Jeff Pulver is frustrated at the apparent port blocking antics in his London hotel. He looks forward to a day when he can screen his accommodation search to those who subscribe to the four Net Freedoms. Namely:

• Freedom to Access Content [of your choice]
• Freedom to Use Applications [of your choice]
• Freedom to Attach Personal Devices [of your choice]
• Freedom to Obtain Service Plan Information

From a UK residential perspective, the whole debate sometimes looks like a quaint parochial American thing. Isolation of the local loop bottleneck by the regulator has done wonders here. I have a choice of different access suppliers in my street, a choice of dozens of retail suppliers on BT[base ']s wholesale DSL product, and a choice of several unbundled loop providers (with the number of choices increasing fast). Whilst the UK is not a connectivity nirvana, the only net freedom that counts is the last one [~] in making such complex choices.

For example, my ISP blocks ports 135-139. Do I care? Not at all. They[base ']ve judged that the geek market they serve sees this as a security benefit, not an imposition. If I didn[base ']t like it, I[base ']d be off in a flash.

Anyone who thinks they can ravage the residential customer and get massive rents in the UK market by port blocking is just plain nuts. The answer to net freedom problems is, by default, competition. Indeed, in a competitive market, the first three [base "]freedoms[per thou], if externally imposed, are damaging. They prevent the healthy price discrimination that enables markets to extend downwards into sub-prime segments. Well-meaning regulation could esaily turn the Net into a middle-class ghetto. (Democratic needs for universal access to [base "]speech[per thou] facilities are a different issue, and shouldn[base ']t be bound up in this part of the debate over commercial terms.)

The above argument doesn[base ']t necessarily apply to the market that Jeff is experiencing. Jeff wants a bed for the night, first and foremost. Connectivity is, even for the nerdiest of us, ancilliary (I hope). The problem is one of transaction costs and externalities. Why do we have consumer protection laws, for example? Why not just allow everyone to negotiate whatever terms they like?

There are search costs in finding a supplier of a hotel room or connectivity. In most markets the majority of suppliers offer basically similar commercial terms, even if the products and pricing vary enormously. Just look, for example, at the ease with which you can return unwanted goods to stores in the USA, even when no law mandates it.

Once you reach a certain supermajority offering the same terms, the minority then start to impose a search cost on the market. Do I need to check whether this contract stipulates that all legal proceedings must be initiated in Vanuatu on a Tuesday? We impose universal consumer rights to overcome co-ordination and search costs, particularly those where one party is imposing additional burdens on others.

In this case, the terms [base "]broadband[per thou] and [base "]Internet[per thou] for short-term access should be taken to imply the net freedoms. No exceptions or small print. You can[base ']t disclaim the ability to sue for negligence in a contract. You can[base ']t create your own definition of [base "]Internet access[per thou], in an Alice-in-Wonderland [base "]it means whatever we choose[per thou].

For peripatetic connectivity the search costs are particularly high. You need to physically travel about to experience the connectivity on offer. You move often. Therefore it is reasonable to apply ex ante regulation on this sub-market.

Net freedoms are just means to ends, not ends in themselves.

UPDATE: [sigma]and just on cue, here[base ']s what you get when you have a competetive access market. Deep packet inspection? No problem, as long as it isn[base ']t being forced on you or done without disclosure.

5:11:07 AM    comment   

It takes a hell of a lot of capital to build a utility. A hundred years ago, when Samuel Insull began making the investments that would lead to the first large-scale electric utility, Commonwealth Edison, a lot of people thought he was crazy. He first bought up all the little mom-and-pop generating stations around Chicago, then he closed them all down and replaced them with a giant central station operating mammoth new generators. He literally had to beg suppliers to build the huge turbines he needed. They couldn't imagine anyone needing that kind of capacity. They were wrong. Within a few years, Insull was one of the richest men in America.

Google's announcement yesterday that it would raise $4 billion in capital with a second stock offering underscores its ambition to become the world's first great computing utility. With $3 billion already in the bank and tons of dollars being generated through its current operations, it's going to have a massive amount of cash to invest in expanding its data centers, buying up fiber-optic network capacity, pioneering new technologies, and acquiring other companies. As leading tech analyst Mark Stahlman put it, ""There's a lot of infrastructure that they need to build ... a couple hundred thousand more servers, a bunch of dark fiber, maybe a few data centers." As someone who believes that most computing services will ultimately be provided, in one form or another, by utilities, I think the kind of investments in centralized infrastructure that Google is making will serve customers well.

But will those vast capital outlays serve Google's investors well? I seriously doubt it. Given Google's stratospheric stock price, it will have to earn enormous returns on those billions of dollars of capital if investors are to make out well in the long run. It's doubtful that Google's current business model - selling advertising - will generate those kinds of returns. When Insull built his electric utility, he was paid directly for the electricity he produced - and because companies and consumers always needed power, the revenue streams were protected from the vagaries of the business cycle. Advertising is a different beast. It's highly cyclical, with big highs and low lows. The revenues are unsteady. And unlike electric utilities, which had monopolies over local supply, advertising is a highly competitive business.

I certainly don't mind having starstruck investors pay for the buildout of infrastructure that will provide many benefits to many, many people, including myself. But if I were one of those investors, I'd be thinking hard about how exactly Google is going to be making money in the future. Stahlman says that "the mistake here is people think that Google is somehow an advertising company and therefore in the media business. They're not. They're in the infrastructure business." Well, they're making investments like an infrastructure company, i.e., a utility, but they're making money like a media company. The question is: Is that sustainable?

5:06:02 AM    comment