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way across numerous national borders? Finally,
opponents to formalization question the appropri-
ateness of prohibiting activities that aren't taking
place (Time Warner, 2009b).
Proponents of formalization argue that ISPs
do have a history of violating the principles,
and that only explicit regulations can meet the
FCC's goals. They point to the 2008 Comcast
case as evidence that ISPs are making attempts
to circumvent the principles. In their view a strict
enforcement regime is needed to combat ISPs'
incentives to defy the FCC.
Most of the effective differentiation among ISPs
focuses on speed (and to a lesser extent reliabil-
ity). Customers who discover that a desired site
or application is blocked or slowed will have an
incentive to switch their ISPs. As the duopoly that
exists in most markets (where a cable company
competes with a phone company) moves towards
multiple providers (perhaps including wireless),
ISP's will have even less ability to discriminate.
Further, it's not entirely clear that ISPs will be in
the dominant negotiating position
visa vis
content
and application providers. As seen in a recent
episode involving ESPN 360, content providers
may be quite willing to discriminate against ISPs
that are unwilling to pay a fee (Bode, 2009).
2. Do ISPs have the incentive to discriminate
against independent applications and content
providers?
3. Would net neutrality rules significantly
diminish the network providers' incentives
to invest in next generation networks?
There are a number of profit-driven rationales
for ISPs to discriminate against particular applica-
tions and content providers. First, discrimination
against applications with high bandwidth require-
ments enables ISPs to lower operating costs.
Discrimination can take the form of blocking the
content/application, reallocating it to the public
Internet or reallocating it temporally by delaying
its delivery. In all cases, the ability to discriminate
allows the possibility of lowering the delivery
cost. Second, discrimination opens the door for
charging content providers for access to the ISPs
delivery system, opening a new revenue source.
Neutrality advocates fear that dominant ISPs may
have market power in negotiating the fee, poten-
tially making this a lucrative source of revenue
- one that ISPs are unlikely to forgo voluntarily.
Finally, ISPs that vertically integrate with content
providers can increase profits by bundling and
placing un-partnered content providers and (in
the case of exclusive arrangements) other ISPs
at a competitive disadvantage.
Neutrality skeptics doubt that ISPs will find
it profitable to discriminate in the delivery of
content and applications. First, an ISP that rou-
tinely discriminates against popular content and
applications will be at a competitive disadvantage.
Neutrality opponents argue that the inability
to discriminate against certain content would
reduce the incentive to upgrade networks (Time
Warner, 2009b). The fear among ISPs is that an
inability to discriminate will commoditize Internet
service. An ISP in this case will only be able to
differentiate its service on the basis of speed and
reliability. Microeconomic theory predicts that
(in this case) an ISP will continue to upgrade
its service only to the point that the cost of such
upgrades can be passed along to customers as a
higher price. The ability to discriminate in favor
of particular content increases the likelihood of
upgrading on two fronts.
First, the ability to discriminate against high-
bandwidth content will provide an incentive for
customers who access such content to either up-
grade their service levels with their current ISP
or switch to a provider that doesn't discriminate
- improving the ability of ISPs to price discrimi-
nate. Under a neutrality system, users of high-
bandwidth content already have an incentive to
upgrade service to a faster speed. In fact providers
often advertise their services as being appropriate
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