The economics of the internet and the future

Josh Marshall had a post yesterday about a big issue concerning the internet. There is a link to a Washington Post article entitled "The Coming Tug of War Over the Internet." According to Marshall, the article "explains how the free flow of information on the Internet could be squelched out by the end of the decade."

This is one time I disagree with Josh. This is not to say that the issue described in the article is not serious or that it could not affect the free flow of information. However, such a conclusion as Marshall's ignores some basic concepts of economics and fairness.

According to the article, telecommunications companies such as AT&T, Verizon, and Bell South are trying to get laws passed that will enable them to charge increased fees for various service providers such as Yahoo and Google to use their phone lines. As stated in the article,

The changes may sound subtle, but make no mistake: The telecommunications companies' proposals have the potential, within just a few years, to alter the flow of commerce and information -- and your personal experience -- on the Internet. For the first time, the companies that own the equipment that delivers the Internet to your office, cubicle, den and dorm room could, for a price, give one company priority on their networks over another.

This represents a break with the commercial meritocracy that has ruled the Internet until now. We've come to expect that the people who own the phone and cable lines remain "neutral," doing nothing to influence the content on your computer screen. And may the best Web site win.

Oh my! This is the end of the world as we know it! All right, my previous sentence is hyperbole, but I stated it as such to prove a point. The point is that the telecommunications companies have a very good point themselves. The view of the telecommunications company was stated elsewhere in the article:

In a November Business Week story, AT&T Chairman Edward E. Whitacre Jr. complained that Internet content providers were getting a free ride: "They don't have any fiber out there. They don't have any wires. . . . They use my lines for free -- and that's bull," he said. "For a Google or a Yahoo or a Vonage or anybody to expect to use these pipes for free is nuts!''

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Whether or not you agree with Whitacre, you can understand his frustration. Companies like Google and Yahoo pay some fees to connect to their servers to the Internet, but AT&T will collect little if any additional revenue when Yahoo starts offering new features that take up lots of bandwidth on the Internet. When Yahoo's millions of customers download huge blocks of video or play complex video games, AT&T ends up carrying that increased digital traffic without additional financial compensation.

In other words, the telecommunications companies undertake all the expense and risk to build and provide the eqipment that makes wide use of the internet possible, but ISPs and internet businesses don't really pay for any of that. Here's another way to look at it. Many of the ISPs would have have no business at all without the equipment and infrastructure provided practically free of charge by the telecommunications companies. That means that the ISPs are paying little or nothing in order to make lots of money. Maybe I am mistaken, but I don't think that's the way a market economy is supposed to work. And I know it is not fair. If I provide equipment or service that allows a business to exist, I expect to be compensated. And if the business I enabled to exist grows and requires more equipment and/or services from me, I don't want to have to pay for that increased cost without receiving further compensation.

Naturally, ISPs and companies like Google and eBay are opposing the efforts of the telecommunications companies. The article explains one of the several reasons for their opposition:

At the end of the day, Google's Davidson says that his biggest worry is not for Google but for the prospect of bringing fresh innovation to the Internet. After all, if worse comes to worst, Google can pay AT&T or BellSouth to maintain its role as the Internet's dominant search engine. But the bright young start-up with the next big innovative idea won't have that option.

Well, if the bright young start-up does not have the ability to pay for the very thing that would allow his "big innovative idea" to manifest at all, should the start-up be given a free ride by the companies that had to spend billions of dollars to provide the necessary equipment? I am simply asking the question.

Now, before it seems like I have turned into a cold-hearted fat cat sort of guy [I could have said "Bush Republican," but I did not. ;-) ], I will say that some sort of compromise seems available. As a self-employed person, I know that the deck is already strongly stacked against small businesses and "bright start-ups." Anyone who has to pay self-employment tax to the IRS knows this. There needs to be some mechanism to allow start-ups to manifest and grow, and a pure market economy will eventually swallow up small businesses. However, in the context of this internet issue, it is insane to make one group of companies bear almost all of the cost of building, providing, and maintaining the very infrastructure which makes internet commerce possible while others reap profits from internet commerce. It makes no sense that if 1) internet commerce grows, meaning 2) more profits for those businesses, and 3) such growth requires more expenditures from the telecommunications companies to increase bandwidth, that the internet commerce business do not have to spend some of their increased profits to pay for that cost. It seems to me that there should be a way to pay the telecommunications companies some compensation while spreading out that cost of doing business among those in internet commerce. The issue for the telecomminications companies does not appear to be control over the internet as much as it appears to be cost. In other words, the economic reality is that increased internet usage in general and internet commerce in particular will require more expenditures on phone lines, fiber optic networks, servers, bandwidth, etc., and that cost should not be borne by the telecommunications companies alone. Do we want an internet that has a free flow of information? I know I do, but it seems to me that in order to have that, the financial cost has to be spread around.

I admit that my knowledge of the economics of the internet is limited, so if anyone has a better understanding of these matters, please feel free to share your views.