Network Neutrality: Charging For Fast Content Only Slows It Down

Are you willing to pay extra to receive specific website content more quickly than what your standard Internet service provides? And more importantly, would you really be benefitting?

As the battle over “network neutrality” continues between supporters and Internet service providers (ISPs), a new study reveals compelling reasons to preserve a free and open world wide web. Economics Professor Benjamin Hermalin, University of California, Berkeley’s Haas School of Business, found that the purported benefits of tiered Internet service don’t materialize because over time, a tiered system slows down overall delivery speed.

The working paper, The Economics of Network Neutrality, co-authored by Nicholas Economides of New York University’s Stern School of Business, analyzes the private and social benefits of allowing ISPs, such as the telephone or cable companies, to charge third parties—for example, content and application providers--for access to the ISPs’ residential customers.

Network neutrality is defined as an open, neutral system free of fees to parties who provide content or applications on the Internet. ISPs want to start charging these third parties for using their networks to reach consumers’ homes. Additionally, ISPs propose charging third parties for “speed of access” to deliver their content. Parties unwilling to pay for fast delivery would have their content delivered to consumers at a slower pace. ISPs continue to challenge the Federal Communications Commission (FCC) proposed rules to preserve a level playing field.

“Most economists would have a natural inclination to support more flexibility but our model shows otherwise,” says Hermalin. “If I make access to Netflix faster, people are going to use Netflix more, which will increase congestion on the fast lane. Eventually the gains you think you achieve by putting Netflix on the fast lane are smaller than you think.”

While some argue the Internet should remain an open medium for all websites and developers, Hermalin and Economides, focused on the economic trade-offs. Their model assumes 1) the existence of online congestion, 2) that ISPs are not producing their own content and applications, and 3) that the amount of content purchased by each household from any given application provider varies.

The model revealed the benefits of bandwidth expansion with respect to speed are less than they might at first seem because larger bandwidth attracts more traffic. In essence, attempts to speed delivery of select content to paying-customers only leads to additional congestion. Consequently, if ISPs try to speed time-sensitive content to consumers, the research shows consumers will purchase more of the quick delivery content, and as a result, re-congest the information superhighway’s lanes.  

Hermalin and Economides conclude the best solution is to maintain a fairly stringent form of network neutrality with all content offered at the same speed without any fees. Hermalin says, "The current policy of network neutrality is probably the best for the economy. “

See the full paper: http://faculty.haas.berkeley.edu/hermalin/net_neutrality_v17.pdf

[This article has been reproduced with permission from Haas Research, published by the University of California, Berkeley's Haas School of Business]