The Voguish Dangers of Net Neutrality

 

The idea of net neutrality is subject to many nuanced interpretations, but at its core it holds that access to the internet should be on equal terms for all comers, under a policy that does not allow the operators of any particular site to give preferential access to those who are willing to pay higher fees for their service.  One implication of this vision is offered on the Harmony Institute in its publication Net Neutrality for the Win, which offers this utopian vision of the future, which embraces:

an Internet that allows users to load an infinite number of Web pages and grants developers the freedom to create sites and services regardless of their content, source, or user.

Predictably, the few dominant telecommunications companies providing Internet access to Americans today would like to capitalize off of their relationship with users and businesses. Companies such as AT&T, Comcast, Time Warner Cable, and Verizon see an opportunity to become the gatekeepers of Internet content by reserving faster, more preferential space for their own sites, and taxing other Web site owners who would like to continue to see their content reach Internet users.

To see what is wrong with the basic vision of net neutrality it is critical to ask this question:  What is the best way to optimize the overall operation of the internet?  That question in turn requires the integration of two tasks.  The first is the creation of the pipes that allows information to travel.  The second is the movement of the information in question.

The first critical error in the Harmony way of thinking is that it assumes that the only social problem is how to optimize the use of the Internet on the assumption that the pipes for transmission have already been built.  That question will always receive the wrong answer if the operating assumption is that the ideal mix allows any user “to load an infinite number of Web pages.”  So long as there is a finite capacity this becomes a model for letting one person, or a very few Internet hogs gain a disproportionate level of influence for which they pay only a tiny fraction of the price.  The only way that this model can work is to have a huge government subsidy to create internet space, which will have to be supported by tax revenues.

The very element that the Harmony people think is the bane of the Internet is in fact its salvation.  The prioritization of information flows is a necessary concomitant of scarcity.  There are few people who use Federal Express to send out generalized advertisements addressed to “resident.”  They reserve the fastest system for the most valuable information.  Just that should be done with the Internet, which is why zero pricing or equal pricing is just the wrong way to go.

The second critical error of the Harmony vision is that it assumes that some larger player exercises dominant power of the Internet.  But the situation here is quite different from that in ordinary public utilities, where a single supplier has a geographical monopoly. This so-called “natural monopolist” has its power not because it has been obtained by state charter, but because over the relevant levels of output a single producer with a heavy front-end investment is a cheaper source of supply than any two or more firms.

The mere fact that Harmony lists four dominant firms is proof positive that there is no dominant firm even if there are many large ones.  Since these firms are in competition with each other the usual assumptions for natural monopoly do not hold.  Any system of rate regulation is likely to be costly, and to make serious errors in pricing.  The huge administrative costs would calculate the bad incentive effects, producing larger social losses. The best policy is to let as many companies start up in different ways. 

The internet costs too much money to create to be free.  And its operation is too important to be left to the FCC, whose record of consistent failure in regulation starts with its control over radio in 1912 and continues to this present day.  The rise of an alternative technology is the best way to break the current FCC monopoly.  Unfortunately, the FCC knows that as well, which is why it won’t stay on the sideline.

There are 35 comments.

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  1. John Yoo Contributor

    If we should learn anything from the history of regulated industries, we should keep the government out of the business of choosing economic winners and losers. Especially during an industry’s infancy. Do we want the government choosing the internet version of Betamax instead of VHS? Or make the mistake, as the Japanese government did once upon a time, of telling Toyota not to try to export cars to the US market? Or of keeping AT&T as the sole telephone monopoly for decades? The internet is still young, it’s companies are still rising and falling, and it is foolish at this point for the government to intervene to bias the playing field one way or the other.

    Public choice theory predicts that what will happen is that in a dominant company will try to use the government to protect its position — which may be all too temporary, if market forces are left to operate freely. It will try to “capture” government bureaucrats to favor it, but at a cost to consumers that outweigh the benefits.

    In the interests of full disclosure, unlike Michael Corleone, I own more than just a few shares of ITT and some minor interests in casinos. I own shares of companies on both sides of this issue.

    • #1
    • December 21, 2010, at 4:47 AM PDT
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  2. Profile Photo Member

    My internet provider is Time Warner Cable, the same folks who own a movie studio, a TV network, magazines and a zillion other properties all being digitally optimized. I have no other choice for high speed provider — my local government awarded them the exclusive rights to our neighborhood years ago. In my situation, I need protection/regulation in order to assure that my ISP isn’t slowing down data packets from non TW content or distribution systems.

    For that reason, I don’t think the FedEx metaphor really applies here as everyone has access to FedEx as long as they are willing to pay. Many parts of the country have no choice in who their provider is and are at their mercy in terms of equal access to the entire internet. The only regulation I want is a rule that there can be no regulation of data until such a time where there are real choices in terms of internet providers.

    • #2
    • December 21, 2010, at 5:17 AM PDT
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  3. Rob Long Founder

    I’ll venture into this discussion fully aware that I’m outclassed by the law firm of Epstein & Yoo, a Professional Corporation.

    But I’ll only venture far enough to offer this real-world tidbit, and to ask Ricochet in-house counsel for their thoughts.

    First, a real-world example of why we don’t need this awful Net Neutrality business: Amazon’s phenomenally successful Kindle device delivers books wirelessly, over something they call the “Whispernet,” but what is actually Sprint, whom Amazon pays a little extra (presumably) to get premium packet-delivery service. In other words, exactly the arrangement that the FCC wants to outlaw.

    And now, a question: how mischievous (and disingenuous) can an administration be when it comes to regulations like this? What kinds of restraints (if any) can a congress put on the regulation factory?

    • #3
    • December 21, 2010, at 5:20 AM PDT
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  4. Profile Photo Member

    I’m no lawyer (and I don’t play one on TV either), but it seems to me that delivering books to Kindles is not an example of net neutrality — there is lots of competition in terms of national wireless data providers and Amazon simply made a deal with one of them to deliver their content. And Amazon actually pays far less than if you or I became Sprint customers as Amazon is only sending relatively small amounts of data on a very sporadic basis. There’s a reason why the browser on the Kindle is so lousy.

    • #4
    • December 21, 2010, at 5:33 AM PDT
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  5. nordman Inactive

    It’s a Trojan Horse if ever there was one.

    • #5
    • December 21, 2010, at 5:58 AM PDT
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  6. Maurilius Member
    John Yoo: If we should learn anything from the history of regulated industries, we should keep the government out of the business of choosing economic winners and losers.

    Exactly. We have no idea what services we cut off through such regulation.

    I’ve always thought about it like this: should it be illegal for an ISP to offer emergency-related services, in which only packets related to emergency services are allowed to take up bandwidth on the service and all others are rejected?

    Should it be illegal for airlines to have an industry-specific ISP that only allows airline related traffic?

    Should it be illegal for a “family friendly” ISP that assures parents the children will only have access to non-adult sites?

    Should ISPs be disallowed from preventing spam? (While they no doubt have spam-exceptions built into the law, the need for exceptions only proves the point.)

    I agree with Blue Yeti that competition is required for this to work, and I am fully supportive to striking down government-based IT monopolies where they exist.

    • #6
    • December 21, 2010, at 6:36 AM PDT
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  7. flownover Inactive

    Upon hearing that they may be able to de-porn the web, I am leaning toward putting a manhole cover on this reverse sewer that our children live on.

    • #7
    • December 21, 2010, at 7:25 AM PDT
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  8. Profile Photo Member
    Maurilius
    John Yoo: If we should learn anything from the history of regulated industries, we should keep the government out of the business of choosing economic winners and losers.
    Exactly. We have no idea what services we cut off through such regulation.

    […]

    Should ISPs be disallowed from preventing spam? (While they no doubt have spam-exceptions built into the law, the need for exceptions only proves the point.)

    I completely agree. It comes down to this: Net Neutrality is Obamacare for the web. For every genuinely negative thing Time Warner or another provider gets away with, there are half a dozen positive things the FCC would ruin – or prevent from happening altogether.

    I don’t expect private companies to be perfect, but I expect them to do leaps and bounds better than the government would.

    • #8
    • December 21, 2010, at 7:52 AM PDT
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  9. Rob Long Founder
    Blue Yeti: I’m no lawyer (and I don’t play one on TV either), but it seems to me that delivering books to Kindles is not an example of net neutrality — there is lots of competition in terms of national wireless data providers and Amazon simply made a deal with one of them to deliver their content. And Amazon actually pays far less than if you or I became Sprint customers as Amazon is only sending relatively small amounts of data on a very sporadic basis. There’s a reason why the browser on the Kindle is so lousy. · Dec 20 at 4:33pm

    Edited on Dec 20 at 04:47 pm

    But you’re making my argument, Yeti. Sprint charges Amazon less, because of competition, and delivers Kindle books faster than it delivers any other data. Even data to me, a Sprint customer. There’s nothing “neutral” about that. It’s differentiating between data delivery speed based on price, which, um, the FCC wants to stop, in the name of some regulatory nonsense.

    • #9
    • December 21, 2010, at 8:11 AM PDT
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  10. Rob Long Founder
    Blue Yeti: My internet provider is Time Warner Cable, the same folks who own a movie studio, a TV network, magazines and a zillion other properties all being digitally optimized. I have no other choice for high speed provider — my local government awarded them the exclusive rights to our neighborhood years ago. In my situation, I need protection/regulation in order to assure that my ISP isn’t slowing down data packets from non TW content or distribution systems.

    You don’t need regulation to protect you from something that isn’t happening, just because it might happen. Why not wait to see if the market will sort it out? Why the rush to regulate, which we know just ends up smothering innovation?

    And if the problem is monopolistic cable ISP providers in your area, why is the solution nationwide, DC-originating, bureaucratic, sweeping legislation? Why should my innovations be crushed just because you live in an area with no competition? When the Net is Neutered by Obama’s FCC, do you really think you’ll have more choices? Or will everything be frozen into place?

    • #10
    • December 21, 2010, at 8:16 AM PDT
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  11. Kennedy Smith Inactive

    I’m all in favor of putting the government in charge of something nobody complains about. It can’t help but serve us all better.

    The only argument in favor has been “there’s a big industry, and, and, it’s not regulated! Something must be done.” Which seems to rub against the zeitgeist.

    • #11
    • December 21, 2010, at 8:23 AM PDT
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  12. TomJedrz Member
    Rob Long
    Blue Yeti: … In my situation, I need protection/regulation in order to assure that my ISP isn’t slowing down data packets from non TW content or distribution systems.
    You don’t need regulation to protect you from something that isn’t happening, just because it might happen.

    And if the problem is monopolistic cable ISP providers in your area, why is the solution nationwide, DC-originating, bureaucratic, sweeping legislation? … · Dec 21 at 7:16am

    I haven’t made up my mind yet about the issue, Blue Yeti’s situation is far from hypothetical. In fact, it is clearly among the situations envisioned by the content providers who also own distribution. And frankly, the ISPs have been less than honest and forthcoming about informing users about how they manage traffic. They already enforce limits on “unlimited” accounts under the guise of “managing the network”.

    The lack of competition for consumer access is the single biggest reason to enact “net neutrality”. And it does need to be federally mandated to work, because that is the smallest jurisdiction that can come close to governing the internet. Look at how well state sales tax laws are working on the internet …

    • #12
    • December 21, 2010, at 8:37 AM PDT
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  13. Profile Photo Member

    From the AP:

    “FCC Chairman Julius Genachowski now has the three votes needed for approval, despite firm opposition from the two Republicans on the five-member commission. Genachowski’s two fellow Democrats said Monday they will vote for the rules, even though they consider them too weak.”

    I guess the question now is: how will we undo this nonsense?

    • #13
    • December 21, 2010, at 8:50 AM PDT
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  14. TomJedrz Member

    How about some analogies.

    1) What is we were talking “phone neutrality”? Would it be OK for the AT&T to intentionally limit call volume or call quality to Verizon customers? Would it be OK for Apple to intentionaly limit call volume or quality to Windows or Andriod phones?

    2) What if we were talking “tv neutrality”? Would it be OK for Comcast to limit (or reduce the image quality) of content produced by other companies viewed by it’s customers?

    As I noted earlier, I haven’t decided yet.

    • #14
    • December 21, 2010, at 8:52 AM PDT
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  15. TomJedrz Member

    One other thought. The foundational technology behind the internet is “messages”. Data (of all forms) is broken into pieces, and the pieces are placed into “packets” and send specifically and individually to another computer.

    Is there any real difference between an internet message (i.e. a packet) and a telephone call or letter? Are we OK that the ISPs may be allowed to look into the packet addressed to me and make decisions what to do with it based on what’s inside? Would we allow a phone company to listen to a phone conversation and drop a call that’s just gossip in favor of a call from that is something more “serious”?

    • #15
    • December 21, 2010, at 9:03 AM PDT
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  16. Misthiocracy grudgingly Member
    Blue Yeti: I have no other choice for high speed provider — my local government awarded them the exclusive rights to our neighborhood years ago.

    You don’t have a local phone company that provides high-speed internet access? That sure sounds like an illegal monopoly to me. But I’m no lawyer.

    Personally, I get my high-speed internet access at-cost from a non-profit ISP. They purchase the bandwidth from Bell Canada and then resell it, just like most other for-profit ISPs. If I don’t like it, I can switch to my local cable provider. There’s also a company that provides television and internet via a dish that points at the nearest microwave tower (rather than pointing at a satellite).

    It simply seems bizarre to me that I would have more choice in Soviet Canuckistan than an end-user in an American municipality.

    EDIT: Crap. I just read that the microwave-based company (www.look.ca) has gone out of business and sold its assets to Bell and the cable company. That hurts my argument a wee bit.

    • #16
    • December 21, 2010, at 9:09 AM PDT
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  17. Misthiocracy grudgingly Member

    Devil’s Advocate Mode = On

    On the other hand, Bell Canada Enterprises (BCE) runs both an Internet backbone (via Bell Nexxia) and an ISP for end-users (Bell Sympatico). It also owns newspapers, television and radio networks.

    Theoretically, Bell Nexxia could provide better bandwidth to its own ISP and its own content providers, at the risk of alienating the other ISPs to whom it sells wholesale bandwidth.

    ISPs could switch to another wholesaler, but Bell still owns the last bit of telephone cable that enters into a person’s home. As such, Bell could theoretically set up switches that throttle a competitor’s bandwidth at the final leg of a data packet’s journey.

    Devil’s Advocate Mode = Off

    None of this changes the fact that there are competing networks provided by the cable companies.

    Plus, as wireless data transmission gets better and better, the phone companies will start to see more competition from that side.

    • #17
    • December 21, 2010, at 9:27 AM PDT
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  18. Doug Scott Inactive

    “Net Neutrality” is purely a red herring to gain an obscenely endless stream of revenue and wrest political control of content.

    If the Internet is an information superhighway, all we have to do is look to the LA freeway system for guidance. LA’s freeways are overburdened, outdated, falling into decay, and the money collected from gasoline taxes and license fees are routinely diverted to other government coffers. And there’s nothing “neutral” about it. If I drive alone, I’m forbidden to use the carpool lanes. To say nothing about the Premium Service offered to those willing to pay for the Toll Roads. (Gee, shouldn’t everyone have a right to a free ride?)

    Without a whisper of government, the Internet’s capacity (wired and wireless) is expanding at an astounding rate. I still remember painfully logging on to AOL with that dialup screech, only to cringe as those dreaded “Downloading Artwork” messages flashed across the screen. Now, 3G isn’t good enough, 4G’s the rage. And it goes on….

    Private business will continue to expand infrastructure just as surely as Dell & Apple build ever faster computers. Simply put, “We don’t need no stinking government!”

    • #18
    • December 21, 2010, at 9:28 AM PDT
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  19. Kennedy Smith Inactive

    What do people think is being suppressed? 9/11 Truth (psst, it was the Jews, of course)? Birth certificates? Wikileaks? Porn? Handy bomb-making tips?

    I have yet to hear anyone (in the US) complain about insufficient choice.

    • #19
    • December 21, 2010, at 9:46 AM PDT
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  20. Andrew Alain Inactive

    Net neutrality fans seem to think that it is their right to have the Internet served to them just the way they want despite the fact that they neither built nor own any of the very costly infrastructure that brings them their bits. It isn’t your property! If we take a Soviet attitude towards the Internet then we’ll get to line up virtually for our packets just like the housewives in the worker’s paradise queued up for bread.

    • #20
    • December 21, 2010, at 10:21 AM PDT
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  21. Misthiocracy grudgingly Member
    Kennedy Smith: What do people think is being suppressed?

    Here’s the only verified example I’ve ever come across:

    In July 2005, while its union workers were striking, Telus blocked its subscribers access to ‘Voices for Change’ – a community website run by and for Telecommunications Workers Union (TWU) members. Telus claimed that the site suggested striking workers to jam Telus phone lines, and posted pictures of employees crossing the union picket lines.

    • #21
    • December 21, 2010, at 11:26 AM PDT
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  22. M1919A4 Member
    Today’s WSJournal reports that the new rules passed.They are rules that would for the first time give the federal government formal authority to regulate Internet traffic, although nobody knows how much or for how long is provided.

    The Commission was divided but approved the proposal by Chairman Genachowski to give the FCC power to prevent broadband providers from choosing what web traffic to limit or block.

    The rules will go into effect early next year.

    Challenge in the courts is likely and Congressional action may occur.

    • #22
    • December 21, 2010, at 11:52 AM PDT
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  23. Profile Photo Member
    Rob Long

    But you’re making my argument, Yeti. Sprint charges Amazon less, because of competition, and delivers Kindle books faster than it delivers any other data. Even data to me, a Sprint customer. There’s nothing “neutral” about that. It’s differentiating between data delivery speed based on price, which, um, the FCC wants to stop, in the name of some regulatory nonsense. · Dec 21 at 7:11am

    Sending small text files intermittently over a legacy 2G network (WhisperNet uses Sprint’s version of Edge) really can’t be compared to your 4G modem. 4G service isn’t even available yet in most of the country, and where is it available coverage is still spotty. It’s like comparing a rural two lane highway to an unfinished freeway. And the reason WhisperNet works so well is because it’s not used much for anything else these days. All of Sprint’s phones run on it’s 3G or 4G networks now. That’s the complete opposite of Net Neutrality.

    • #23
    • December 21, 2010, at 11:56 AM PDT
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  24. Jan-Michael Rives Inactive

    I’m interested to know how this ties into the notion of the importance of reasonable and non-discriminatory access to transportation networks for which Richard has so often argued. There is some analogy to be made there, no?

    • #24
    • December 21, 2010, at 12:24 PM PDT
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  25. Dan Hanson Thatcher

    The problem with such legislation is that it is designed for the internet as it exists today, and therefore will have unintended consequences when the structure of the internet changes (or attempts to change) based on changing technology or market conditions.

    For example, let’s say I develop a new application that creates a virtual 3D world for musicians using the Kinect Camera and MIDI instruments, allowing them to play as a group in real time. To enable this, I need my data to be transferred with extremely low latency. My packets have to be guaranteed to get to the users very fast.

    Unfortunately, all packets are equal by law. So the packet of data for a web page, which is not time-critical at the millisecond level like my packets are, gets the same priority. And since the law prevents the ISP from charging me extra for high-priority delivery, there’s no way for an ISP to profit from building out its network to support my needs. So my product stays dead, no one ever hears about it, and everyone thinks net neutrality is working great. No one sees the products and services lost because of the law.

    • #25
    • December 22, 2010, at 1:07 AM PDT
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  26. Dan Hanson Thatcher

    Here’s an analogy: Let’s assume that fifty years ago people were worried about the rich paying postal carriers to delivery high-priority mail faster than low-priority mail. So the government passes a law which says “Mail is mail”, and all must be delivered at the same rate, and that postal carriers are not allowed to provide higher-priority services for additional fees.

    Had such a law existed, Fred Smith would never have created Federal Express, even if mail delivery had been privatized, because the law prevented him from charging extra for overnight delivery. His business model would have been unprofitable.

    This would have been a terrible blow to the economy, but we would never have known about it. We would have gone on with our egalitarian, outdated mail delivery system, completely oblivious to the grand improvements we lost. We might even have come to believe that the law was a good idea, because the products and services left in the minds of dreamers and entrepreneurs have no way to demonstrate their value.

    • #26
    • December 22, 2010, at 1:15 AM PDT
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  27. Misthiocracy grudgingly Member
    Blue Yeti

    Verizon offers DSL service, but the speeds are much lower than what Time Warner offers. It’s not competitive at all.

    So the government should regulate Time Warner because Verizon offers an inferior product? Why couldn’t someone use the same logic to argue that the government should create regulations forcing Verizon to speed up its network?

    Correct me if I’m wrong about the argument you are making: Time Warner offers a higher-quality service than Verizon, which gives Time Warner an unfair advantage over Verizon, so the government should regulate Time Warner to ensure that they don’t reduce the quality of their service? If the quality of Time Warner’s service declines too far, consumers would then have an incentive to switch to Verizon!

    • #27
    • December 22, 2010, at 1:17 AM PDT
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  28. Midget Faded Rattlesnake Contributor
    Blue Yeti: My internet provider is Time Warner Cable, the same folks who own a movie studio, a TV network, magazines and a zillion other properties all being digitally optimized. I have no other choice for high speed provider — my local government awarded them the exclusive rights to our neighborhood years ago. In my situation, I need protection/regulation…

    No, what I’d say you need is for your local government-awarded monopoly to be dissolved. I’m not sure how this would be accomplished (I’m no lawyer) — But if it were possible to dissolve these government-awarded monopolies, wouldn’t the case for net neutrality become considerably weaker?

    Here’s a legal question I’d love to have answered by one of Ricochet’s Bright Legal Minds: Why does government go to so much trouble to acquire legal power to bust up monopolies, only to create other government-awarded monopolies?

    • #28
    • December 22, 2010, at 1:26 AM PDT
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  29. Robert E. Lee Member
    Andrew Alain: Net neutrality fans seem to think that it is their right to have the Internet served to them just the way they want despite the fact that they neither built nor own any of the very costly infrastructure that brings them their bits. It isn’t your property! If we take a Soviet attitude towards the Internet then we’ll get to line up virtually for our packets just like the housewives in the worker’s paradise queued up for bread. · Dec 20 at 9:21pm

    It was tax money, MY money, ripped from my wallet without my permission and used by the government, again without my permission, to invent the internet. It was my tax money filling in the gaps created by giving incentives to the industry to build the infrastructure to carry those internet packets. Wires strung following public roads built with my tax money. Run by an electrical system paid for by my taxes. So who really owns the net? Who’s property is it? Not the content, but the net itself? Forget the Soviets, the major providers already have us lining up begging for bandwidth.

    • #29
    • December 22, 2010, at 1:45 AM PDT
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  30. Midget Faded Rattlesnake Contributor
    Dan Hanson:

    …Unfortunately, all packets are equal by law. So the packet of data for a web page, which is not time-critical at the millisecond level like my packets are, gets the same priority. And since the law prevents the ISP from charging me extra for high-priority delivery, there’s no way for an ISP to profit from building out its network to support my needs. So my product stays dead, no one ever hears about it, and everyone thinks net neutrality is working great. No one sees the products and services lost because of the law.

    Excellent example.

    Similar arguments could be made about many aspects of scientific computing. People use grid computing to enable ordinary computers connected by the internet to do supercomputer work. A slower connection speed means slower supercomputing. If folks in a scientific supercomputing network want to pay extra to get higher priority, hence a faster supercomputer, why shouldn’t they be allowed to do this?

    Furthermore, if I’m OK with a poky connection, why shouldn’t I be allowed to get a discount for accepting a poky connection? It’s a mistake to assume everyone wants the same speed.

    • #30
    • December 22, 2010, at 1:47 AM PDT
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