Net neutrality and the value of the Internet

FCC Chairman Julius Genachowski

Verizon (s vz) filed its second suit against the network neutrality laws submitted last December by the Federal Communications Commission, sparking what is certain to be more debate over who has what rights to regulate the content on the Internet. Meanwhile a policy paper out today suggests the Internet so far delivers between $4,155 and $5,686 in economic value to each consumer: a number that may decline or stagnate if net neutrality disappears.

Assigning value to the web

A study by the Institute of Policy and Integrity at New York University has crunched some numbers and determined that the combination of network infrastructure and content that comprise the Internet offers significant economic value to consumers. The authors describe their methods below:

The results suggest that the consumer surplus generated by the Internet is very large. The average survey respondent spent 114.5 minutes a day on the Internet recreationally. The benefits that use generates are equivalent to 5.2 percent to 7.1 percent of income. If we use the median income value of Pew’s survey, we find that individual consumers collect between $4,155 and $5,686 worth of value from the Internet per year. This estimate is big, but it is in the same neighborhood as those found by Goolsbe and Klenow. They found that the consumer benefits of the Internet were somewhere between 2 percent and 3 percent of total income. The amount of time consumers spend on the Internet suggests that they receive a great deal of benefit from access.

How much is the web worth to you?

Of course this number is debatable, as are many number associated with the economics of broadband and the web. While the dollar value may be up for debate, the intrinsic value of having faster and more connectivity is not. As Om has pointed out, broadband is the processor of the next generation of the economy–as we move from the Information Age to the Insight Age. And for those not worried about broad economic shifts, there’s also the value to consumers from telecommunications services such as Skype (s msft) or over-the-top video services such as Hulu or Netflix. (s nflx) These services are what’s at stake in the overall net neutrality issue. Which brings us back to the rebirth of the network neutrality fight that commenced last week with Verizon’s lawsuit.

A refresher in network neutrality and why it matters

So it’s once more into the breach on the net neutrality as the courts weigh in on the FCC rules published last December. Verizon’s first lawsuit was filed prematurely according to a judge, who said the telecommunications company had to wait for the rules to get published in the Federal Register, which finally happened last month. As I wrote at the time of the original lawsuit, the rush to sue isn’t just a fight over the rules, but also a fight to control the venue of the trial, and perhaps get a judge that’s more sympathetic to either the telcos or the FCC’s arguments.

As the lawsuits revive the contentious debate over whether or not ISPs can interfere with the traffic flowing over their networks, it’s worth looking at what has changed in the last nine months. The rules say wireline networks can’t interfere with traffic, but those same rules muddy the waters when it comes to wireless. And today, with the world going wireless, that’s an important distinction.

Call it what you willl, but a lack of competition makes net neutrality policies essential.

Since the rules were passed, we’ve seen AT&T (s t) attempt to scoop up T-Mobile and reduce the number of players in the wireless industry significantly. Given that net neutrality is necessary because we don’t truly have competitive broadband networks in the U.S., a reduction in wireless competition is significant. For example, if my local wireline ISP charges Netflix  more money to send me content, and Netflix decides to raise prices for customers of that ISP, then I may only have one other option to get my Netflix bits from — an option that tends to work in lock-step to match the pricing and services available from the other ISP in my area.

Bring that dynamic to a wireless market, where there isn’t a firm guarantee of network neutrality ,and now factor in the prospect of fewer players and the lack of wireless network neutrality is troubling. So far, the AT&T-Mo merger is in doubt, but it isn’t completely shut down.

There’s also the appearance of more sophisticated carrier equipment that can now monitor the bits flowing over ISP pipes and show ISPs exactly how much traffic (and how much money) they are losing to other services. Sandvine, for example, showed off such gear in September. Google (s goog) and its planned purchased of Motorola Mobility (s mmi) also have the potential to change things, although I’m not entirely sure how that could play out. It could end up bringing Google closer to the carrier perspective because it now has a handset business that is under carriers’ thumbs. But a handset business might also become a platform for new services that make wireless net neutrality more important for Google.

This is an economic, not a technical argument

This is all about money, honey.

The fight on network neutrality essentially is a fight between ISPs that see companies such as Google or Netflix getting rich off the pipes provided by the telcos and cable companies. The ISPs argue that these content providers are overwhelming their networks, cutting into their profit margins. So they’d like to create a two-sided business model whereby ISPs charge content companies and consumers, so every bit you download from Netflix is paid for by Netflix and by you.

Content providers don’t want that, because it lowers their margins on service, and potentially could halt innovation because a smaller startup couldn’t pay an ISP to deliver its packets ahead of a larger web company. However, it also acts as a disincentive to investment in an ISP network. As the NYU study argues, under a traffic prioritization scheme, ISPs benefit when networks are congested, because it means paying for expedited delivery makes sense. Thus, why invest in adding more capacity to the network to make prioritization unnecessary? The report argues:

If the status quo is changed and ISPs are allowed to prioritize content, they will likely earn more money, but there is no guarantee that they will invest that additional revenue in their networks. Much of that additional revenue will reward past investments, rather than incent the development of new infrastructure. If they return the additional revenue to shareholders, or use it to invest in their own Internet content, then the future benefits from the Internet are at risk.

So, the lawsuits set in motion last week will release another torrent of debate — this time in the courts — about the merits of net neutrality. But aside from fear mongering associated with “regulating the Internet,” the real debate is one that will matter deeply — to consumers and tech companies alike. We may have to help lawmakers realize the true value we derive from the Internet, and ensure that value continues to accrue.