early examples. I think then there will be a whole different approach to this. I cannot stress enough that they will not go out of the way to degrade somebody's service. They will go out of the way to upgrade their own service, which are two different things. But the end result is pretty much the same. You know, it's like, "Hey it's my car. If I drive it at a hundred miles an hour, who are you to say anything?" So that would be their argument, but that's a valid argument though.

Niall:

Or is another part of the valid argument that these are very time-sensitive services, so in order to have VoIP or IPTV, you would notice if it was delayed by a second for example.

Om:

Right.

Niall:

Whereas if you were downloading e-mail, or loading up a webpage, maybe you can wait a second for that. So from a carrier point of view, wouldn't it make sense to them explaining it to their customers to say, "We realize that these types of services are more time-sensitive, and we've done the hard work for you."

Om:

Right, so a lot of smart companies are actually preparing for this kind of a situation. Google is one of those companies. There is a specific reason why they are building up their own backbone and coming closer to the user is because if they have appealing relationship with, let's say SBC or Comcast, they are actually in a better position to exchange their traffic. So similarly traffic coming out of SBC's network or Comcast's network gets priority onto Google's infrastructure. So those things are important. Those are traditional relationships, which companies like Google are realizing they have to do those in order to kind of stay relevant in the future. The way I see this shaking out, in 2006, 2007? Before the end of 2006 we will have an example of this. We will have to, you know there is nothing wrong with two-tiered Internet really.

You know one Internet, the way it is, but then the incumbent carriers, at least in the U.S. will create what is the managed layer on top of this Internet. This will be the premium networking layer. It will be used by, for example, online gaming companies. You know latency's such a big issue, so if you're Sony or Microsoft it makes sense. If you are Xbox Live, you will be asked to pay a few million dollars to make sure your service, or your packets, get priority over everything else. There's nothing wrong with that, because this is a commercial service Microsoft is selling over somebody else's pipe so Microsoft or Sony will have to pay for it. Similarly Apple will make sure that iTunes will get priority traffic handling. These are premium services, so the concept is if Apple is making money and Microsoft is making money and Sony is making money, why shouldn't the carrier make money?

They're thinking along those lines. I don't think they're going to try and mess with your e-mail or your webpages, you know you can still get your online services the way you want. However if Sony or Microsoft or Apple have a relationship with Comcast and SBC they know they get better performance. And as a consumer you don't pay for it. You're paying Microsoft, Microsoft is paying SBC or whoever. So that, in the end, that's not actually a bad thing, if you're a paying consumer. The biggest concern I have, and I've written about it extensively, is that if they start deprioritizing other people's traffic intentionally, that's when things start to go wrong. That is just not right. And I hope it doesn't happen, and I don't think big gazillion dollar companies like Comcast or SBC or Verizon will do that because that would just open up too much political scrutiny.

Niall:

Well there have been threats to do it, right? A lot of people have come out and said, "Well I could just shut off Skype tomorrow." And there have been a lot of executives that have talked about this, and hasn't it already been done in Europe? Or in other countries, hasn't this already been happening?

Om:

It has in some places. Now Skype is a totally different. Skype is a parcelling service. It basically it doesn't add anything to the carriers. So if you're Vonage or Skype, you're actually taking away dollars from those carriers. You're actually throwing away commodity. They get scared of that. I mean everybody's scared of that, because that's been their cash cow for a century or even more than that, so that's a whole different thing. But what I'm trying to talk about is the other applications and not just the voice applications. The way I see it shaking out is they're gonna come out with their own voice offering, which will be a VoIP offering, which will probably compete with Skype and Vonage and that will get priority over those two. And unfortunately there is very little we can do about it.

Niall:

So how are people working with the networks right now, to make sure their company's services are one of those services prioritized? I think people listening to this will say, "I wonder if my competitors are on that list, and how do I get on that list?"

Om:

So let's say it's Microsoft, Sony, or whosoever. First of all, this doesn't happen right away. It is two or three years before the network neutrality, which means equal access to everyone go off. So that's very important. So there is time to build relationships.

Niall:

Now what does that mean, "network neutrality rules go off?" Is there a certain law that's about to expire?

Om:

Because of the recent approval of mergers between AT&T and SBC, and MCI and Verizon, the FCC, which in my opinion is not doing its job, unfortunately, not watching out for the consumers, has shown that at least for two years we won't have network neutrality in place. So, having said that, I have issues with that, but I don't want to get into that right now.

The whole concept is that going forward, we have to worry about giving access to all services. The biggest concern right now is, what if we go back to the same argument I made earlier, what if they start shutting down access to IP services, which do not pay them at all? That's wrong. I think as long as they can charge, they want to charge and have a managed network, and charge a premium from certain people who want better performance, that is fine. The minute they start imposing a toll tax, this quasi-toll tax for the access part of it, that is where things get a little complicated. That's where, as a consumer, you have to stand up and scream, because why are you paying them fifty dollars when they define what you can see or what you can't see? So we cross that bridge when we get to it. Right now everybody's made threats, nobody's followed through. So it's something we have to watch very carefully.

Niall:

And how would we even know? If we were watching, how would we even know when it starts to take place?

Om:

Well, unfortunately for the big phone companies and the big cable companies, I'm there. I'm gonna be watching. It's what I do. So, it's one of those things. But I think this is going to be a very hot issue for 2006. I think it becomes more and more important, I think the FCC will have to stand up and give clarification on how this thing is going to be run. I have some doubts about the FCC's willingness to defend the American consumer, but they will have to. I hope the political climate in this country just becomes slightly different than what it is right now. And even we have more open minded FCC in that sense, but there was a big article in Washington Post which compared FCC to the KGB or something like that. I'm not going that far, but at some point they have to really, really figure these things out.

Niall:

Some companies already integrated with the carriers. Verizon and MSN partnered together for content deals, and the same thing with SBC and Yahoo!, so they already have a good position for this changing landscape.

Om:

Right. They do. I would bet you that in exactly twelve to eighteen months from now, there will be some major rethinking of the phone companies and cable companies. They will suddenly wake up in eighteen months and realize that the relationship is with Yahoo!, not with SBC. And that's when they're gonna say, "Uh oh." And I think that will be an interesting development. And that's my prediction, in eighteen months you will see that happen.

Niall:

And do you think it changes the M&A game for carriers? Are they going to start looking at more content acquisitions?

Om:

I don't know if they will start looking: the cable companies already are. Cable companies slowly, unwillingly, kicking and dragging themselves into this new world. They are starting to think like a software company. They have to think like a software company. They have to think like Yahoo!. They have to think like Microsoft. Because that's the world. What use is the network if it doesn't have anything you can do with it? The cable companies are actually getting the message pretty well. Comcast recently formed a special group in which they will invest in companies and that sort of thing. I think Rupert Murdock has already gotten the message. It's not just video advertising and online advertising which is driving it, but there's a change in consumer behavior, which is very important. But let's see how the phone companies react to it.

Niall:

So how does this affect Silicon Valley? Carriers versus the valley?

Om:

Ahhh. You know how it affects Silicon Valley? I think it throws cold water on innovation a little bit. I think the biggest companies at risk here are the start-ups. Yahoo!, Apple, Microsoft, Google, Sony, HP, they have enough money to pay the carriers. So they have the mass market, they have the mass volume to actually figure all this into their business plan. I think all these little start-ups, which are basically getting started, they haven't taken into account this reality, that one day they will have to pay, they might have to pay a little toll-tax on what they do. I mean if you are an online, I don't know, word processing software company, something like Writely or whatever, they can basically give priority to Microsoft Word over you, so those little, little things start to become a bit of a problem. Things like latency issues, because Microsoft Word is gonna perform better online than the other ones. So you're inherently thinking, as consumers, "Let's go with the one which is working better." So those are the issues. Those are practical problems. People will have to deal with them.

Niall:

Are there any open networks that we won't have to worry about this on?

Om:

Well.... Look, this is all projection. I don't know how the world shakes out. I mean that's, this is the worst case scenario, I'm trying trying to present, so...

Niall:

OK.

Om:

All right. So, I don't know. You know muni wireless is one hope we have. I hope it really takes off because it actually puts some sort of pressure on the carriers and when I say carriers I mean both cable and phone companies. So I'm not taking sides on this one. But meanwhile this is important and I hope we see some of this traction, I think sources like MetroFi and cities like Philadelphia and New York and San Francisco are actually successful in doing this and giving people at least an option. It may not be much of an option, but it is an option. And you also have to worry about even the smaller players like Clearwire. They're also pretty stringent about who gets access to their network. Because the networks are pretty complex things and you can't really define who's the good guy or the bad guy, and everybody needs to make money.

I can look at the issue on both sides and I say, "Well, I understand the incumbent point of view because they need to make money and yada, yada, yada." And I look at the other side and I say, "Jesus. I'm a consumer and I don't want anybody stopping what I can see or how I can use my Internet. I pay sixty dollars a month for it! Why should anybody be defining how I use my Internet connection?" So those are two conflicting thoughts right? But muni wireless, they'll perhaps become the third option. If it's free, if it's available, I can maybe say, "Well, maybe I don't need all my services from Comcast or SBC. I can maybe take a little bit from them, the rest of it comes from muni wireless" or something like that. I don't know. The issue with muni wireless is bandwidth. How much bandwidth will they have?

Niall:

OK. One final question. If I'm a small business, Technorati or Pandora for example, what should I be doing about this? What should I be looking out for to make sure my business is not hampered?

Om:

I think a lot of the companies actually do business with AT&T. I'm sure your company does business with AT&T for example. Pandora does, or anybody, because they know how to manage a network, manage infrastructure. So, you have a little bit of that built into your gameplan so to speak. But I think as it becomes clearer that these guys are beginning to work with certain providers more so than you, then you probably have to reach out to these guys and see how it happens.

I really don't have a clear answer on this to be honest, I mean, look we've heard three telco executives make big noise about how they want Yahoo! and Google to pay for everything, but we haven't seen anything actually happen. So, I really can't say. But this is something people need to think about. This needs to be factored into their gameplan. Just like how many people you need to hire, and how much venture capital you need to make, this is something people should be thinking about as start-ups.

Niall:

All right, we'll post some more notes on the blogs, so people can follow up and get more information.

Om:

I didn't let you talk today though.

Niall:

I've done plenty of talking. We'll have another time for that.

Om:

Nah, it's not RSS right?

Niall:

I'm deeper than that Om, but I'll make sure my tinfoil hat is securely attached to my head.

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Comments

You should ask the folks at the Gartner Group for their opinion on this issue...

I think there is one thing in this argument that Om misses, certainly for the European markets anyway.

There is a lot of competition among telcos. However, the backbone carriers are at an advantage, yet in many countries they are controlled at a national level.

Nevertheless, I wonder the extent to which competition among telcos - especially in cross-border situations - will act as a counterweight to any cost increases the providers may be faced with. I am thinking here of the potential impact on SaaS providers. At present, they're little more than a flea bite in traffic. But if they pick up and become noticeable I wonder what happens then?
I am also thinking of the prevelance of mobile here. In Spain for instance, there are more mobile phones than fixed line. Broadband is offered with virtually every new phone line. There's plenty of take up but service costs at the consumer end are considered high enough as it is.

I believe the triple play telcos will be in a strong position but then so will Sky. so the pressures may not - at least - be one way.

But I agree, with Om on the question of planning for what this might mean. It will be intriguing to see how it works out.