innovation through discrimination!?innovation ... - tu berlin · the isp and regulators incentives...

Institute of Information Systems and Management (IISM)Institute of Information Systems and Management (IISM)

Innovation through discrimination!?Innovation through discrimination!?The Net Neutrality debate

Dr. Jan Krämer, Lukas Wiewiorra

KIT – University of the State of Baden-Württemberg andNational Large-scale Research Center of the Helmholtz Association www.kit.edu

Agenda

The Net Neutrality debate

g


Economic model

Innovation, investment and policy results

Institute of Information Systems and Management (IISM)

2 25.09.2009 Dr. Jan Krämer, Lukas Wiewiorra – Innovation through discrimination!?

Net Neutrality – Two definitionsy

„Net Neutrality means no discrimination. Net Neutrality prevents Internet providers from blocking, speeding up or slowing down Web content based on its source, ownership or destination “ownership or destination.(http://www.savetheinternet.com/=faq#what)

Net Neutrality „…usually means that broadband service providers charge consumers only once for Internet

faccess, do not favor one content provider over another, and do not charge content providers for sending information over broadband lines to end users “information over broadband lines to end users.(Hahn et al. 2006 )



Discrimination – Content vs. Transmission

Content discrimination Transmission discrimination

Offering service classes with different priority in the network independent of content or service

Insulating its own affiliated content or service from competition by blocking or independent of content or service

characteristics. (QoS)competition by blocking or degrading the quality of outside content or services.

Mobile phone operators P2P trafficCost reduction

Mobile phone operatorsVoIPCall-through numbers

Refuse to distribute an affiliate content or service over competing conducts


4 25.09.2009

conducts

Dr. Jan Krämer, Lukas Wiewiorra – Innovation through discrimination!?

The Net Neutrality Debate – Innovationy

Neutrality Discrimination

End-to-End principle fosters “innovation” on the Internet

Dumb pipes: No network judge

Best-effort transportation inappropriate for emerging demanding servicesu b p pes o et o judge

Innovation at the edgeNo comparative disadvantage

g

Enables higher reliability of t t tiNo comparative disadvantage

for start-upsCritical massN t t t

transportationHealthcareSecurity

No constant revenue stream etc.



The Net Neutrality Debate – Infrastructurey

Neutrality Discrimination

Best-Effort transmission necessitates overprovisioning of network capacity to guarantee a

Content providers’ payments support ISP’s infrastructure investmentsp y g

certain transportation quality

C t t id ti i t tDanger of artificial quality

d ti ( d d itContent providers participate not directly on the infrastructure investments of the ISP

reduction (reduced capacity expansion) to generate higher prioritization premiums?



The Net Neutrality Debate – Literature Overviewy

Disciplines

Law

Economics

Involved Parties

Contra Pro

Engineering• Network Service Provider• Network Equipment Provider

• Content and Service Provider• Consumer Rights Groups

Net Neutrality is at length discussed in the law domain with a very rich set of existing literature

Wu, T. (2003). Network neutrality, broadband discrimination. Journal of Telecommunications and High Technology Law.

Yoo, C. (2005). Beyond Network Neutrality. Harvard Journal of Law & Technology.

Yoo, C. (2006). Network Neutrality and the Economics of Congestion. Georgetown Law Journal.

Very few analytical economic papers exist until nowVery few analytical economic papers exist until nowHermalin, B., & Katz, M. (2007). The economics of product-line restrictions with an application to the network neutrality debate. Information Economics and Policy.

Economides, N., & Tåg, J. (2007). Net Neutrality on the Internet: A Two-Sided Market Analysis. Workingpaper.


7 25.09.2009

Cheng, H.K. et al. (2009). The Debate on Net Neutrality: A Policy Perspective. Information Systems Research. (forthc.)


Agenda


g


Economic model




Neutrality – The benchmark casey

Revenue (r) through advertisementsContent- and service provider

(CP) rwLU N

iiNCP )()(

Revenue generation is congestion-sensitive ()

Internet Service Earn money from consumers’ access fee (a)

Provider(ISP)

NN a

Internet ConsumerValue connectedness (h)

Internet Consumer(IC)

UN hvN

cw t aN

Value content variety (v*)Dislike network congestion (c)


9 25.09.2009

UIC hv c w taDr. Jan Krämer, Lukas Wiewiorra – Innovation through discrimination!?

Content variety and congestion sensitivityy g y

Lr rwLU Nii

NCP )()(

wN 1

prof

it L

rwN

p

Increasing congestion sensitivity

0 1



M/M/1 – A standard queueing model

Traffic requests () arriving at the network are queued

q g

The congestion level (w) depends on capacity (µ) of the network and the share () of content providers buying first priority access

wN 1

1

1Dw

DD ww 12



Discrimination

Generate revenue through clicks on advertisements (r)Content- and service provider

(CP)

Generate revenue through clicks on advertisements (r)Revenue generation is congestion-sensitive ()

rwL

U D

Di

iDCP

)()( 2 Best-effort

Internet Service

prwLU D

iiCP

)(

)(1

Earn money from consumers’ access fee (a)

Priority

Provider(ISP)

Earn money from consumers access fee (a)Earn money from content providers’ priority fee (p)

paDDD

Value connectedness (h)Internet Consumer

UD hvD

cw t aD




12 25.09.2009


Agenda


g


Economic model




Short-run effect on content providers’ surplusp p

loss



Short-run effects on innovation

In the short run all content providers earn less under a pdiscriminatory regime.

This surplus is expropriated by the ISP.

B t th i t d ti f di i i t t k i dBut the introduction of a discriminatory network regime does not reduce the number of active content providers in the market.



Short-run effects on welfare

Total welfare is higher under a discriminatory regime Network congestion is allocated away from the most congestion sensitive content providers



Short-run effects on welfare

Total welfare is higher under a discriminatoryunder a discriminatory regime

Network congestion is

lossallocated away from the most congestion sensitive content providers

gaing



Long Run Effects

In the long run capacity is not fixed and the incentives for infrastructure investments are different in both regimes

g

infrastructure investments are different in both regimes

U d t k di i i ti th ISP h t i ti tUnder network discrimination the ISP has stronger incentives to increase capacityThe overall congestion level is lower under discriminationgMore content providers enter the market which can be interpreted as innovation at the edge



Priority revenue effecty

loss

gain

innovationinnovation at the edge



Outlook

Power user

P2P – Degradation

Competition between ISP’s

Capacity regulation



Thank you for your attention…y y



BACKUP

Assumptions

Average vs. Accumulated waiting time

Regulation


22 25.09.2009Dr. Jan Krämer, Lukas Wiewiorra – Innovation through discrimination!?

Basic Framework

Users value the connectedness (h) to the network positvelyU l th b f t t id ( hi h tUsers value the number of content providers (which connect to the platform positively (v)Users suffer from waiting time through waiting costsUsers suffer from waiting time through waiting costsUsers pay an access fee (a) to the platform ownerWaiting time (w) in a network depends negatively on the g ( ) p g ycapacity (µ) the platform offers and positively on the average total number of service requests () from the consumer side

fThe business of content- and application providers is diverse sensitive to the average waiting time in the network



Assumptionsp

In equilibrium all consumers buy access from the monopolistic platformplatformContent- and application provider are not in competition to each other (independent monopolists)( p p )Each content provider gets the same average number of service requests (L) from the consumer sideContent providers are uniformly distributed according to their sensitivity



Neutrality – The benchmark case (B)y ( )

Revenue (r) through advertisementsContent- and service provider

(CP) LwrU N

iiNCP )()(

Revenue generation is congestion-sensitive ()

Internet Service Earn money from consumers’ access fee (a)

Provider(ISP)

NN a

Internet ConsumerValue connectedness (h)


UN hvN

cw t aN



25 25.09.2009


Average vs. Cumulated waiting timeg g

Average waiting time:

21 )1(ˆ www

g g

Cumulated waiting time: D* 1

˜ w 2

w1(1)2

w2

Cumulated waiting time: pD* Lr 1 1L2 1

2 1 2 2

UIC hvcw ta



A world without a neutral network?


27 25.09.2009

Quelle: http://digg.com/odd_stuff/Why_net_neutrality_is_important_pic


Price Regulationg

The ISP and regulators incentives are perfectly aligned with respect to the priority and access feeswith respect to the priority and access fees

If p is too low, there will be excessive congestion in the priority classIf p is too high, there will be excessive congestion in the best-effort class P i l ti t i lf Price regulation cannot improve welfare



Effect of price regulation on content providers’ surplusp

loss



innovation through discrimination!?innovation ... - tu berlin · the isp and regulators incentives...

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