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Local loop unbundling

24 Feb 2014

Local loop unbundling is common in Europe and is a way to ensure competition in the retail ISP market. It’s also a way to sidestep many of the issues surrounding net neutrality: if one ISP does something distasteful, you can just switch to another one.

The basic idea behind LLU is that you don’t have to buy Internet access from the same company that owns the wire (copper pair designed for phones or coaxial cable designed for television). For example, I might get Internet access through an independent ISP. They would then pay a monthly fee to Time Warner Cable, which owns the physical cable, and have some equipment in a TWC facility. My ISP would have a backbone that includes a connection to the TWC facility. If I am unsatisfied with my ISP, I could switch to a different one that services my neighborhood and has a deal with TWC.

TWC still has a monopoly on access to the cable (the local loop), so their rates might have to be regulated. This regulation is difficult in some countries where the local loop owner also operates a retail ISP business, because TWC might price their own Internet access offering too low compared to competitors because their own cost is much lower. You then need to come up with some scheme to come up with and mandate the “right” price for the local loop. An alternative could be to ban TWC from offering retail Internet access, and let them charge ISPs whatever they want.

If you think that monopoly rents are too low in an LLU scenario, you could set wholesale loop rates at a very high level, or even not regulate them at all (and ban the provider from providing retail services).

LLU can operate at different levels in the network. One method is to have the physical wire from my home terminate in equipment owned by my ISP. If I change ISPs, the other end of the wire would have to be physically or electrically switched to a different ISP’s equipment. That can become impractical as technology changes; for example, with AT&T U-verse, your wire terminates in a box on the street less than a few blocks away, and it’s not possible for lots of ISPs to all be present in every box. Instead, you would do the unbundling at different levels; bitstream access is a common way to do it for DSL type connections.

Mandating LLU for cable Internet access in the US would be a huge step and it’s not clear that the FCC has or wants the authority. It might also seem like an overreaction to what is, in the short term, a relatively minor problem. But if LLU had been implemented in the US a decade or more ago, we probably wouldn’t be in this mess.

The concept of LLU doesn’t just apply to telecommunications. In the US, FedEx and UPS operate shipping services where they move your package most of its way across the country, but then hand off to USPS for the last mile. SmartPost and MI happen to be among the crappiest shipping methods known to man, but that’s only weakly related to the fact that they hand off to USPS.

The motives of cable companies

24 Feb 2014

Tyler Cowen:

In a nutshell, the gatekeeper won’t want to exclude the programs which consumers really want.

Kevin Drum:

Comcast wants us to use the internet only in ways that don’t interfere with the money they make from bringing TV and other video streams into our homes.

Why Netflix paying ISPs is bad

23 Feb 2014

A few days ago we received the apparent good news that Comcast and Netflix are now exchanging traffic directly. Today, the Wall Street Journal reports that Netflix is paying Comcast for peering. This sets a disastrous precedent for the future of the Internet.

I’ve seen several attempts to explain why it’s bad that Netflix pays for Internet access. Some of them have been a bit unsatisfying. In one analogy I saw on Twitter that appears to have been withdrawn, it was compared to UPS opening up packages and delaying them based on the contents. But that’s not quite right: UPS already charges shippers extra for faster shipping, and they certainly won’t ship anything for free.

In the Netflix–Comcast deal, Netflix and Comcast entered into a peering arrangement. The way this works for high bandwidth content providers, Netflix is basically shipping streaming bits directly to the customer’s doorstep at multiple locations throughout the United States. A Comcast customer who watches House of Cards in Philadelphia will receive the stream from Netflix through a Comcast facility somewhere in the Northeast. (Comcast could, reasonably, require the stream to be delivered to a facility in Philadelphia.) Netflix has already paid to bring the video from their servers all the way to the nearest Comcast peering point.

The analogy I would use is that your apartment building charges Netflix to bring their red envelopes through the door. This is unfair because you’ve already paid for your mailbox and lobby (and maybe even a doorman) through your rent. Netflix should pay to bring the DVD to your doorstep, and they do. (I won’t consider the special case where USPS is your landlord.)

Your building should not get to charge shippers and delivery people extra: you don’t really have a choice of an alternative mailbox/lobby provider if you think their terms are unfair. And you already paid for this service.

You could always move to a different building. But guess what: every building in the neighborhood (or if you’re in a smaller town, the whole town) is owned by the same company.

Getting back to my earlier post on net neutrality, the problem isn’t so much that Netflix has to pay a little extra. It’ll add a bit to their costs, in the longer run they have to charge you a bit more, but a Netflix subscription is already cheap. The problem is that we lose a culture of permissionless innovation:

Anyone can buy Facebook ads (maybe BuzzFeed gets a better deal?), but the kind of access that Netflix can get by paying is only available to big, established companies who can get ISPs on the phone and get them to take meetings. Or who have the wherewithal to meet with every major residential ISP in the country (or the world, if they want to be global).

And who knows if Netflix could ever have become a big, established content provider if established players had been allowed to veto their growth at every stage. (This would be a lot more tolerable if the cable companies got out of the content business and become pure ISPs.)

There’s a growing trend of mood affiliation in favor of high and increasing monopoly rents in as many markets as possible. It’s true that in contestable markets, monopoly rents can provide an incentive to invest and to actually contest the market.

However, I see very few attempts to ask “how much?” and “how?” There are potential benefits to the existence of rents. There are costs too, in the form of reduced consumer surplus (you have to pay more), less innovation, and in the case of the Internet, the loss of permissionless innovation. Some methods of collecting rents are more harmful than others.

In the US, patent terms are 20 years from priority date; why not make it 30 years, or 40 years, or 120 years? I think the reason is obvious, but nobody ever thinks this way about ISP rents. Until the Netflix–Comcast deal, a limiting principle for rents accruing to an ISP was “you can screw the customer as much as you want, but you can’t screw the content provider”. No more.

Update: Changed the title to reflect the fact that this post is not written from Netflix’s point of view. Also, I should add that my description of peering reflects what Netflix is now paying Comcast to do, and what they do with other providers such as Cablevision on a settlement free basis, but does not describe how peering generally works. In particular, what I describe is the opposite of the “hot potato” routing in most peering agreements.

BuzzFeed Master Quiz: A proposal

15 Feb 2014

Everyone is buzzing about BuzzFeed quizzes. What font are you? Billionaire tycoon? Parks and Recreation character? Which US state do you belong in?

These quizzes ask you a bunch of sillyrelevant questions and ostensibly give you an answer based on them. Some of the questions are repetitive and are potentially relevant to multiple quizzes (assuming that they are relevant to any).

BuzzFeed should devise a Master Quiz that’s kept on file for each user. Whenever the geniuses at BuzzFeed come up with a new quiz, it might ask a few extra questions that are specific to that quiz, but will take into account the answers to the master quiz and all previous quizzes the user has taken.

As users take more and more quizzes, BuzzFeed will have a huge number of answers in its database, which they can use to improve the accuracy of quizzes. They could also send out email alerts telling users whether they are a hipster or what arbitrary thing they are without them answering a single additional question.

Bitcoin and stock clearing

07 Feb 2014

Quoth Felix:

A large part of the technology underpinning stock exchanges is the way in which they have to ensure that once you sell a share, you no longer own it, and you can’t sell it a second time. That’s also the technology which underpins bitcoin, except bitcoin transactions take many orders of magnitude more time to clear than stock transactions do.

There are two claims here. One is that stock exchanges enforce rules against “double selling” of stock. Others will be more qualified to comment on this, but my impression is that they don’t actually do this. Brokers do. That’s why brokers can some times lose track and let customers do things that aren’t really allowed. And that’s part of the reason why we have failures to deliver in the stock market.

The second claim is that Bitcoin transactions take much longer to clear than stock transactions. How long Bitcoin transactions take depends on how many confirmations (blocks in which the transaction appears) you wait for, and how much time passes between blocks. Bitcoin blocks come every 10 minutes. The convention used to be 6 confirmations for most transactions, but these days I think it’s closer to 3. With 3 confirmations, Bitcoin transactions will an average of 25 minutes to clear, after which the transaction is irrevocable.

In the United States, stock transactions take 3 business days to settle, which is when you hand over your cash and receive stock (or vice versa), and you can withdraw that cash or buy other stock with it. I know that “clearing” can technically mean something else—the netting of multilateral obligations between brokers—but I don’t think that happens much sooner than 3 business days after the trade.