I came across an article on Net Neutrality on the newly redesigned (nice!) CNN.com:

“Today I’m pleased to introduce the Internet Freedom Act of 2009 that will keep the Internet free from government control and regulation,” McCain said in a statement. “It will allow for continued innovation that will in turn create more high-paying jobs for the millions of Americans who are out of work or seeking new employment. Keeping businesses free from oppressive regulations is the best stimulus for the current economy.” – John McCain

That’s a lovely statement. Now let’s see what this guardian of virtue is defending us from:

The FCC voted unanimously Thursday on a proposal that would start the process for creating regulation that will keep the Internet open. The proposal itself uses the FCC’s open Internet principles as a foundation and would forbid network operators from restricting access to lawful Internet content, applications, and services. It would also require network providers to allow customers to attach non-harmful devices to the network.

It seems counterintuitive that network operators, a small oligopolistic group of companies protected by massive barriers to entry resulting from extremely high fixed infrastructure costs, would need congressional help defending against the tyranny of their own users.

Left to their own devices, network operators would not hesitate to exert their power over the content they serve. This isn’t malicious – it makes business sense, but it unequivocally stifles innovation.

Network operators own the path between content creator and consumer. Without regulation, they are free to offer different tiers of access to that path to the highest bidder.

For example – let’s imagine that Google’s ability to pay dwarfs that of startupx, so that when Comcast rolls out a premium service at $10MM/year, Google walks away with the fastest, most reliable delivery network available. Even if startupx’s product makes Google look like Microsoft, without the ability to deliver their service with the same speed and reliability that Google offers, startupx doesn’t stand a chance. Innovation stifled.

I can appreciate caution in this situation. Taking regulation too far can be equally egregious, but given the history of the telecom industry, I would err on the side of regulation.

[FCC] Chairman Julius Genachowski…said that the commission is faced with a “dangerous combination of an uncertain legal framework with ongoing as well as emerging challenges to a free and open Internet.”

But he said the consequences of doing nothing are too great. And “fair and reasonable rules of the road” can’t wait.

There is a very nice piece by Brad Burnham of Union Square Ventures (and Wesleyan University) on the problem with the Free debate.

“Free is not a pricing strategy, a marketing strategy, or the inevitable consequence of a market with low variable costs. It’s a symptom of a much more fundamental economic shift.”

Brad has some shed light on the dark corners of Chris Anderson’s “economic” argument and has at the same time proposed a new way to think about the exchange of value in networked content delivery. Here is the problem that we encounter when trying to apply conventional economic models to modern web services: The price of a good is understood to rely on the supply of that good (production inputs of capital + labor) as well as the demand for that good (consumer utility). The question we have to ask however, is what happens when utility is driven by the number of consumers who engage in the service? Through their engagement, consumers end up increasing their own utility, thereby driving further user adoption (a shift outward in the utility curve). This in turn increases utility and continues the feedback loop.

When a user engages in a useful social web service, she derives a value from that service that is necessarily greater than her individual contribution. While the consumption of the greater-than-the-sum-of-its-parts final good is partially paid for by her contribution, the remainder is paid for in the form of user attention. Traditionally, user attention is then monetized by web services through a third party: advertisers. In some cases, user attention is sold back to the user at a premium (i.e. ad-free web experience).

Social web services supply users with a reliable infrastructure and a set of algorithms for the maintenance of a network. The infrastructure product could be a considered a direct good, as it results directly from capital and labor inputs paid for by a firm. The network phenomenon itself however, while sustained by the direct good, produces an indirect good that requires for its existence a healthy level of user engagement. This indirect good is the collective intelligence, and it results from a combination of a reliable infrastructure (including useful algorithms) and labor inputs given freely by the consumer. In other words, social web services supply two goods that differ in form, production, price, and demand dynamics.

I am having a difficult time wrapping my head around what might be considered a reasonable model for marginal cost for social web services. On the one hand you could argue that if infrastructure was the only good produced by social web services, then indeed marginal cost would seem to move inexorably towards 0. On the other hand, if you recognize that there is something else at play here, some other product being created by a network effect beyond the direct control of the social web service, then perhaps our traditional understandings of marginal cost fail to provide clarity. Perhaps one might look towards the more intangible costs of a healthy level of user engagement: brand trust, robust reputation systems, signaling potential, social context. These elements are more difficult to quantify, but should certainly be considered “inputs” into the production of a sustainable collective intelligence.

I highly recommend reading Brad’s article. Freeconomics desperately needs a more useful (and economically grounded) framework for debate or, as Brad says, “we are not just talking past each other, we are talking about the wrong things.”

With regards to my prior post, further perspective on the Wall Street Journal article:

“Google has been caught red-handed negotiating deals with ISPs to host servers inside the building, just like Akamai does. The semi-technical press thinks this is some sort of a game-changing event:”

http://bennett.com/blog/2008/12/google-gambles-in-casablanca/

“Google caches within an ISP’s network could make Picasa twice as fast as Flickr, Orkut faster than Facebook and so on.”

http://blog.wired.com/business/2008/12/google-blasts-w.html

This morning the Wall Street Journal published a story claiming that Google had approached broadband providers with hopes to secure higher quality content delivery services. A concept anathema to most Network Neutralites, Lawrence Lessig is even cited as “softening” his position on NN to allow for this kind of differentiation.

Lessig responds in a post here in which he appears to reject the characterization of his position:

“While broadband providers should be free, in my view, to price consumer access to the Internet differently — setting a higher price, for example, for faster or greater access — they should not be free to apply discriminatory surcharges to those who make content or applications available on the Internet. As I testified, in my view, such “access tiering” risks creating a strong incentive among Internet providers to favor some companies over others; that incentive in turn tends to support business models that exploit scarcity rather than abundance.”

After reading his post I was left confused over his use of the word “consumer”. The question that he was supposedly responding to had more to do with content producers like Google, Yahoo, and Microsoft than with consumers like you and me. I dug deeper to try to understand the semantics and watched an overview of his testimony to the FCC that he gave at Stanford.

The “consumer” Lessig refers to is the content producer after all. Google and Yahoo consume bandwidth just as you and I do. Lessig’s position is that Google should be able to pay a higher price for delivering video content at faster speeds if they want to, so long as all video content sites are offered the same price/opportunity. Further, a site that delivers only text content may not want such high speeds/bandwidth and may opt out of the higher price. He suggests that a parallel is that we pay more for overnight FedEx than FedEx ground.

I recognize that this model does not choke competition or seem unfair for the likes of Google, Microsoft and Yahoo, but I question whether or not this sort of barrier to entry for video startups, for example, is legitimate. If it costs $15MM for a video startup to deliver content in a competitive way, then I would submit that the differentiated pricing model based on Lessig’s “zero discriminatory surcharge” model is inherently unfair, and while it may avoid monopoly, it does nothing to prevent oligopoly. Finally, there is a vast difference between pure movement services (FedEx/UPS/Mail) and network operators. The analogy is more relevant to email services than to an entire system of markets and consumer interaction.

Then again, is this anything other than saying that the advantages of scale are just that: advantages? The most important point, as Lessig says, is that those advantages of scale are not locked in by preferential treatment. This is a thin line we tread.

“We need a merger partner or we’re not going to make it,” Mr. Mack told Mr. Pandit, according to two people briefed on the talks. Mr. Pandit, a former senior investment banker at Morgan Stanley, said Citigroup was not interested. It is thinking of deals it can strike with consumer banks, like buying the struggling Washington Mutual out of bankruptcy if its reported efforts to auction itself should fail, that would provide it with cheaper deposit funding. A Citigroup spokeswoman declined to comment.

On Thursday morning, a spokeswoman for Morgan Stanley said that Mr. Mack “vigorously denies” making the statement to Mr. Pandit.

Having failed at that, Mr. Mack entered into discussions on Wednesday with Wachovia and several other banks, people briefed on those discussions said. The talks with Wachovia are preliminary and a deal may not emerge. The banks declined to comment.”

This NY Times article reports a discussion based on speculation, writes a line noting that those involved in that discussion vehementaly deny it, then continues the article as if that denial had never happened. One would expect better from them.

Article here