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backpedaling3The Wall Street Journal had an article out Monday that has created a real firestorm of controversy. It’s about how some of the large Internet players (such as GOOG, MSFT, and AMZN) are backpedaling on their previous Net Neutrality stances.

Moreover, they’re variously negotiating with telecablecos to gain “favored nation” or preferred treatment status on their networks.

Holy Turnaround, Batman!

Some writers quickly noted–here, and here–that Google at least is simply caching content closer to customers, just like Akamai (NASDAQ: AKAM) and other CDNs do. And that much of the Journal article reflects the kind of sensationalism many feared would appear once Rupert Murdoch (NYSE: NWS) bought the paper.

[As an aside, when I was doing research a year or two ago on Akamai, top management there vehemently denied my suggestions that they would ever be in competition with Google. Heh.]

If any of this is true, it’s a sad development, but hardly unexpected. As competition heats up for everything from ad serving to video downloads to cloud computing, everybody wants an edge. And they’re willing to pay for it.

Those that can afford to will get better services, better access, better distribution. Which means the little guys get shafted again. If you want to buy from Amazon, you get speedy page refreshes (not to mention faster access to things like S3). Google apps will work faster than, say, Zoho.

The rich do, indeed, get richer.arrow

This plays right into telecableco hands. It’s is what they’ve been lobbying for, after all. (I can almost see the big, fat, spider sitting there in the middle of its web inviting them all in. ) The result will be a vertical model, with only a few players controlling the entire value chain, up and down.

If this was just about commerce, I’d be less concerned. But it’s also about access to information. And about control of content. Ultimately, it’s about exclusion and higher costs for everyone. As well as a loss of the kind of innovation that has made this country successful.

Imagine if TV stations were free to broadcast good signals from those advertisers (or news programs) that spent more. Everyone else, they deliver fuzzy pictures with the sound continually dropping out. Pay to play. Eventually, everyone gets their news and entertainment from a few large companies. Welcome to the 50s. There’s progress for you.

Critics argue: “But as businesses they should be allowed to offer different levels of service”. If there was true competition at the last mile level, I’d be inclined to agree. However, most of the large telecablecos built their networks–and their competitive advantage–on the revenue streams from exclusive franchises and government mandated monopolies.

You and I paid for their broadband networks through our monthly TV and telephone bills, mostly at a time where we had no choices. Or they used the proceeds from bonds whose attractive terms were based on the existence of those same “guaranteed” payment streams, which is basically the same.

Now that the moats around them have been fortified, we shouldn’t think that they’re entitled to operate as normal businesses. Monopolies (or even duopolies) don’t get the same rights as firms in a free marketplace. It’s not that I believe Network Neutrality should be regulated. (I agree about the principle but not the solution.) It’s last mile competition where the natural monopoly lies, and that’s what should be regulated. Until it’s no longer a monopoly, or until the telecablecos no longer have insurmountable market power.

Or until there’s structural separation.

Many thinkers (at least the ones whose salaries don’t depend on the success of telecablecos), have long recognized the most efficient market structure is horizontal–one company does the infrastructure, one does the content. Each competes within its own level, but not up and down the stack.

horizontal-model

The PC industry helped this country thrive with the same model. Some companies built chips, some sold computers, some provided software. This drove innovation and helped keep costs low and falling. (Even the emergence of intra-level monopolies like Microsoft couldn’t halt the effect–some argue the standardization even helped.)

But now the big players are changing the game, in order to become even bigger. The Internet guys want to differentiate on performance, because they’re finally getting into each others businesses, and have to compete–some for the first time. The pipes guys want a piece of the content pie, because as network usage grows their costs go up, and they face resistance in trying to charge consumers more money for Internet access, especially as they’ve been billing flat rates for so long. But we will pay, one way or another.

Not everywhere, thankfully. Much of the rest of the world actually has competition in the last mile. They’ve created a more horizontal model, with providers competing “across” levels. If we fail to adopt this kind of structural separation in the U.S., we can watch our innovative spark and competitive advantages slowly drain away.

And just as many around the world laughed at us for voting to re-elect George Bush, they’ll laugh at us again, for voting to go “up and down”.

Disclosure: I hold no position in any of the stocks mentioned here.

Source: Telecom, Internet Players Backpedal on Progress