Inimai Chettiar and Scott Holladay from the Institute for Policy Integrity New York University School of Law have responded to my critique of their report “Free to Invest: The Economic Benefits of Preserving Net Neutrality”.  Chettiar and Holladay refute my assessment that their analysis is flawed, but they don’t actually address the key criticisms and they double down on bad logic instead.

My main criticism of their original analysis is that their core premise is wrong because the regulations they are demanding would accomplish the opposite of what they want.  Chettiar and Holladay hold the position that content creators must be protected from higher Internet content distribution costs by restricting broadband providers from charging content providers for access to their broadband customers.  Yet these connectivity options that Chettiar and Holladay would abolish for the sake of protecting the content providers from higher distribution costs would actually raise the content providers’ costs.

As I explained in my original critique, the source of Chettiar and Holladay’s confusion is the fact that they assume that charges levied by a broadband ISP on a content provider is in addition to the charges that a content provider paid to their transit Internet Service Provider (ISP) which provides access to the global Internet.  But the reality is that any content provider that pays a broadband provider for regional access – a service called Paid Peering – is going to bypass their transit provider which means the Paid Peering charges are in place of the transit charges.  Since the Paid Peering charges are only a third of the transit charges, content providers can save money while getting better performance and support.

Yet even after I pointed this out to Chettiar and Holladay, they ignore these facts and continue to demand a regulatory ban on these more efficient and more affordable services like Paid Peering.  It is one thing to make an honest mistake the first time, but it seems like Chettiar and Holladay have a permanent anti broadband provider agenda that precludes them from common sense.

Furthermore, they subscribe to the dogma that no content provider should be allowed to purchase superior connectivity.  In their rebuttal to me they state:

“First, paid prioritization allows existing market leaders in content to purchase better access to end-users; while some content providers will win out in this situation, others will be losers, ending up with the worse access to users.”

This is where all economic reason is suspended and we are asked to accept the premise that all content providers have to be equal regardless of their ability to pay for connectivity.  With this kind of reasoning, no content provider should be allowed to buy caching services from Content Delivery Networks (CDNs) like Akamai or LimeLight or build their own private Internet like Google.  Google or Amazon should not be able to purchase better connectivity to reach end users than DigitalSociety.org.  Yet we know this is preposterous because our $50/month server hosting plan used for DigitalSociety.org is vastly inferior to Amazon.com or YouTube.com, and the Internet has been doing just fine under this free market arrangement.

Chettiar and Holladay also argue in their rebuttal that “targeted government support” should be used to expand the broadband network where needed and that this is cheaper than subsidizing content.  So Chettiar and Holladay would ban the economic benefits of Paid Peering and then use government subsidies to undo the damage.

Lastly, Chettiar and Holladay make the “perverse incentives” argument against technological progress on the Internet.

“ISPs will face perverse incentives.  There are a number of ways in which ISPs could pursue various prioritization schemes (like paid peering) that would increase their revenue while decreasing the value of the Internet to society as a whole.  Further, the edge of the network generates a tremendous amount of wealth and ISPs are ill-positioned to consider the impact of their decisions on the economy and the Internet as whole.”

Based on their economically destructive ideas, Chettiar and Holladay are the ones ill-positioned to tell us how the Internet should operate.  Killing a more cost-effective and architecturally efficient model of the Internet is not a good way to improve the value of the Internet.  Paid Peering and other enhanced or prioritized services would vastly increase usage on the broadband network along with increasing revenue which necessitates and funds more investment in broadband.  The revenue going to the broadband industry isn’t just for “past investment” as Chettiar and Holladay suggests, it will add to the tens of billions of dollars already being spent each year on maintaining and improving the nation’s Internet infrastructure.

The argument that broadband providers are only trying to pay off past investment is simply false.  Just between a few telecom and cable companies like AT&T, Verizon, Comcast, Qwest, and TimeWarner, these companies spent $51.4 billion in 2007 and $53.5 billion in 2008 in capital expenditures.  All of this investment is happening under the current regulatory regime which permits advanced architectures like CDN, Paid Peering, and private Internet backbones.  To argue for a return to the Internet as it was 15 years ago with heavy handed regulation is ludicrous.