Policy by the Numbers: Everyone Already Pays their Fair Share

Everyone Already Pays their Fair Share

Wednesday, December 14, 2011

Six years ago, CEO Ed Whitacre declared that his company (then SBC, now AT&T) and cable operators had invested too heavily in the Internet’s infrastructure to let companies like Google, Yahoo! or Vonage “use the pipes for free.” His argument recently resurfaced in a report by A.T. Kearney, which claims that consumers don't pay enough for telephone, cable or other Internet service providers (ISPs) to continue building broadband infrastructure. The report also says that companies like Google should pay additional money to the ISPs in a “two-sided market.”

The truth is that no one is using the “pipes” for free. Most ISPs tell their investors that their contributions pay off and customers pay monthly fees for Internet access. Upon closer inspection of the data, we’ve drawn the following conclusions:

Consumers pay for Internet access because they want services like Google, YouTube, Netflix, and Yahoo! -- not because they are loyal to their ISP. 75 percent of consumers say they’re willing to pay for better service and higher data rates to improve the quality of streaming to their home.

Network operators are experiencing a downward pressure on prices -- a normal response in a market where unit costs are falling faster than consumption is growing. This demonstrates a successful competitive market rather than a failure, as A.T. Kearney claims. In addition, it validates researchers’ predictions that supply and demand for Internet access would grow at comparable rates and level prices -- thanks to Moore's law.

Companies like Skype that were once startups in a garage are now the driving force for consumers to purchase high-speed Internet. Broadband and mobile data providers made approximately €155 billion in Europe last year as a result of consumer demand for Internet-based content and applications.

A.T. Kearney’s proposal would result in European fixed network charges of approximately $1.5 billion for YouTube, which is, according to third parties, more than three times YouTube’s estimated global revenue of $450 million. Imagine the impact that this would have on new entrants (the next YouTube) which may not have the backing of a company like Google. It would effectively shut them out of the market.

To be clear, there’s something to be said for Whitacre’s sense of entitlement with fiber, copper and other miscellaneous attachments -- a sense of entitlement that I have felt, advocated for, and believed in. Prior to joining Google, I worked in telecommunications for almost 18 years, deploying infrastructure that makes the Internet work. The business is tough, expensive and heavily regulated because everything is installed on shared, public infrastructure. It takes a lot of people, machinery and coordination to get the networks built.

But there’s a line to be drawn. Regulators have done well to ensure that competitive providers have access to public resources like the Internet’s infrastructure, but we should be careful about asking them to dictate pricing structures for services that run over that infrastructure. Shouldn’t this be left to the consumers and the market?

posted by Patrick S. Ryan, Policy Counsel at Google

Policy by the Numbers

Everyone Already Pays their Fair Share

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