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Verizon-Google: Of Common Carriers & Contract Carriers

By 14 August 2010 No Comment

One way of looking at the recent Verizon-Google Legislative Framework Proposal is that the companies are arguing for an Internet structure that is a hybrid between “common carriers” and “contract carriers.”

A fundamental distinction, which can be traced back centuries in the common law, is between a service that holds itself out to the public as a common carrier or common calling and one that does not.

The former have always been subject to special requirements, such as duties to accept all comers; not to discriminate; to operate at regular hours; to exercise competence; to handle business in the order received; to differentiate in price only for different services.

Sometimes the impositions are explained by the fact that the service has received some special benefit from the state, such as a charter or monopoly or the power of eminent domain. Sometimes they are justified by some legal formulation, such as a finding that the business is “affected with a public interest” or similar formula, usually tautological.

It is a complicated area of legal and economic history, and is based far more on experience than logic, since no theory is totally explanatory.  Usually, imposition of common carrier requirements seems to be related primarily to two factors: monopoly power of some degree (even if only of the nature of the power of the innkeeper late on a dark and stormy night); and the need for predictability on the part of those who use the service, especially when these users are themselves producers of other goods and services and must make investment choices that depend in part on the carrier’s service. A factory deciding where to locate wants predictability in railroad rates, for example.

Services that are outside of this circle of common carriers are “contract carriers,” and are free to strike what deals they choose, without obligations on a common carrier.

Obviously, the world needs both. A common carriage trucking service from City A to City B is a precious national asset, but the denizens of both places also benefit from the existence of individualized trucking services available on negotiated terms, designed to meet the special needs of the parties and able to offer integrated turnkey services if desired.

Telephone service has long been subjected to common carrier requirements, and the result is not entirely a happy one, as the barnacles of a century of regulation have slowed the pace of technical and business innovation.

The FCC, to its great credit and to the great advantage of the nation, refused to impose common carrier requirements on the Internet, and this forbearance has had the effect of allowing the explosive creativity of the past two decades.

Nonetheless, and paradoxically, the ISPs have voluntarily accepted many common-carrier-like obligations. They do not discriminate among users; differences in price are based on differences in service; they happily accept all comers; they do not try to extend their power into related businesses; they have not engaged in price discrimination targeted at extracting the producers’ surplus from complementary services; network management has been directed at improving the overall network rather than favoring particular applications.

This is all good stuff, but these common-carrier-like business policies forego the benefits that could be obtained from tailored services of the type provided by a contract carrier. A leading example is Apple, which tightly controls all aspect of the iPod, the iPhone, and the iPad, and is loved by customers precisely because of the totality of its control and the resultant quality of the overall service.

The situation has led to another paradox. The more it has become apparent that there would be benefits from having ISPs act with the freedom of contract carriers rather than under the constraints governing common carriers, the more fearful the tech world has become that these are mutually exclusive and that any increase on the contract carrier side must come at the expense of the common carrier function.

Much of the fear makes no sense whatsoever. As George Ou pointed out in The three extreme forms of Net Neutrality, some forms of net neutrality would deny the carriers the power to engage in network management practices that are vital to performance of the common carrier functions, or would outlaw different charges for different services. (Not even the most obtuse medieval king thought that engaging in the “common calling” of blacksmithing required the farrier to shoe all four hooves for the same price as one.)

However, some of the concern cannot be dismissed, in that firms that are investing in web businesses or in apps construction or in digital commerce want some assurance that the expectations on which they base their plans will not be frustrated.

So the essence of the proposal is that Verizon, as an ISP, is committing to the maintenance of a base level of common-carrier-like Internet services. The exact nature of this cannot really be specified, since it is a target that moves with technology, but Verizon is saying that it will indeed ensure that something like the current structure of the Internet continues.

In addition, Verizon will also be free to put together contract carriage services, of a nature as yet unspecified, since this concept is also a moving target. Obviously, some of these may be superior to the common carriage services on offer, in the same way that contract trucks can beat common carriage. But those who rely on the common carriage can count on its remaining on the menu.

It looks like a good solution to me. There is no reason that those who want to rely on the ISPs as common carriers should have a right to cripple alternative models, any more than Apple’s competitors have a right to cripple its business model. The more options available to both producers and consumers the better, and let each model pursue its own arete, its own particular excellence.

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