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Why the Carriers Can Afford Net Neutrality

If the argument over net neutrality is: Is it fair for AT&T not to be able to charge Google a premium for using its (AT&T's) pipes?, then Odlyzko's answer is an unequivocal: Yes. It (net neutrality) is fair.

Odlyzko argues that the telcos are doing quite well, thank you very much, when it comes to paying to build out the next-gen infrastructure:

Already almost a decade ago, it was estimated that the entire plant of the U.S. phone companies, which had cost about $340 billion, could be duplicated for about $180 billion, or roughly half....That is why capital expenditure (capex) of the telcos has been so weak, as their replacement cost has been consistently lower than their depreciation charges. And that is what has helped produce the bountiful free cash flow and profits of recent years.

So why are the telcos so intent on fighting net neutrality? Odlyzko writes that based on the above realities about replacement plant costs, "While the telcos probably do not need to engage in differential pricing to pay for a broadband network, they may very well need such pricing to support their stock prices."


Now, Odlyzko isn't necessarily making a value judgment here, and I'm not either. Wall Street has been giving the telcos, especially Verizon, a hard time over the fiber access networks they've been building out. Such buildouts may, in fact, be well within the telcos' means to afford, but investors apparently aren't keen on money being spent on long-term infrastructure investment instead of being handed back to them. So the telcos didn't necessarily create the situation they find themselves in.

Odlyzko's conclusion is:

Policy makers in the U.S. have limited tools with which to induce deployment of broadband networks. But it is very doubtful whether imposing some sort of net neutrality would impede that policy goal, as the current rate of deployment seems gated by other considerations. Some form of net neutrality mandate, hard as it would be to define and enforce, might be more appropriate, in order to promote the development of the applications that will provide value to users and make them willing to spend on "dumb pipe" broadband, which might be much more effective in stimulating investment by current players.

And this, following on an observation earlier in the paper that, "Connectivity has always been valued far more than content":

Left to themselves, current operators would surely concentrate on building out systems optimized for content delivery. Yet, as has been easy to predict from historical precedents, the most promising avenues for stimulating interest in broadband by users is by promoting social interactivity. In that sense, success of services like YouTube and Facebook was very natural and predictable, yet it caught the industry by surprise.

Which brings us to the sad truth: "The one thing that has been well that established service providers are terrible at innovation in services."

Like all of Andrew's work, of which I've been a big fan over the years, it's awesome stuff. Go read the whole thing.