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This paper is intended as an introduction to the debate on net neutrality and as a progress report on the growing body of academic literature on this issue. Different non-net neutrality scenarios are discussed and structured along the two dimensions of network and pricing regime. With this approach, the consensus on the benefits of a deviation from the status quo as well as the concerns that are unique to certain non-net neutrality scenarios can be identified. Moreover, a framework for policy decisions is derived and it is discussed how the concept of neutrality extends to other parts of the Internet ecosystem.
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Net neutrality: A progress report
Jan Kr¨
amer
n
, Lukas Wiewiorra, Christof Weinhardt
Karlsruhe Institute of Technology, Institute of Information Systems and Management, Englerstr. 14, 76131 Karlsruhe, Germany
article info
Available online 1 November 2012
Keywords:
Internet
Net neutrality
Quality of service
Pricing
abstract
This paper is intended as an introduction to the debate on net neutrality and as a progress
report on the growing body of academic literature on this issue. Different non-net neutrality
scenarios are discussed and structured along the two dimensions of network and pricing
regime. With this approach, the consensus on the benefits of a deviation from the status quo
as well as the concerns that are unique to certain non-net neutrality scenarios can be
identified. Moreover, a framework for policy decisions is derived and it is discussed how the
concept of neutrality extends to other parts of the Internet ecosystem.
&2012 Elsevier Ltd. All rights reserved.
1. Introduction
With the rapid development of the Internet as an ubiquitously available platform for information, entertainment and
communication, the role of network infrastructure owners has shifted to an essential gatekeeper position in the information
society. Therefore, the public and politicians alike are concerned about how Internet service provider (ISPs) are going to
monetize access and usage of the networks in the future. This discussion on the future of the Internet is known as the net
neutrality (NN) debate. It has many facets and many battlegrounds. Like many political debates it is much too often based on
historic, technical or economics myths rather than a close analysis of facts. This paper provides a survey of the most important
academic papers that have structured the debate in recent years. Even among these papers, a widespread set of believes is
found on top of which the academic analysis is conducted. Therefore, it is important to recapitulate some facts about the
history and architecture of the Internet first, in order to be able to understand what has caused the ongoing NN debate.
Internet is the abbreviation of the term internetwork, which describes the connection between computer networks all
around the world on the basis of the same set of communication protocols. At its start in the 1960s, the Internet was a
closed research network between just a few universities, intended to transmit text messages. The architectural design of
the Internet was guided by two fundamental design principles: Messages are fragmented into data packets that are routed
through the network autonomously (end-to-end principle) and as fast as possible (best-effort (BE) principle). This entails
that intermediate nodes, the so-called routers, do not differentiate packets based on their content or source. Rather,
routers maintain routing tables in which they store the next node that lies on the supposedly shortest path to the packet’s
destination address. However, as each router acts autonomously when deciding the path along which it sends a packet, no
router has end-to-end control over which path the packet is send from sender to receiver. Moreover, it is possible, even
likely, that packets from the same message flow may take different routes through the network. Packets are stored in a
router’s queue if they arrive at a faster rate than the rate at which the router can send out packets. If the router’s queue is
full, the package is deleted (dropped) and must be resent by the source node. Full router queues are the main reason for
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Telecommunications Policy
0308-5961/$ - see front matter &2012 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.telpol.2012.08.005
n
Corresponding author. Tel.: þ49 721 6084 8378; fax: þ49 721 6084 8399.
E-mail addresses: kraemer@kit.edu (J. Kr¨
amer), wiewiorra@kit.edu (L. Wiewiorra), weinhardt@kit.edu (C. Weinhardt).
Telecommunications Policy 37 (2013) 794–813
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congestion on the Internet. However, no matter how important a data packet may be, routers would always process their
queue according to the first-in-first-out principle.
These fundamental principles always were (and remain in thecontextoftheNNdebate)keyelementsoftheopenInternet
spirit. Essentially, they establish that all data packets sent to the network are treated equally and that no intermediate node can
exercise control over the network as a whole. In the context of the NN debate this has become known as a non-discrimination
rule (see, e.g., Schuett, 2010). However, this historic and romantic view of the Internet neglects that Quality of Service (QoS) has
always been an issue for the network of networks. Over and beyond the sending of mere text messages, there is a desire for
reliable transmission of information that is time critical (low latency), or for which it is desired that data packets are received at
asteadyrateandinaparticularorder(lowjitter).Voicecommunication, for example, requires both low latency and low jitter.
This desire for QoS was manifested in the architecture of the Internet as early as January 1, 1983, when the Internet was
switched over to the Transmission Control Protocol/Internet Protocol (TCPIP). In particular, the Internet protocol version 4
(IPv4), which constitutes the nuts and bolts of the Internet sincethen,alreadycontainsatypeofservice(TOS)fieldinitsheader
by which routers could prioritize packets in their queues and thereby establish QoS. However, a general agreement on how to
handle data with different TOS entries wasneverreachedandthustheTOSfieldwasnotusedaccordingly.Consequently,in
telecommunications engineering, research on new protocols and mechanisms to enable QoS in the Internet has spurred ever
since, long before the NN debate came to life. Among the more prominent examples are Frame Relay [RFC 3202], ATM [RFC
2386], DiffServ [RFC 2474] or Token Bucket [RFC 2698]. Also the current Internet protocol version 6 (IPv6), which was
standardized in 1998, contains header information on the traffic class as well as a flow label, which facilitates QoS for real-time
applications. In addition, data packets can even be differentiated solely based on what type of data they are carrying, without
the need for an explicit marking in the protocol header. This is possible by means of the so-called Deep Packet Inspection (DPI).
All of these features are currently deployed in the Internet, and many of them have been deployed for decades. The NN debate,
however, sometimes questions the existence and use of QoS mechanisms in the Internet and argues that the success of the
Internet was only possible due to the BE principle. While the vision of an Internet that is based purely on the BE principle is
certainly not true, some of these claims nevertheless deserve credit and will be discussed in detail.
Another far-reaching event was the steady commercializationoftheInternetinthe1990s.Ataboutthesametime,the
disruptive innovation of content visualization and linkage via the Hyper Text Markup Language (HTML), the so-called World
Wide Web (WWW) made the Internet a global success. Private firms began to heavily invest in backbone infrastructure and
commercial ISPs provided access to the Internet, at first predominately by dial up connections. The average data traffic per
household severely increased with the availability of broadband and rich media content (Bauer, Clark, & Lehr, 2009). According
to the Minnesota Internet Traffic Studies (Odlyzko, Hong, Pakanati, & Adhikari, 2012)InternettrafcintheUSisgrowing
annually by about 50%. The increase in network traffic is the consequence of the ongoing transition of the Internet to a
fundamental universal access technology. Media consumption using traditional platforms such as broadcasting and cable is
declining and content is instead consumed via the Internet. Today the commercial Internet ecosystem consists of several
players. Internet users (IUs) are connected to the network by their local access provider (ISP), while content and service
providers (CSPs) offer a wide range of applications and content to the mass of potential consumers. All of these actors are
spread around the world and interconnect with each other over the Internet’s backbone, which is under the control of an
oligopoly of big network providers (Economides, 2005). The Internet has become a trillion dollar industry (Pe
´lissie
´du Rausas
et al., 2011)andhasemergedfromamerenetwork of networks to the market of markets.MuchoftheNNdebateisdevotedto
the question whether the market for Internet access should be a free market, or whether it should be regulated in the sense that
some feasible revenue flows are to be prohibited.
This survey on the emerging NN literature is thus organized along the following two central questions of the debate:
How will different types of QoS management techniques and business models affect the Internet ecosystem? And which
types of revenue streams in the Internet, if any, should be prohibited? It can be said in advance that the present paper will
not conclude with a definite answer to these questions. Rather, the paper is meant as a progress report that summarizes
the arguments for and against different types of NN regulation and provides a policy guideline for the decision whether an
NN regulation should be adopted or not. Furthermore, the paper provides an outlook beyond the NN debate and discusses
how the concept of ‘neutrality’ could be adopted to other parts of the Internet ecosystem. In particular, it is likely that soon
other gatekeepers up and down the information value chain may be pushed to center stage when the debate concentrates
on issues like device neutrality (e.g., with Apple being the gatekeeper) or search neutrality (here, Google is the gatekeeper).
The remainder of this paper is structured as follows. In the next section, a working definition for NN as well as the
fundamentals of the NN debate are introduced. In Section 3 the different non-net neutrality (NNN) scenarios that have
been discussed in the literature are evaluated with respect to their opportunities and threats for the future of the Internet,
as well with respect to possible remedies that could alleviate these threats. Where appropriate, the current state of NN
regulation in different countries is summarized. In the light of these results, policy guidelines for NN regulation are derived
in Section 4. Thereafter, other forms of neutrality in the Internet ecosystem are considered in Section 5. Finally, the paper
concludes with a brief summary and open research questions.
2. Fundamentals of net neutrality
The term ‘net neutrality’ was coined by law professor Wu (2003), although the idea of Internet neutrality can be traced
back to the open access movement that was lead by Lawrence (Lessig, 2001, p. 168175). The debate on NN centers around
J. Kr¨
amer et al. / Telecommunications Policy 37 (2013) 794–813 795
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the potential consequences of network owners exercising additional control over the data traffic in their networks. In this
context, the meaning of ‘control’ is often ambiguous and can mean anything from blocking certain types of undesired or
unaffiliated traffic (Wu, 2007), to termination fees (Lee & Wu, 2009), to offering differentiated services and taking
measures of network management (Hahn & Wallsten, 2006). To date, there is no generally accepted definition of NN.
In this paper, a strict definition of NN is adopted that has, among others, been put forth by consumer rights groups:
1
Definition 1 (Strict net neutrality). Net neutrality prohibits Internet service providers from speeding up, slowing down or
blocking Internet traffic based on its source, ownership or destination.
As mentioned above, the techniques necessary to differentiate certain types of traffic are by and large already
implemented in the networks. However, what has caused the debate is that ISPs have implicitly and overtly signaled that
they intend to use these techniques to generate extra revenues. In this context, proponents of NN envision several
particular deviations from NN which, as they say, endanger the ‘openness’ of the Internet that has been instrumental for
generating innovations. In the remainder of this section, each concern and corresponding NNN scenario is considered
in turn:
2.1. Exercising market power in the customer access network
The debate was particularly stimulated in 2005 after a blunt statement by Ed Whitacre, at the time the Chief Executive
Officer of ATT, who said: ‘‘Now what [content providers] would like to do is use my pipes free, but I ain’t going to let them
do that because we have spent this capital and we have to have a return on it’’ (O’Connell, 2005). Similar statements have
been released by major European network operators since then (Lambert, 2010;Schneibel & Farivar, 2010).
To understand what the ISPs are implying here, consider Fig. 1. From an economic point of view ISPs are the operators
of a two-sided market platform (Armstrong, 2006;Hagiu, 2006;Rochet & Tirole, 2006) that connects the suppliers of
content and services (CSP) with the consumers (IUs) that demand these services. In a two-sided market, each side prefers
to have many partners on the other side of the market. Thus, CSPs prefer to have access to many IUs, because these create
advertisement revenues. Likewise IUs prefer the variety that is created by many CSPs. Suppose for a minute that there
would only be one ISP in the world which connects CSPs with IUs. This ISP would consider these cross-side externalities
and select a payment scheme for each side that maximizes its revenues. Instead of demanding the same payment from
both sides, the classic result is that the platform operator chooses a lower fee from the side that is valued the most. In this
vein, entry is stimulated and the added valuation can be monetized. There are several real world examples that
demonstrate this practice: Credit card companies levy fees on merchants, not customers. Dating platforms offer free
Fig. 1. Current (gray) and prospective (black) revenue streams in the Internet ecosystem.
1
See, e.g., Save the Internet (2012). There are also more fine grained definitions of NN, which, however, require additional insights that are yet to be
developed in this paper. For now, it is useful to adopt a definition of NN that is strict enough to encompass all possible concerns of NN proponents. Other
definitions will be presented later where they fit.
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amer et al. / Telecommunications Policy 37 (2013) 794–813796
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subscriptions to women, not men. Sometimes even a zero payment seems not enough to stimulate entry by the side that is
valued the most. Then, the platform operator may consider to pay for entry (e.g., offer free drinks to women in a club).
Such a two-sided pricing is currently not employed in the Internet. One of the reasons is that CSPs and IUs are usually
not connected to the same ISP, as depicted in Fig. 1. The core of the Internet comprised several ISPs that perform different
roles. More precisely, the core can be separated into (i) the customer access network: the physical connection to each
household, (ii) the backhaul network, which aggregates the traffic from all connected households of a single ISP and (iii) the
backbone network: the network that delivers the aggregated traffic from and to different ISPs. IUs are connected to a so-
called access ISP which provides them with general access to the Internet. In most cases, IUs are subscribed to only one
access ISP (known as single-homing) and cannot switch ISPs arbitrarily, either because they are bound by a long-term
contract, or because they simply do not have a choice of ISPs in the region where they live. Conversely CSPs are usually
subscribed to more than one backbone ISP (known as multi-homing), and sometimes, like in the case of Google, even
maintain their own backbone network. This limits the extent of market power that each backbone ISP can exercise on the
connected CSPs severely (Economides, 2005). The important message is that currently CSPs and IUs only pay the ISP
through which they connect to the Internet. Interconnection between the backbone and access ISPs is warranted by a set of
mutual agreements that are either based on bill-and-keep arrangements (peering) or volume-based tariffs (transit). In case
of transit, the access ISP has to pay the backbone ISP, and not the other way around.
Consequently, the IUs subscription fee is currently the main revenue source for access ISPs. Moreover, in many
countries customers predominantly pay flat fees for their access to the Internet, and thus they are not sensitive with
respect to how much traffic they are generating. Moreover, due to competition or fixed-mobile substitution, prices for
Internet access have dropped throughout the years. Currently, it seems unlikely that access ISPs can evade from this flat
rate trap. For example, in 2010 the big Canadian ISPs tried to return to a metered pricing scheme by imposing usage-based
billing on their wholesale products. As a consequence, smaller ISPs that rely on resale and wholesale products of the big
Canadian ISPs would not be able to offer real flat rates anymore. With the whole country in jeopardy to loose unlimited
Internet access, tremendous public protest arose and finally regulators decided to stop the larger telecommunications
providers from pursuing such plans (Openmedia, 2011).
At the same time Internet traffic has increased, a trend that is often created by an increasing number of quality
demanding services. One prominent example for this development is the company Netflix. Netflix offers video on demand
streaming of many TV shows and movies for a monthly subscription fee. According to Sandvine (2010, p. 14), already 20.6%
of all peak period bytes downloaded on fixed access networks in North America are due to Netflix. In total, approximately
45% of downstream traffic on North American fixed and mobile access networks is attributable to real-time entertainment
(Sandvine, 2010, p. 12).
In an effort to prepare for the exaflood
2
ISPs were and are forced to invest heavily in their networks.
3
Such investments
are always lumpy and thus periodically cause an overprovisioning of bandwidth, which, however, is soon filled up again
with new content. This is the vicious circle that network operators are trying to escape from. However, it is important to
emphasize that transportation network equipment providers like Cisco, Alcatel Lucent and Huawei are constantly
improving the efficiency of their products (e.g., by making use of new sophisticated multiplexing methods) such that the
costs per unit of bandwidth are decreasing. This partially offsets the costs that ISPs worry about.
In summary, ISPs claim that their investments in the network are hardly counter-balanced by new revenues from IUs.
In reverse, CSPs benefit from the increased bandwidth of the customer access networks, which enables them to offer even more
bandwidth demanding services, which in turn leads to a re-congestion of the network and a new need for infrastructure
investments.
In this context, it is clear what led Ed Whitacre to the above cited statement, and what he thinks access ISPs should do
about it: In the absence of additional profit prospects on the user side, access ISPs could generate extra revenue from CSPs,
who are in part causing the necessity for infrastructure investments, by exercising their market power on the installed
subscriber base in the sense of a two-sided market. CSPs have a high valuation for customers, consequently, the
terminating access ISP demands an extra fee (over and beyond the access fee to the backbone ISP they are connected to)
from the CSP for delivering its data to the IUs. This new revenue stream (the black arrows in Fig. 1) would clearly be
considered as a violation of NN according to the strict definition above, but also of less strict definitions. Hahn and
Wallsten (2006), for example, define NN as follows:
Definition 2 (Hahn and Wallsten, 2006). ‘‘Net neutrality usually means that broadband service providers charge consumers
only once for Internet access, do not favor one content provider over another, and do not charge content providers for sending
information over broadband lines to end users.’’
2
The term exaflood was introduced by Bret Swanson of the Discovery Institute in 2001. In Swanson and Gilder (2008) he draws the picture of the
presumably impending flood of exabytes (10
18
bytes) that is caused by increasing media consumption and will eventually lead to the congestive
breakdown of the Internet.
3
The largest share of the cost is due to the civil engineering that is necessary to upgrade the customer access network with fiber. In Europe, for
example, 60–80% of the overall investments costs into last mile fiber access network are due to civil works (Analysys Mason, 2008). Mobile operators, on
the other hand, are constrained by the limited availability of spectrum as well as by the increasing amount of electromagnetic interference that is caused
by a more widespread availability and usage of wireless services.
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amer et al. / Telecommunications Policy 37 (2013) 794–813 797
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When CSPs are charged extra, just to be able to transmit their data to the access ISP’s customers, but without any
additional benefits in return, then these payments are simply termination fees, which are common practice in the fixed
and mobile market for voice communications. In the remainder of this paper this deviation of NN is called the termination
fee model. The related academic literature is discussed in Section 3.3.
However, instead of blocking the traffic of those CSPs that do not pay the termination fee, ISPs may also offer CSPs faster
access lanes to its customers in return for an additional fee. Such a pay for priority arrangements seem less obtrusive, yet,
given a fixed amount of bandwidth, speeding up some CSPs‘ traffic will inevitably lead to a slowing down of those CSPs
that do not pay the priority fee. The introduction of pay for priority arrangements is probably the most controversial issue
of the NN debate, and consequently, many economic papers have been devoted to it. The authors denote this as the CSP
tiering model and discuss its implications in Section 3.4.
2.2. Applying traffic management
A second major concern of the NN movement addresses the ISPs’ possibility to apply traffic management techniques
(i.e., the technical possibilities to prioritize or degrade certain traffic flows) in order to distort downstream competition or
to limit undesired or unprofitable traffic. In this way, revenues can be generated by avoidance of opportunity cost. Two
scenarios are likely and have in fact already been subject to legal disputes.
First, with the availability of QoS techniques ISPs may be tempted to prioritize affiliated content or, conversely, to degrade or
block content that is harmful to the ISPs other revenue streams. This argument applies mostly to ISPs that are vertically
integrated with a large CSP (like in the case of Comcast and NBC Universal) or that originated from a telecommunications
company (like most DSL-based operators). The threat of abuse of market power by vertically integrated ISPs is a strong concern
in the United States (US) where cable, which tends to be vertically integrated more than telephone companies, served 54.9% of
the retail market in June 2011. Although this concernhasbeenarticulatedinacademicpapers(e.g.,van Schewick, 2007)no
actual case is known so far. By contrast, there exist several examples of ISPs that have blocked voice over IP (VoIP) traffic which
is in competition to their regular telephone service. The mostprominentexampleisthatofMadisonRiverCommunications,
which was subject to an investigation by the FCC in 2005 for exactly such practice. The case was settled under the old common
carrier powers of the FCC, which applied at that point in time to DSL service (c.f. FCC, 2011).
Some ISPs in Europe, especially those that offer mobile Internet access, currently prohibit VoIP traffic in their networks
by means of their terms and conditions, unless the IU pays extra for it.
Second, traffic management techniques may be used by the ISP to avoid or limit traffic that, in their view, generates nothing
but costs. Here, the most prominent example is that of Comcast, the largest cable company in the US, which was subject to
scrutiny by the FCC in 2008 because it had restricted the flow of peer-to-peer (P2P) traffic. The FCC issued a cease or desist order
against Comcast in 2008, which was overturned by the US Court of Appeals in 2010, because it was found that the FCC has failed
to tie its assertion of regulatory authority to an actual law enacted by Congress (McCullagh, 2010). P2P traffic usually accounts for
alargeshareofthetotaltrafcthatissentinthecustomeraccess network. However, because it is generated and consumed by
the end users, the ISPs can hardly monetize this traffic. It is therefore still a common, but since the Comcast case less pronounced
practice by ISPs around the world to ‘manage’ P2P and related traffic. For example, in 2010, Georg Merdian, director of the
infrastructure regulation devision of Kabel Deutschland, Germany’s largest cable company, said in an interview that the cable
network currently is sufficient for the data traffic generated by the customers, but ‘‘we anticipate we will soon have to use some
kind of management techniques’’ (O’Brien, 2010). Interestingly, Kabel Deutschland was already using traffic management
procedures on a large scale at the time Georg Merdian was interviewed. Table 1 reports the amount of DPI that is performed by
the largest German ISPs. The table was compiled using data from the Glasnost project (Dischinger et al., 2010), a research project
at the Max Planck Institute for Software Systems, which developed an online tool that enables IUs to check if their ISP is actually
interfering with their data transmissions. The table reports the number of performed DPI tests by voluntarily participating IUs
and the share of tests that showed indications of DPI interference by the respective ISP. They found that on average at least 10% of
users experienced degradation in P2P traffic and, contrary to the arguments of ISPs, throughout the day and not only at peak
times. Even higher numbers of DPI were observed by Mueller and Asghari (2012) for the US market.
Table 1
DPI of German ISPs based on Glasnost data in Q4/2009 (Source: Mueller et al., 2009).
Operators name Tests DPI (%)
Kabel Deutschland 250 39
Deutsche Telekom 205 3
Vodafone Germany 116 4
HanseNet Telekommunikation 112 7
Telefonica O2 Germany 50 2
Kabel BW 27 7
Unitymedia 26 4
NetCologne 18 11
Versatel Communications 18 6
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amer et al. / Telecommunications Policy 37 (2013) 794–813798
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Thus, traffic management constitutes the current status quo of the Internet. The implications of this status quo are
discussed in more detail in Section 3.1.
2.3. Offering differentiated Internet access
Finally, QoS techniques may also be employed to provide tiered Internet access to IUs (as opposed to CSP tiering), or to
manage the traffic of certain IUs (as opposed to certain protocols). Two scenarios, or combinations of these, are feasible.
First, light users could be offered limited access to the Internet in return for a discount to the current flat rate price for
unlimited access. This means that access to websites or services that are not included in the selected Internet access package
would be denied, or cost extra. At the same time, the cost for an unlimited Internet access is likely to increase, because it is no
longer cross-subsidized by the light users. This is not merely a vision, but has already been pursued in mobile communications,
where walled-garden Internet access, like iMode, was common a decade ago (Olla & Patel, 2002). However, with respect to
fixed-line Internet access, proponents of NN fear that such a practice may lead to a fragmentation of the Internet.
The second scenario would allow users to opt for different QoS classes when selecting their Internet access. Power users
could then, for example, choose between a BE flat rate or a QoS flat rate for Internet access, the latter of course at an
increased price. Likewise, it could be possible to buy QoS just for particular services (like VoIP) and to be otherwise content
with an BE access to the Internet. Particularly mobile communications providers envision to offer such practices. The
current mobile communications standard Long Term Evolution (LTE) allows exactly for such QoS requests on demand.
Some fixed-line ISPs already offer quality-tailored Internet access solutions. The British ISP Plusnet, for instance, offers
three service classes to its customers. To explain and justify this procedure the provider clarifies: ‘‘With traffic
management we can do lots of clever things to make sure everyone gets a good, fair online experience’’ (Plusnet, 2011).
Offering different QoS classes to users is commonly known as user tiering. According to the strict definition, it is a violation
of NN and thus also under scrutiny by some NN proponents. However, even strict NN activists would acknowledge that
some kind of differentiation in users’ Internet access can be useful. Currently, this differentiation is usually achieved by
offering Internet access with different bandwidths. Such a capacity-based discrimination is generally accepted by NN
proponents because no particular traffic is prioritized or degraded. Thus, it is in line with the strict definition of NN. This
paper will therefore focus on the case of user tiering which is believed to generate extra revenues for ISPS (denoted by the
additional black arrows in Fig. 1) and discussed in Section 3.5.
2.4. Content delivery networks
Finally, it is worth to draw attention to content distribution network (CDNs) which have, so far, not been the focus of
the NN debate. Classic CDNs like Akamai, Level3 and Limelight are paid by big CSPs to improve the Quality of Experience
(QoE) in a BE Internet. They achieve this by building additional infrastructure that bypasses congested routes on the public
Internet and by caching frequently downloaded content closer to respective customer access networks. Often, CDNs even
pay ISPS in order to be able to locate their servers directly in the ISP’s customer access network.
It is evident that the implications of CDNs are very similar to those of QoS mechanisms and, thus, they should be
mentioned here. CSPs are usually considered to be the primary proponents of NN and clearly, under a termination
fee model, all CSPs are definitely worse off. However, under CSP tiering this is not clear at all. As mentioned before,
CSPs generate revenues predominantly by advertisements. The advertisement revenues increase with the number of users
of a service. Therefore, the revenues of CSPs are obviously somehow related to the value and the performance of the
content or the services. If consumers experience a bad service quality due to congestion in the network they will probably
not visit this CSP again because they attribute the bad quality directly to the CSP. For this reason CSPs are eager to improve
their Quality of Experience (QoE) for the customer. QoE is not the same as QoS. This is exemplified by Fig. 2, which shows
that the QoE of a service is influenced by three major dimensions: (i) the CSP’s requirements with respect to QoS, (ii) the
Fig. 2. Quality of experience (inspired by Kilkki, 2008).
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amer et al. / Telecommunications Policy 37 (2013) 794–813 799
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actual QoS that is delivered by the network and (iii) the IUs’ preferences and expectations about the service experience.
In this framework, the QoS mechanisms that have been discussed above are only one possible means of achieving
QoE. Another possibility is to employ a CDN, and in the absence of global QoS standards, CDNs already are a very important
part of today’s Internet infrastructure. In Section 5 the role of CDNs in a ‘neutral’ Internet will therefore be discussed in
more detail.
3. Opportunities, concerns and remedies in possible non-net neutrality scenarios
To the best of the authors’ knowledge, there are only three notable papers which structure the NN debate and the related
literature. Schuett (2010) provided the first review that focuses narrowly on the presentation of the theoretical economic
literature. In particular, Schuett distinguishes between NN as a zero pricing rule and as a non-discrimination rule.Faulhaber
(2011) gives a more general introduction to the debate and also discusses the relevant literature that has emerged in the post
Schuett (2010)-era. He also analyzes the new FCC rules and draws the clear-cut conclusion that no evidence or academic result
would justify ex ante NN regulation. Similarly, Bauer (2007) identifies three possible governance structures that could deal with
potential NNN threats: Relying fully on anti-trust law, non-discrimination rules and full NN regulation. His policy implications
inspired parts of the structured policy decision process that is presented in Section 4.
This section presents a new framework to structure the NN debate that combines and extends previous approaches.
In particular, two general dimensions are identified that form all possible NNN scenarios. The scheme allows categorizing
the economic literature but can also accommodate contributions from the law and engineering domain. Especially in the
engineering domain network management and prioritization mechanisms were studied long before the NN debate
emerged.
From the previous discussion, it is obvious that (preferential) access to customers is the key to the NN debate.
The academic NN debate centers around the question whether the potential outcome of possible NNN scenarios
constitutes such a grave threat to the freedom of the Internet ecosystem and welfare, that ex ante NN regulation is
necessary and appropriate. Over the last years the question about neutrality in Internet access has therefore grown from a
mere dispute between policy makers and network owners to a debate about the potential pitfalls of ex ante regulation in
contrast to a laissez-faire approach with respect to the long term effects on innovation, content variety and network
investments. With this survey, the authors do not intend to engage in this policy debate. They rather evaluate possible
NNN scenarios on the basis of the extent literature by taking a normative stands that is based on maximizing welfare and
especially consumer’s surplus.
Their survey of the academic debate is structured along the NNN framework that is depicted in Fig. 3. NNN scenarios
can be categorized along two dimensions: The network regime and the pricing regime. The pricing regime denotes
whether an access ISP employs one-sided pricing (as is traditionally the case) or two-sided pricing (as described above).
The network regime refers to the QoS mechanisms and corresponding business models that are in place. Under strict NN,
which prohibits any prioritization or degradation of data flows, only capacity-based differentiation is allowed. This means
that CSPs or IUs may acquire Internet connections with different bandwidth, however, all data packets that are sent over
these connections are handled according to the BE principle, and thus, if the network becomes congested, they are all
equally worse off. In a managed network, QoS mechanisms are employed, e.g., to ensure QoE in the customer access
network. However, thereby no new revenue streams are generated for the access ISP. Finally, the network regime may
allow for pay for priority arrangements, such that CSPs or IUs can self-select whether and to what degree they prefer a
preferential treatment of their data packets. In this survey, as is also the case for the extant literature, it is assumed that
QoS can be acquired on a non-discriminatory basis, such that first-degree price discrimination, which would clearly be
anti-competitive, is ruled out.
The different NNN scenarios described in the previous section can be categorized along these two dimensions as shown
by Fig. 3. For example, the current status quo is constituted by a managed network with one-sided pricing. Consequently,
according to the strict definition of NN, this is already an NNN scenario. In the following, for each scenario of the NNN
framework, the opportunities, concerns and possible remedies to counteract these concerns that are unique to each
scenario (over and beyond the status quo) are discussed.
Fig. 3. Non-net neutrality framework.
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3.1. Status quo
As outlined before, prioritization mechanisms for data packets are by and large readily implemented in the network
infrastructure of access ISPs today. Based on these techniques the ISP can decide how to handle the identified data packets.
Without going into too much technical details, one can distinguish between two possible outcomes that are of the concern
to NN proponents: First, packets of certain applications, services or content are not delivered to the requesting customer
(blocking). Second, the experience while using or consuming certain applications, services or content is reduced, beyond
the level that would be achieved under BE (degradation).
Blocking is evidently the strongest form of interference. In the public NN debate it is often related to the fear that ISPs
may be in the position to limit the freedom of speech. ISPs could block access to politically controversial (but legal)
information, or shut down websites of unwanted organizations (e.g., the websites of labor associations to prevent an
assembly of workers Austen, 2005). Evidence of such practices is anecdotal, however, not at least because it evokes almost
certainly a loss of reputation for the ISPs. It seems obvious that such limitations of freedom of speech should be
addressable by constitutional law of the respective country. However, the authors are aware that there exist remarkable
differences in the legal basis for preserving free speech online, which they cannot discuss in detail here. Depending on the
country, there might be special circumstances that warrant a net neutrality law with respect to free online speech. For
continental Europe at least, Holznagel and N ¨
ußing (2011) conclude that the existing constitutional law already offers
sufficient protection in this regard.
On the contrary, the practice of degradation of certain protocols or traffic flows is commonplace. The cases of Madison River
Communications and Comcast, as well as the results of the Glasnost project provide ample evidence. However, the prioritization
of certain protocols and services (e.g., Internet Protocol television (IPTV)), which may be exercised by the ISP for justifiable
reasons (e.g., to ensure QoE) will inevitably also result in the degradation of non-prioritized traffic during peak times. ISPs have
the strongest incentive to prioritize those services that provide them with additional revenue streams.
The fine line between reasonable network management, which may be to the benefit of all consumers, and distortion of
downstream competition has particularly been discussed by legal scholars, and constituted the kick-off to the NN debate.
In his seminal paper, Wu (2003) discusses in detail the differences between necessary network management and harmful
degradation and proposes an NN law called Forbidding Broadband Discrimination. He emphasizes the right to reasonably
use the Internet connection, but also accounts for the necessity to ensure the quality of the Broadband service for the
better part of the customers. Yoo (2005), also a law professor, can be seen as his dogmatic counterpart. While Wu is
concerned with the gatekeeper position and anti competitive behavior of ISPs, Yoo highlights the efficiency gains of QoS
and the advantages of more intense infrastructure competition under differentiated services. In his view differentiation
facilitates the survival of more ISPs and therefore more alternatives in local Internet access exist. Both authors also differ in
their assessment about innovation in the Internet ecosystem. While Wu argues that innovation at the edge of the network
is more important and cannot be compensated by innovation in the core and new local access products, Yoo concludes that
the natural monopoly theory has led to the false premise that competition in the service layer is more important than
competition in the infrastructure layer. In his eyes NN is a matter between the big CSPs and big ISPs.
While Wu (2003) and Yoo (2005) focus on the aspect of traffic management, QoS and price discrimination, van Schewick
(2007) analyzes the incentive of ISPs to discriminate against unaffiliated CSPs of complementary products in detail. She
concludes that NN regulation is necessary to protect independent producers, but acknowledges that this does not come
without social costs. Van Schewick sees a direct trade-off between innovation at the network level (core) and innovation at the
application level (edge). In her analysis, the reduction of innovation incentives of a high number of potential innovators cannot
be compensated by the higher innovation of a few network providers. In addition, she reasons that centralized innovators, like
ISPs, cannot successfully replicate the innovative potentialofalargenumberofindependentdeveloperswiththeirown
services. In other words, she sees applications and services as themaindriveroftheInterneteconomyandthereforeinnovation
at the edge of the network is more important than innovation at the core. Consequently, she argues that the NN regulation is
needed to foster innovation. The paper has received much attention, however, at the same time its conclusion also seems to be
an assumption, namely that innovation at the edge is more important than innovation at the core. In addition, antitrust law
(i.e., ex post regulation in contrast to ex ante regulation) should already be able to deal with distortions of downstream
competition (see Section 4).
Remedies. In order to counteract these alleged threats of the status quo, two remedies seem particularly promising:
Transparency and competition.
One of the main concerns with network management is that it is intransparent to the public which network management
techniques are employed and which content is subject to it. Therefore, establishing transparency about the ISPs’ network
management practices could alleviate these concerns and empower users to make an informeddecisionwhentheychoosean
access ISP. Transparency can be established bottom-up or top-down. In the bottom-up approach, users are enabled to detect
whether their ISPs discriminates certain types of traffic. This is done by the Glasnost project, for example. The top-down
approach would require the ISPs to make their network management practices publicly available. This is currently not
(satisfactorily) done and would potentially require ex ante NNrules.TheusefulnessoftransparencyinthecontextofNNis
discussed in detail by Faulhaber (2010) and Sluijs, Schuett, and Henze (2010).Faulhaber (2010) emphasizes that information
has to be easily accessible and understandable to be helpful in the NN context. He draws a comparison to nutrition information
on groceries and claims that there has to be information available on the product, otherwise consumers incur unnecessary
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amer et al. / Telecommunications Policy 37 (2013) 794–813 801
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search costs. If the information is accessible, but complex and difficult to understand,theinformationdoesnothelpconsumers
to make a more informed decision. In addition, the information should be verifiable. In contrast to this qualitative approach,
Sluijs et al. (2010) use an economic laboratory experiment to study the impact of transparency. They simulate a market with
two ISPs and a potential customer base with human participantsandvarytheinformationaboutthedeliveredservicequality
available to the customers. Their most important result is that already a fraction of informed users can help the whole market
to achieve a welfare-superior outcome. This suggests that a fewinformedentities(e.g.,ITexpertswhopublishaconsumer
review) might be enough to ensure that all customers can make an informed choice when selecting their access ISP. This is
likely to discipline ISPs and to increase welfare.
The aspect of transparency is closely related to the aspect of competition between access ISPs. Transparency is
essentially useless if IUs cannot act upon it by choosing an alternative ISP. A sufficient level of competition, however, will
not materialize in many cases. In rural areas (especially in the US) often a maximum of two ISPs is available. Usually one of
them is the local telecommunications provider, while the other is the local cable company. Opponents of the NN regulation
argue that abuse of network management as well as other deviations from the status quo are unproblematic in the face of
competition. However, it is far from obvious that competition will alleviate the concerns of NN proponents. Wu (2007), for
example, analyzes the US mobile phone market with respect to NN and finds many examples of non neutral behavior (e.g.,
crippled products and degradation) although this market is considered as highly competitive. He explains the interplay of
competition and transparency as follows: ‘‘To say that competition can then be a reason not to examine industry practices
and mandate as much disclosure as possible is exactly backward. For it is such information that is necessary to make
competition work in the first place’’ (Wu, 2007, p. 423). Also Kocsis and Bijl (2007) argue that competition may not always
be beneficial in the context of NNN scenarios. They argue that termination fees and exclusive deals with CSPs can lead to
more horizontal differentiation of ISPs and consequently to higher mark-ups. This conversely would result in less intense
competition between the ISPs in the market.
Legislation and regulation. Since 2005, the Federal Communications Commission (FCC) has worked towards a
codification of principles that ensure the open and interconnected character of the Internet, a circumscription to avoid
the biased term NN. By and large, the FCC seeks to maintain the current status quo and has followed the views presented in
this section. In its final Report & Order from December 2010 the FCC adopted the following NN framework.
Definition 3 (FCC). ‘‘A person engaged in the provision of fixed broadband Internet access service, insofar as such person
is so engaged, shall[y]’’
1. Transparency
‘‘[y]publicly disclose accurate information regarding the network management practices, performance, and commer-
cial terms[y].’’(FCC, 2010, Section 54)
2. No Blocking
‘‘[y]not block lawful content, applications, services, or non-harmful devices, subject to reasonable network manage-
ment.’’(FCC, 2010, Section 63)
3. No Unreasonable Discrimination
‘[y]not unreasonable discriminate in transmitting lawful network traffic over a consumer’s broadband Internet access
service. ’’(FCC, 2010, Section 68)
4
The FCC acknowledges the usefulness of reasonable network management, but also concludes that pay for priority arrange-
ments would raise significant cause for concern (FCC, 2010, Section 76). Likewise, transparency and competition are considered
to be the main remedies to ensure NN. It is important to highlight that wireless network services are not subject to restrictions of
network management. The main reason for this differentiation lies in the alleged competition between wireless network
operators. Because the effect of competition is yet unclear, it will be interesting to see whether the FCC’s NN ruling, which took
effect on November 20, 2011, will lead to different developments of the fixed and wireless networks in the US.
3.2. Strict NN model
It should be clear by now that strict NN would imply taking astepbackwardsfromthecurrentstatusquooftheInternet
towards a network regime where any network management practice would be forbidden. Such regulated technical disarming
could lead to congestion problems in peak times, which could only be counteracted by overprovisioning of network capacity. In
any case, ISPs’ revenues would be reduced because business models that rely on managed services, like IPTV, could not be
reliably offered anymore. The likely result of this strict interpretation of NN would be that consumer prices for (full) Internet
access increase, or that the rate of investments in network infrastructure is reduced.
4
‘‘A network management practice is reasonable if it is appropriate and tailored to achieving a legitimate network management purpose, taking into
account the particular network architecture and technology of the broadband Internet access service’’ (FCC, 2010, Section 82). ‘‘Legitimate network
management purposes include: ensuring network security and integrity, including by addressing traffic that is harmful to the network; addressing traffic
that is unwanted by end users (including by premise operators), such as by providing services or capabilities consistent with an end user’s choices
regarding parental controls or security capabilities; and reducing or mitigating the effects of congestion on the network’’ (FCC, 2010, p. 17952).
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A related problem is that strict NN prohibits offering limited Internet access for a lower price. This could mean anything
from access to the ‘full’ Internet with lower priority in the backhaul of the ISP, to unhampered access to only a subset of
content or services for a lower price. This line of argumentation is also acknowledged by vice-president of the European
commission Neelie Kroes who said that ‘‘requiring operators to provide only ‘full internet’ could kill innovative new offers
[y] Even worse, it could mean higher prices for those consumers with more limited needs who were ready to accept a
cheaper, limited package’’ (Meyer, 2011).
3.3. Termination fee model
In this NNN scenario access ISPs understand themselves as two-sided market operators, connecting CSPs with the IUs
via their network. Under this regime, ISPs could use their monopoly over the last mile to charge the CSPs additional fees for
terminating their traffic to the installed customer base. Under the termination fee model these fees would accrue
independently of how a CSP’s data traffic is handled by the ISPs and thus they are merely an additional financial burden for
CSPs, without any immediate reward.
First, it is important to understand that the termination fee model, as well as all other NNN models discussed in this paper,
will generally pose the same concerns as the current status quo. In other words, if ISPs have an incentive to block or degrade
costly traffic flows or heavy users under a managed network regime, why should this incentive not prevail under any other
NNN scenario? The same logic applies to concerns about freedom of speech. If ISPs would indeed want to block disliked
websites, why should they do not so under another network regime?Finally,alsotheconcernsthatanintegratedISPabusesits
control over the network to artificially degrade or block rival content persist under all NNN scenarios. If ISPs indeed want to
pursue such goals, the network regime is not of importance to this matter, as long as the network technology offers the
possibility to differentiate data packets, which holds true for all scenarios except strict NN. Therefore, the discussion of the
status quo will not be repeated for each NNN model. Rather it is noted that these opportunities, concerns and remedies apply
more generally to all NNN scenarios. In the following, only new or unique issues of the NNN scenario in question are presented.
With respect to the termination fee model, and any other model of NNN that employs two-sided pricing, the main
concern of NN proponents is that the additional termination fee causes CSPs to cease or to be discouraged from ever
offering their services. It is therefore argued that two-sided pricing reduces innovation in the Internet.
Economides and T ˚
ag (2012) study the termination fee scenario in a formal two-sided market model, where CSPs pay a
lump-sum to connect to the IUs. The essential assumption in the model is that CSPs value an additional IU more than IUs
an additional CSP. The first working paper version of the paper was available in 2007 and many things changed in the
process of refining the model. The main finding in the published version of the paper is that IUs and ISPs are better off with
NNN. Regulators, who are often most concerned with consumer welfare, should therefore be considerate before imposing
mandatory NN. This result is a direct consequence of the above assumption and fully in line with the extant two-sided
market literature: The more consumers can be attracted, the more profit can be generated with additional fees on the CSP
side of the market. Consequently, consumers enjoy a lower subscription price as under NNN and ISPs are allowed to
extract additional revenues from the CSPs. This rebalancing of the tariff to IUs is known as the waterbed effect (Genakos &
Valletti, 2012). Under monopoly NN is only welfare enhancing if the differentiation between the consumers is relatively
high. In other words, this would mean that IUs have a very strong brand preference for a particular ISP compared to their
valuation of access to and content in the network. This is a very questionable case in the context of a homogeneous
product like Internet access. Therefore, in their model only CSPs would profit undoubtedly from NN regulation. Although
the results of the preliminary version of the paper supported the need for NN regulation, the results of the published
version are therefore rather tipped in favor of NNN. The authors themselves conclude that the welfare results are
ambiguous. Nevertheless, the published version remains to be written in a very NN orientated manner.
Njoroge, Ozdaglar, Stier-Moses, and Weintraub (2010) follow a similar approach but add the platform investment decision
and interconnection between two ISPs to the picture. Both platforms charge flat access charges to CSPs and IUs. Under NN the
platforms differentiate maximally resulting in a high and low quality platform. They show that welfare in their model is
generally higher in the NNN regime because the NNN regime leads to higher infrastructure investments by the low quality ISP.
In their model, the same argument as for the model of Economides and T ˚
ag (2012) holds true with respect to consumer surplus
and CSPs revenues. CSPs revenues increase through higher advertising revenues, overcompensating for the higher price for
access. Even though the welfare results in Njoroge et al. (2010) are unambiguously pro NN, it is interesting that the high quality
ISP prefers the NN regime. This is due to the fact that under the NNN regime the low quality ISP can catch up through
additional investments in the network infrastructure, resulting in fiercer competition and lower revenues.
Musacchio, Schwartz, and Walrand (2009) also incorporate investment costs into their model, but mainly add to the
debate by exploring the effect of multiple ISPs charging for access. The ISPs in their model are assumed to have regional
monopolies and are therefore not in direct competition with each other. Their interest is the price charging behavior in this
situation. The authors show that two-sided pricing is preferable if the ratio of advertising rates to price sensitivity is
extreme. However, otherwise a situation similar to the tragedy of the commons may arise in equilibrium. ISPs tend to
ignore their own negative effect of overcharging on the investments of the CSPs and consequently on the revenue of all
other ISPs. This negative effect becomes more prominent as the number of ISPs increases and therefore NN becomes more
attractive in this case.
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amer et al. / Telecommunications Policy 37 (2013) 794–813 803
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Hermalin and Katz (2007), mainly interested in studying product line restrictions, apply their model to the NN debate.
They analyze a monopolistic ISP which offers a menu of qualities (i.e., transmission classes with different QoS) to CSPs. In a
special case of their model, they also look into the enforcement of the zero-price rule for CSPs. They find that the ISP would
only produce one quality in this case, but that this quality would be even lower than the quality that would result from a
termination fee model. Thus, their findings are in favor of this NNN scenario.
Lee and Wu (2009) also discuss two-sided pricing, but argue in favor of a zero-price rule for CSPs for several reasons.
First, they highlight the important fact that all IU are potential future CSPs and that a zero-price rule ensures cheap market
entry. Moreover, a zero-price rule ensures that no one has to ask for permission to reach the installed base of ISPs.
In addition to that they make the point that access ISPs are actually already compensated for traffic by peering and transit
agreements. Because these contracts are negotiable and voluntarily, there is no reason why higher infrastructure costs
could not be supported by more favorable agreements. A zero-price rule would also eliminate costs, because two-sided
pricing makes new billing and accounting infrastructure for CSPs necessary and thereby introduces a new form of
transaction costs. The most striking argument in the paper deals with the potential fragmentation of the Internet
ecosystem. Interconnection will depend on the number of ISP and its agreements with CSPs, but given the number of ISPs
and CSPs worldwide it seems inevitable that IUs would have only access to a fraction of the CSPs they have today.
Yoo (2005) argues that the burden of proof that NNN is indeed worse than NN is on the side of those who want to
regulate. He therefore calls for a wait-and-see approach. In particular, Yoo (2005) doubts that the presumption that
bandwidth increases faster than demand is correct. In his opinion, overprovisioning is more likely to be welfare-inferior
than management or diversification of the network.
Remedies. In light of these many arguments for and against a termination fee model, the policy conclusion is not
obvious. However, it is the opinion of the authors that there exist remedies (besides the enforcement of strict NN) which
can alleviate most of the concerns of NN proponents (see Section 4).
One important piece of the puzzle seems to be the issue of price discrimination. With very few exceptions, there is
consensus among academics that price discrimination techniques which are not beneficial to the IU side of the market,
should also not be allowed on the CSP side of the market. This applies in particular to first degree price discrimination.
Therefore, even many opponents of NN vote for some kind of non-discriminatory surcharge rule in pricing. However,
different forms of non-discriminatory access are feasible. For instance, ISPs could charge all services using the same
protocol (e.g., Session Internet Protocol (SIP)) or that are in the same group of services (e.g., VoIP) the same fees for data
transportation, but services in another class (e.g., IPTV) a different price. Because services in the respective classes are not
in direct competition with each other, and because the quality expectations of consumers may differ between the two
types of services,
5
such a price discrimination could be considered as non discriminatory (Wyatt, 2010). Clearly, the most
undisputed price discrimination scheme would be to charge the same fee to all CSPs that want to connect to the network
of an access ISP. As long as ISPs would be allowed to engage in price discrimination (e.g., by auctioning off access as is
considered by Choi & Kim, 2010), financially strong CSPs have an indisputable advantage. Therefore, a non discriminatory
surcharge may be one regulatory tool to ensure a level playing field for all CSPs (that are in the same class of services).
Even a non discriminatory surcharge would not alleviate the problem that young start-up companies with a
constrained budget, but innovative ideas and services, may be excluded from entry. However, this is not solely a problem
that is related to NN. Start-ups have to raise money for all other aspects of their business (e.g., hardware, personnel), and
thus it is hard to believe that a great service may not make it to the Internet market just because of termination fees.
Nevertheless, one viable way to overcome such problems would be to enforce that promising companies are granted
access to the network free of charge.
6
NN proponents would counter that then somebody would have to judge the idea and
business plan of the start-up ex ante, possible denying support for ‘promising’ ideas. They would continue that the Internet
is only what it is because it did not have such gatekeepers. Therefore, another option could be to offer some kind of non-
discriminatory revenue sharing. Start-up companies could commit to pay a fixed share (for a limited time) of all potential
revenues to the ISP. This would not hinder access to the network for anyone, but allow the ISP to generate additional
revenues in the case the business idea becomes successful. This construct would allow all possible ideas to be introduced
to the market and fees are only imposed if the innovation becomes successful. Consequently, the key underlying question
is whether Internet start-ups should be treated differently than traditional start-ups.
3.4. CSP tiering model
Many critics of NN refer to the argument that the current BE Internet cannot be considered as ‘neutral’ since different
types of data and applications have different requirements for network quality. Consider for instance an application like
Skype.
7
If the network is congested, the resulting delay of data packages of the Skype service has a highly detrimental
effect on the usability of the service. In comparison, the detrimental effect on an email service is negligible. According to
this logic, congestion-sensitive services could be better off if they were allowed to pay for priority, whereas the detrimental
5
IUs usually expect more reliability and quality with real-time communication services than with streaming media, where buffering of data can
already account for temporary quality reduction due to network congestion.
6
Likewise, under a QoS regime, access to the priority lane could be granted free for a limited time.
7
Skype offers a VoIP service that allows free calls between all connected users.
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amer et al. / Telecommunications Policy 37 (2013) 794–813804
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effect of a worsening in congestion to the remaining BE class could be less severe, because only congestion-insensitive CSPs
remain in this class.
Although all pricing schemes that are compatible with two-sidedpricingarefeasible,themostrelevantscenarioforthisCSP
tiering model is that only the CSPs that opt for the priority lane have to pay extra. CSPs that remain in the BE class must not pay
additional termination fees. Hence, in contrast to the pure termination fee model, CSPs get priority in return for their payment
and thus the overall effect of CSP tiering on welfare is more likely to be positive than under the termination fee model.
However, CSP tiering also bears one additional risk compared to the termination fee scenario: If the ISP makes more
money from the sales of priority access, then it may have the incentive to artificially degrade the quality of the BE class in
order to force more CSPs into the costly priority lane. In effect, when the quality of the BE is such that all CSPs are required
to buy priority, the ISP would establish a termination fee model through the backdoor. This is known as the dirty road
fallacy in the context of the NN debate (Sidak & Teece, 2010).
The economic literature on QoS tiering on the CSP side is veryyoung,butmanypapershavebeenpublishedinrecentyears.
Many theoretical models rely on assumptions about the network industry, that may influence the results. First, there are
differences about the nature of Internet service quality. Some authors view data transportation quality as a complement to
quality of the delivered content, while others see it as substitutes. Jamison and Hauge (2008),forexample,focusonthisissue.
They assume that the current network capacity will increase with the introduction of CSP tiering, such that the transmission
quality of the BE class is not affected. In this special case, they find that CSP tiering has an beneficial effect on content variety.
This result is possible, because CSPs with a lower content value can now compensate by buying priority access.
Economides and Hermalin (in press) focus in their formal analysis on the so-called re-congestion effect, which describes
the assumption that those CSPs that are prioritized under a QoS tiering regime will receive even more consumer requests
(high value content) and thus generate more traffic than under NN, which in turn re-congests the network. This
assumption contrast this model to previous work by Hermalin and Katz (2007) and leads, by construction, to a welfare loss
under CSP tiering. In addition, much of the analysis is now based on the implicit assumption that content variety is
exogenous and equal under NN and CSP tiering. This leads to the result that NN is superior in the short-run. However, this
assumption neglects possible positive effects on content and service variety through the provision of higher quality that
would not be delivered under NN. In case the re-congestion effect is not too strong CSP tiering is the more efficient regime,
because it provides higher investment incentives (i.e., investments are not overcompensated by increase in demand).
Hermalin and Katz (2007),fromwhichaspecialcasehasbeendiscussedinthecontextoftheterminationfeemodel,rests
otherwise on the same principal modeling assumptions as Economides and Hermalin (in press).TheauthorsanalyzeCSPtiering
by a monopolistic ISP and also in a duopoly when the ISP is free to offer a menu of qualities (NNN) and when it is restricted to
offer one quality (NN). One obvious result of NN is that all CSPs with a lower valuation for quality are driven out of the market,
while CSPs with a high valuation for quality are suffering from the underprovisioning of quality. By contrast, under CSP tiering
there are some CSPs with a medium valuation for quality that are now receiving a better quality than under NN.
Cheng, Bandyopadhyay, and Guo (2011) and Choi and Kim (2010) were the first to employ a queuing model to formalize the
relationship between priority and BE traffic. This can be exemplified formally by means of the M=M=1queuingmodel
(Kleinrock, 1976). Essentially, the model assumes that there exists a single router in the Internet with an infinite queue (i.e., no
packets are dropped) and at which data packets arrive with rate
l
according to a Poisson process (i.e., each pair of consecutive
arrivals has an exponential distribution and each of these inter-arrival times is assumed to be independent of other inter-arrival
times). The router can handle the arriving data packets at rate
m
,whichcanbeinterpretedasthecapacityofthenetwork.Ina
BE Internet, at which the arriving data packets are handled by the router according to the first-in-first-out principle, the
classical result is that the average waiting time of a packet, which can be interpreted as the level of congestion in the network,
is w
NN
¼1=ð
m
$
l
Þ.However,nowconsideratieredsysteminwhichthedatapacketsofsomeCSPsarehandledwithpriority,
i.e., these packets are always enqueued ahead of the BE packets. Let xdenote the share of CSPs that have bought priority access,
then the waiting times are w
P
¼1=ð
m
$x
l
Þand w
BE
¼
m
=ð
m
$
l
Þw
P
for the priority and best-effort class, respectively. It is easy to
see that the relation w
P
ow
NN
ow
BE
holds, assuming an equal transmission capacity in both regimes and assuming that not all
CSPs buy priority access. Otherwise, when all CSPs are inthepriorityclass,themodeltriviallycollapsestow
P
¼w
NN
,which
amounts again to a termination fee model. Both papers investigate the effect of CSP tiering on competition among CSPs and on
the ISP’s investment incentives. In both models, which are strikingly similar, exactly two CSPs compete for customers that
dislike congestion and visit one of the two CSPs exclusively. CSPs can improve their competitive position by purchasing priority
access from a monopolistic ISP. This alleviates customers of the respective service from some of the network’s congestion. Choi
and Kim (2010),incontrasttoCheng et al. (2011),assumethattheISPsellspriorityaccesstoonlyoneofthetwoCSPs
exclusively in order to exclude a possible prisoners’ dilemma situation. More specifically, Cheng et al. (2011) find that when the
difference in profit margins between the two content providers is rather small, both will individually buy priority access. In this
situation, neither CSP gains an advantage and the price paid for priority access is forfeited. Therefore, Choi and Kim (2010)
make the restrictive assumption that the ISP will auction off the priority lane (discriminatory surcharge). As discussed before,
this can be considered as the worst casepricingscenarioforCSPtiering.Cheng et al. (2011) and Choi and Kim (2010) show for a
large range of parameters that the ISP’s incentive to invest in infrastructure is higher under NN, whereas CSP tiering is generally
welfare enhancing in the short run.
Kr¨
amer and Wiewiorra (in press) model the main arguments of the NN debate in a two-sided market framework with
network congestion sensitive CSPs and IUs on each side, respectively. The platform is controlled by a monopolistic ISP
offering CSPs prioritized access to its customers for a non discriminatory surcharge. The CSPs are not in direct competition
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to each other, but the model allows for entry of new CSPs and can therefore also account for the impact of CSP tiering on
content variety. CSP tiering functions as a means to allocate congestion away from the congestion sensitive and to the
congestion insensitive CSPs. Kr¨
amer and Wiewiorra (in press) find that CSP tiering may be the more efficient regime in the
short run. In the long run, it provides higher incentives for broadband investments, because the entry by new, congestion
sensitive CSPs creates additional demand for the priority service and consequently additional revenues for the ISP.
However, the long run welfare results depend on the distribution of congestion sensitivity on the CSP side of the market.
If the mass of congestion sensitive CSPs is very large, an effect that is similar to the re-congestion effect of Economides and
Hermalin (in press) can be observed. This shows how dependent the welfare results of formal models are with respect to
underlying assumptions about the development of Internet traffic.
Reggiani and Valletti (2012) extend this approach by adding a single big CSP (e.g., Google) to the picture. The big CSP
can offer different services simultaneously, while a continuum of small CSPs (‘the fringe’) can offer only a single service per
CSP. Reggiani and Valletti (2012) find that NN is likely to hinder investment at the core, but fosters innovation at the fringe.
Moreover, they show that the content variety of the big CSP is reduced. Like in Kr ¨
amer and Wiewiorra (in press), CSP
tiering leads to a better allocation of network resources and is consequently welfare enhancing. Nevertheless, CSP tiering
may eventually be more beneficial to the big players on the CSPs side of the Internet ecosystem.
It is still an open question how competition between access ISPs will affect the welfare implications of CSP tiering. To date
only two papers exist that consider the issue of ISP competition and NN in a formal model. Bourreau, Kourandi, and Valletti
(2012) extend the framework of Kr ¨
amer and Wiewiorra (in press) by allowing by competition between ISPs. Their results are
remarkably similar to those of Kr ¨
amer and Wiewiorra (in press),whichsuggeststhatcompetitionwillnotpushtheInternet
access market towards NN. A different outcome is obtained withrespecttotheISPssurplus,however.AlthougheachISPs
unilaterally prefers to introduce a CSP tiering regime, there might exist situations in which the ISPs do not benefit from this
deviation from NN, because competition is intensified. A similar result with respect to consumers’ surplus is obtained by Choi,
Jeon, and Kim (2011),whofocusontheinterconnectionagreement between competing ISPs in a static model of CSP tiering (i.e.,
without investments). They find that the competition for IUs is stronger under a CSP tiering regime if ISPs have some monopoly
power over the CSPs. In conclusion, this preliminary evidence suggests that, from a regulatory perspective, the case for CSP
tiering might even be strengthened if there exists competition between access ISPs.
Remedies. The general tone of the economic literature on CSP tiering is that this practice is likely to be welfare
enhancing if the dirt road fallacy can be avoided. In order to deal with this issue, regulators could implement a minimum
quality standard (MQS) policy that warrants a sufficient transmission quality to the BE class. However, under certain
circumstances, as Kr¨
amer and Wiewiorra (in press) show, an MQS could also be detrimental to welfare because it forces
the ISP to invest too much into the network (overprovisioning). Brennan (2011) argues in favor of an MQS and shows that
this regulatory tool may have far less negative impact than NN. It can mitigate not only QoS related concerns, but also
traffic management related concerns that relate to the artificial degradation of rival content or costly traffic flows.
However, he also notes that an MQS could also be abused by the industry. Incumbents could vote for a high quality
standard in order to foreclose the market for (low quality) entrants.
Legislation and regulation. In contrast to the FCC’s order (FCC, 2010), the current European legal framework on electronic
communications networks and services (specifically, EU Directive 2009/136/EC from November 25, 2009) has no general
objections against CSP tiering. However, it already takes precaution by allowing the national regulatory agencies to set a
minimum quality of service requirement (Article 22, 3) in order to prevent the degradation of service and the hindering or
slowing down of traffic over networks. In addition, the European framework contains similar rules to the FCC’s order with
respect to transparency and blocking. Beyond that, a specific NN law is currently only effective on two other countries.
First, Chile enacted an NN law in 2010, which was finally implemented in May 2011 (Art.24Ha/Ley 20.453). In its initially
proposed version, the law was considered to be the first implementation of strict NN in the world. However, the finally
adopted version of the law merely states that ISPs cannot arbitrarily block, interfere, discriminate, hinder or restrict the
use of the Internet. Thus, the law does not prevent a tiered system per se. In this respect the final law is in fact a
compromise between NN proponents and opponents, rather than a codification of strict NN. Second, the Netherlands
enacted an NN law in 2011 that forbids network operators to degrade certain applications or to charge extra fees from
customers. The law was suggested after the announcement of mobile network operators to charge extra for certain VoIP
and messaging applications. In contrast to the USA, where mobile markets are to some degree exempt from NN regulation,
the Dutch law specifically targets the mobile markets (O’Brien, 2011). The law became effective on May 8, 2012. Other
countries are currently considering whether to impose NN regulation and the body of European regulators (BEREC), issued
a series of discussion papers for consultation on the topic of net neutrality. Moreover, for example in Germany the
government commissioned a committee of inquiry (partially comprised by politicians and partially by experts) on
different issues of the digital economy, among which was also the issue of NN. In its final report, which is also intended as
guidance to the national regulatory authority, the committee did not come to a consensus with respect to CSP tiering.
However, similar to the FCC’s order, it acknowledges that reasonable network management is welfare-enhancing.
3.5. User tiering model
The strict definition of NN does not only apply to QoS tiering on the CSP side, but also to QoS tiering on the IU side.
Therefore IU tiering, i.e., when some IU pay for the prioritized transmission of their data packets, would also constitute a
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amer et al. / Telecommunications Policy 37 (2013) 794–813806
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violation of NN. However, IU tiering adheres to the current one-sided pricing paradigm of the Internet and thus no
additional fees are collected from CSPs. Therefore, one of the NN proponents’ main concerns, namely the negative effect of
NNN on innovation, does not hold here. Moreover, IU tiering is different from CSP tiering in that the users themselves
decide about which service is being prioritized or degraded. Therefore, the need for transparency and the fear that
downstream competition is distorted are lessened. Nevertheless, it should be clear that network management may be
exercised on top of IU tiering arrangements. Furthermore, it is obvious that upgrading some users will inevitably
downgrade others. Therefore, in general the same arguments as for CSP tiering and the status quo also apply here.
In a paper that preceded the NN debate, Reitman (1991) looks into endogenous quality differentiation in congested
markets. He distinguishes between impatient and patient consumers and finds that in an competitive equilibrium firms
will always choose prices and capacities to differentiate themselves from each other. With many firms in the market, all of
them are choosing the same level of capacity and differentiate each other solely by prices. This result is similar to the idea
of Paris Metro Pricing (see e.g. Chau, Wang, & Chiu, 2010). Until the mid 1980s the Paris Metro service was operated with
first and second class cars. The cars in both classes were absolutely identical, but first class tickets cost twice as much as
second class tickets. With respect to access ISPs, Paris Metro Pricing would mean that the available bandwidth is split up
in a portion for priority services and a portion for BE services. This has in fact been proposed by Odlyzko (1999).
The consequence of splitting up capacity and differentiating prices is that more revenue is generated compared to a single
network with two times the capacity.
In the spirit of Paris Metro Pricing, Schwartz, Shetty, and Walrand (2008) investigate the investment and capacity
division decision of competing ISPs. They find, that two service classes together are socially beneficial. Moreover, the
proportion of consumers that is worse off than with a single service class is decreasing in the number of ISPs in the market.
If there are only a few ISPs with market power, too much capacity would be provided for the premium service and thus a
larger share of consumers would be forced into this service class, resulting in a welfare loss. Therefore, the authors
conclude that capacity regulation (i.e., the assignment of a predefined share of capacity to the standard service), would be
welfare enhancing. This regulation would be similar to an MQS regulation. The authors assume that users could otherwise
boycott the transition to a new QoS regime. Ex ante MQS regulation can consequently build reputation for a QoS regime
and increases the probability that the transition to a new tiered system successfully takes place. With respect to the NN
debate, the authors interpret the current regime as a voluntary abandonment of QoS (i.e., the ISPs assign all capacity to one
service class).
Bandyopadhyay and Cheng (2006) study the effect of IU tiering in a theoretical model that incorporates queuing theory.
In their model, users are able to decide for preferential treatment of their data on the fly during an Internet session. They
find that this pricing scheme would increase the revenues of ISPs without significant costs to introduce the service.
Nevertheless, the authors identify a potential problem: The monopolistic ISP might want to serve only customers with a
high valuation for this service, excluding other customer groups. This could make regulatory intervention necessary if
Internet access is politically classified as an universal access technology.
Remedies. As mentioned above, IU tiering is currently only employed by very few ISPs. Therefore, it is interesting to ask
why ISPs lobby so intensely for the introduction of differentiated services on the CSP side, but still hesitate to offer
differentiated service to the IUs. Evidently, given the backup of the above academic papers and the less heated arguments
of NN proponents, IU tiering would be a much less scrutinized business strategy. For some observers of the NN debate, IU
tiering would not even be an issue of NN. For example, Tim Berners Lee, Director and Founder of the World Wide Web
Foundation, said once in an interview: ‘‘While we may pay for different service levels, e.g., we pay more for a higher
bandwidth, the important thing about the Net is that if we both pay for a certain level of service, then we can communicate
at that level no matter who we are. We pay to be able to connect to a certain bandwidth and that’s all we have to do. It’s up
to our ISPs to ensure that the interconnection is done. This is how it has always been done’’ (Powell, 2006, p. 3).
One potential reason for this puzzle might be that ISPs are afraid of the IUs reaction to such price discrimination (i.e.,
differentiated services). In particular, end users’ perception of fairness seems to play a very important role in this context.
In contrast to CSPs, the IUs’ perception of the fairness of pricing schemes is generally more prone to psychological and
social influence factors (Bolton, Warlop, & Alba, 2003). This effect becomes even more prevalent if the good is scarce and
has to be allocated between all users (Xia, Monroe, & Cox, 2004). Consequently, ISPs, who are in competition for IUs, are
reluctant to offer pricing schemes that trigger such emotions. In fact, the NN debate shows in an impressive way to what
size the complaint of Internet activists can grow.
4. Policy conclusions
The debate on net neutrality rests on two fundamental assumptions. First, the belief that Internet traffic will increase at
a rate which cannot be handled by the current technology and traffic management techniques and which will therefore
result in a severe and persistent congestion problem (exaflood). Second, the ISPs’ claim they cannot bear the costs for the
necessary network infrastructure investments without tapping additional revenue streams, yielding an NNN scenario.
If regulators deem that both assumptions are probably true, a switch to an NNN model should not be prohibited ex ante.
In fact, the previous survey of the academic literature has shown that deviations from NN are generally welfare enhancing
if the appropriate remedies are applied. In the spirit of (Jordan & Ghosh, 2009), Fig. 4 shows a flow chart that can guide
policy makers through the potential threats that are associated with the different NNN scenarios. The chart is clustered
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amer et al. / Telecommunications Policy 37 (2013) 794–813 807
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into those threats that are specific to a tiered QoS system (CSP tiering or IU tiering model), two-sided pricing (termination
fee model) or a managed network (status quo). For each threat, a remedy is suggested that can potentially deal with it. For
the sake of clearness, the authors have simplified the flow chart with respect to the binary nature of the decision whether a
remedy is considered to have solved the threat at hand or not. Of course, they acknowledge that in reality the conclusion
may be more fine grained and result in a ‘rather yes’ or ‘rather no’.
Fig. 4. Proposed net neutrality policy decision process.
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amer et al. / Telecommunications Policy 37 (2013) 794–813808
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The most prevalent concern in an NNN scenario that entails QoS tiering is the dirt road fallacy. It may be counteracted
by an appropriate MQS policy, as for example, foreseen in the current European regulatory framework. Only if this measure
is, for whatever reason, not considered to be suitable, a more specific NN is warranted.
The same logic applies to the concerns that are related to two-sided pricing. First, if ISPs engage in discriminatory
pricing, a non discriminatory surcharge could be demanded. Second, reduced innovation at the edge, which results from
the existence of positive termination fees that cannot be raised by smaller CSPs, could be alleviated by innovation funds
(venture capital) or revenue sharing agreements, as described in Section 3.4.
Third, there may be a threat of fragmentation of the Internet, which results from the concern that ISPs and CSPs cannot
reach an agreement on the payment of a termination fee. As Lee and Wu (2009) point out, this may be due to the ISP’s
desire to differentiate itself through exclusive content. A possible remedy, that is well known from the telecommunica-
tions industry, would be to instantiate interconnection obligations. Only if one of these measures fails to solve the problem
at hand, stricter NN seems justified.
The final set of concerns and remedies is related to practices that can already be employed by access ISPs in the current status
quo, i.e., in a managed network. Distortion of downstream competition (degradation of rival content, e.g., VoIP) can readily
be addressed ex post by antitrust law. Likewise, violations of freedom of speech could already be subject to constitutional
law. Furthermore, if an ISP engages in degradation of certain users, content or protocols due to cost considerations, a mix of
transparency obligations and competition is currently considered to be the right regulatory response. Again, only if these
measures cannot address the concerns adequately, stricter NN regulation should be taken into consideration.
In summary, it is evident that the case for strict net neutrality regulation is viable only if many, if not all of the proposed
remedies are believed to fail. Additionally, such regulationwouldonlybesupportedbytheassumptionthattheconjectured
congestion and investment problems are not real and that the prospective efficiency gains under NNN would not be realized.
In all other cases, it seems that policy makers have appropriateoptionsathand,mostofwhichconstituteundisputedlegal
or regulatory pillars (constitutional & antitrust law, interconnection), or which can be outsourced to the market, as in the case
of innovation funds and revenue sharing.
5. Outlook: neutrality in the internet ecosystem
In the end, the NN debate may only be the onset of a larger debate on neutrality in the Internet ecosystem. Renda (2010),for
example, points out that the Internet ecosystem is affected by competition up and down the Internet value chain, which exerts
pressure on the network layer by taking over revenue sources historically exploited by ISPs. In other words, while the NN
debate is currently focused on ISP as the gatekeepers of the customer access network, other gatekeepers of the information
society may soon enter center stage on otherformsofneutrality.ThisisexempliedbyFig. 5.
First, the concept of neutrality may be applied to content and services, i.e., upstream the network layer. Second,
neutrality may become an issue downstream the network layer, i.e., with respect to the devices through which end-users
access the network. Third, the NN debate may spill over to other players in the network layer, specifically CDNs. Each issue
is discussed in turn.
5.1. Net neutrality and CDNs
The role of CDNs has already been introduced in Section 2. In the context of the NN debate, the relationship between
CDNs and CSP tiering is obvious. CDNs are paid by CSPs in order to be able to provide QoE to IUs (see Fig. 2) and employ
Fig. 5. Neutrality in the Internet ecosystem.
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sophisticated mechanisms in order to circumvent congestion in the network. Thus, CDNs can be considered as a network
management technique. Nevertheless, from a technical perspective, it is arguable whether CDNs violate the strict
definition of NN because the data packets of CDNs are sent with BE, although not over the same paths as other traffic.
In any case, the fact remains that only big CSPs can afford to employ a CDN and thus, the same arguments with respect to
openness and insurance of fair competition between CSPs as in the case of CSP tiering apply (Wu & Yoo, 2007).
Interestingly, the NN debate seems to have bypassed CDNs, possibly because some proponents of NN view CDNs as less
harmful. This is mainly because the market for CDNs is considered to be competitive. Consequently, it is argued that CDNs
cannot be seen as gatekeepers for delivering quality in the public Internet.
However, the CDN market is dominated by Akamai, who invented this business and who has more than 60% market
share (Rice, 2010). In many cases this would be considered a dominant position by a regulatory authority. Therefore, large
CDNs should be considered as gatekeepers in the Internet economy. Moreover, in recent years access ISPs have begun to
cooperate with CDNs in order to increase the QoE for their customers or simply to reduce costs from transit (see, e.g.,
Rayburn, 2009). Latest with this development in mind, the differences between CDNs and access ISPs finally vanish.
5.2. Device neutrality
With the tremendous success of smart phones and tablet computers, mobile device manufacturers (such as Apple) and
owners of mobile operating systems (such as Google) are exerting more and more control over the content and services that are
consumed on this class of devices. In times when predominantly feature phones were sold, (mobile) network operators were in
control of the software and services that were preinstalled onthesubsidizeddevices.Thispowerstructurehaschanged
dramatically. More recently the network operators’ own affiliated services (e.g., SMS, MMS, video telephony) are steadily
replaced by applications that rely only on Internet connectivity, and not on special protocols that are under the network
operator’s control. Additionally, device manufacturers are opposing the demands of network owners to control the
technological capabilities of their handsets. According to Hahn, Litan, and Singer (2007, p.424),theseincludetherequirement
that the handset (i) must be sold by the operator (or its agent), (ii) cannot be used in a rival network, (iii) is free of call timers, or
(iv) provides limited or no connectivity to open access networks (e.g., Bluetooth or WiFi).
This development was again turned over by Apple. With the iPhone, Apple essentially took over full control over the
end user experience and software, including all wireless functionalities. Apple decides which software is allowed on their
devices, both indirectly (e.g., no support of flash media) as well as directly through its centralized approval process for the
AppStore. Thereby, Apple as well as other mobile operating systems providers (such as Google or Microsoft) are in the
position of a gatekeeper that controls the content and functionality of end-user devices. The similarity to NN is immediate
and thus, it is not surprising that this development is also of concern to some NN activists. For example, Wu (2007)
discusses related problems under the umbrella term ‘Wireless net neutrality’. In particular, he surveys extensively the
practices of mobile network operators by which they attempt to exert as much control over their network as possible (see
list above) and calls for regulation that would impose the right to connect any non-harmful device to the network
(‘Wireless Carterfone’). Moreover, Wu demands to regulate handset subsidies and to enact strict rules to prevent crippled
products, e.g., phones with disabled Bluetooth functionality. Wallsten (2007) responds to Wu (2007) paper with a short
note, because he thinks that many of his arguments are flawed, especially in the light that there is enough competition in
the mobile communications industry. Among others, he provides several counterexamples. Hahn et al. (2007), finally, call
for a more moderate approach with respect to wireless NN. They conclude with the somewhat tautological recommenda-
tion that regulatory intervention is only necessary if there is a definite market failure and if the proposed interventions
lead to a better outcome as the status quo. Nevertheless, wireless NN, or as it is called more intuitively here, device
neutrality, seems to be an issue that deserves more academic attention in the future.
5.3. Content and service neutrality
A similar line of argumentation may apply upstream the Internet value chain. Big CSPs, such as Google, certainly have
significant market power in the Internet ecosystem and may therefore also abuse their dominant position. A particular
concern addresses Google’s power to report search results in a non-neutral way. For many people, Google’s search engine
is the first place to go when they look for information in the WWW. However, it is not publicly known how Google’s
algorithm derives the order of the search results. Google has just revealed the set of measures that are taken into account,
but there is no information about how important a single measure is for the final ‘page rank’. This provides ample ground
for suspicion with respect to the neutrality (non-discrimination) of Google’s search results.
Odlyzko (2009), for example, argues that even the founders of Google, Sergey Brin and Larry Page, once thought that
advertisement funded search engines have an incentive to bias search results in favor of their paying advertisers.
The problem becomes even more evident if one considers other well known gatekeepers in the modern Internet ecosystem.
Social network providers (e.g., Facebook), for instance, own the information about the so-called social graph (the aggregate
information about all links of each participant of the social network with other participants of the network and the related
personal information). With this information search engines can personalize search results even more, based on personal
preferences, social affiliation and browsing history.
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In this context, Grimmelmann (2010, p. 438) analyzes eight principles for search neutrality: (1) Equality:Searchengines
should not differentiate between websites. (2) Objectivity:Therearecorrectsearchresultsandincorrectones,sosearchengines
should return only the correct ones. (3) Bias:Searchenginesshouldnotdistorttheinformationlandscape.(4)Traffic:Websites
that depend on a flow of visitors should not be cut off by search engines. (5) Relevance:Searchenginesshouldmaximizeusers
satisfaction with search results. (6) Self-interest:Searchenginesshouldnottradeontheirownaccount.(7)Transparency:Search
engines should disclose the algorithms they use to rank web pages. (8) Manipulation:Searchenginesshouldranksitesonly
according to general rules, rather than promotinganddemotingsitesonanindividualbasis.
Of course, each of the principles is disputable. However, it is also obvious that Google’s search results have a
tremendous impact on the success of a new CSP. Therefore, the debate on search neutrality is akin to that of net neutrality
and consequently, the same general concerns (e.g., with respect to manipulation or transparency) are addressed.
Interestingly, Grimmelmann (2010) finds that all of the above principles of search neutrality are inappropriate for any
possible form of regulation. However, he also comes to a conclusion that is similar to the herein proposed decision process
for NN regulation: ‘‘Just because search neutrality is incoherent, it doesn’t follow that search engines deserve a free pass
under antitrust, intellectual property, privacy, or other well-established bodies of law. Nor is search-specific legal oversight
out of the question. Search engines are capable of doing dastardly things[y]’’(Grimmelmann, 2010, p. 438).
6. Conclusions
The NN has received much attention by Internet enthusiasts, policy-makers and academics alike. However, much of the
public debate, and even some parts of the academic debate, were driven by emotionality, rather than facts. This paper is an
attempt to provide a comprehensive introduction as well as a survey of the academic state of the art on the issue of net
neutrality. In particular, the concerns, benefits and remedies of different NNN scenarios are discussed along a framework
that characterize these scenarios by the QoS regime and the pricing regime that is employed.
Irrespective of the regime, the majority of the papers that conduct an economic analysis find that strict NN regulation is
warranted only under very special circumstances. The main assumptions that drive pro NN results are that (i) innovation at the
edge is more important than innovation at the core (e.g., van Schewick, 2007), (ii) the introduction of QoS tiering will inevitably
lead to a re-congestion effect (e.g., Economides & Hermalin, in press)andthat(iii)CSPshavelessmarketpowerthanISPs.With
respect to the latter, the extant literature that models the Internet as a two-sided market has thus far ruled out that large CSPs
may also be the recipient of additional revenues in a termination fee model (e.g., Economides & T ˚
ag, 2012), because no access ISP
would be able to attract customers withoutaccesstotheseCSPs.Likewise,theeffectofcompetitionbetweenaccessISPsis
currently not sufficiently researched. First evidence suggests, however, that the results from monopoly considerations carry over
to a large extent. Moreover, the empirical evidence from the mobile communications industry, which is usually considered as
sufficiently competitive, also demonstrates that operators remain in the positiontoexertmarketpowerduetotheir(temporary)
termination monopoly over their current customers. Thus, there iscurrentlylittlereasontobelieve that sufficient competition
between access ISPs will warrant NN. Consequently, an exemption from NN obligations, if it is considered necessary in the first
place, for wireless networks based on the argument of competition does not seem to be justified. By contrast, the problem of
network congestion, which is one of the main drivers for a deviation from NN, is likely to be more pronounced in wireless
networks. In any case, the economics of NN should be the same for wireless and wired networks.
In conclusion, while there is consensus on some parts of the NN debate (e.g., allowing reasonable network management
Faulhaber, 2011), there is also still considerable disagreement that necessitates further research (e.g., with respect to the
effect of competition). In the future, it would also be desirable to see more empirical papers on the topic that could either
confirm or reject some of the assumptions that drive the results of the analytical models. Finally, it is also likely that the
debate on neutrality will intensify in the future, extending to related topics such as content and service neutrality as well
as device neutrality. However, with respect to many of the underlying questions, society will have to acknowledge that the
Internet ‘‘is evolving to permit more sophisticated forms of pricing and cost recovery, a perhaps painful requirement in this
commercial world’’ (Leiner et al., 2011).
Acknowledgments
The authors would like to thank the editors Erik Bohlin and Johannes M. Bauer, as well as two anonymous referees
and participants of the 2012 ITS Regional European Conference for valuable comments.
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Full-text available
Preprint
This paper analyzes whether repealing net neutrality (NN) improves ordecreases the capacity of a regulator to make internet service providers(ISPs) extend broadband coverage through universal service obligations(USOs). We model a two-sided market where a monopolistic ISP links contentproviders (CPs) to end users with a broadband network of a given bandwidth.A regulator determines whether to submit the ISP to NN or to allow it tosupply paid priority (P) services to CPs. She can also impose a broadbandUSO to the ISP, i.e. she can mandate the broadband market coverage. We show that the greater is the network bandwidth, the more likely the repeal of netneutrality increases ISP profits and social welfare. Regulation can still benecessary, however, as there are bandwidth ranges for which the ISP wouldbenefit from a repeal of NN while such a repeal is detrimental to society. JEL: D21, K23, L12, L51, L96
... Most countries impose two types of regulation on Internet Service Providers (ISPs): Net Neutrality (NN) and Universal Service Obligations (USOs). The first prohibits ISPs from "speeding up, slowing down or blocking Internet traffic based on its source, ownership or destination" (Kramer et al. [21]). It aims to promote investment, innovation and competition among content providers (CPs) and more generally, to ensure free speech (Katz [20]). ...
... Although this is in line with seminal papers on universal services, such as Anton et al. [1] and Valletti et al. [32], the question of the choice of the funding mechanism and its impact on the ISP behavior has quickly become a central theme in the literature. 21 In this section, we take into account the possibility that the optimal USO coverage brings a deficit to the ISP so that there exists an ISP participation constraint that can be tight. We consider first the case where no compensation mechanism exists. ...
... 22 Note, however, that we analyze the case where funds 20 Note that even in the range (µR,μu), where welfare is higher under TMR than under USO, USO nevertheless bring a coverage n P * that is higher than the coverage n N I that is brought about by the regulator's choice of net neutrality under TMR. 21 Seminal contributions on the subject are Chone et al. [13], [14]. 22 Chone et al [14], p. 1249. ...
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Conference Paper
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Chapter
The introductory chapter starts by referring to three topical examples of transformations in higher education that can be observed from a geopolitical perspective and, thus, provide a thematic entry point for the theme of the Volume: how at various levels – supranational, national, local, but also at the level of the firms or individuals – a premium has been placed on knowledge and knowledge generation activities and have been made centerpiece in imaginations of the future, in social, political and economic terms. Innovation, science capacity and education – representing the main missions of Higher Education – thus are reckoned key to succeeding in global economic competition. The Introduction discusses a geopolitical perspective on the transformations in higher education adopted in the chapters collected in this book, also relating the topic to adjacent debates in higher education research. Finally, the introduction provides a brief overview over the chapters of the book.
... Back to the problem of censorship, in the Internet in particular, we need to define what we mean by Net Neutrality. The debate over net neutrality originated in the capitalist world when Internet Service Providers (ISPs) started joggling new business strategies to generate income, for instance, pay-to-access the Internet, section or the whole, and pay-for-content (Krämer et al., 2013). Net neutrality is a multifaceted discourse in defense for the Internet to remain accessible, open and free to the public. ...
Chapter
The chapter argues that higher education is now part of a New geopolitics of knowledge that refers to the integration of higher education in the imaginations and calculations of different actors aiming at asserting and/or improving their positions in the global knowledge-based economy. This integration, the chapter argues, not only prompts a (re-)imagination of the future of HE in terms of serving knowledge-intensive capitalism, but also reshapes and transforms HE missions and infrastructures. The chapter starts by, first, introducing a geopolitical perspective that, it is argued, can help us understand and deliberate on the implications of current developments shaping higher education. Here the theme of geopolitics is unfolded and two different strands of the debate about a (new) geopolitics of knowledge discussed that offer a conceptual perspective for assessing the relevance and implications of current developments. Second, in taking a global perspective, the chapter presents two distinct sets of contexts that shape contemporary transformations in higher education. To start with, the integration of higher education in global regionalism projects is examined in terms of the relevance of these policy contexts as a background for developments in the field; in what follows, we look into the emerging Global Education Industry that also serves as an influential shaper of higher education transformations. In a third section, the chapter discusses examples of how current transformations in higher education can be better grasped by adopting a geopolitical lens. The section considers the creation of international education hubs by states aspiring to improve their position in global economic circuits; and it discusses the placelessness of the (imagined) future of higher education by examining a current project that aims at disrupting the future of higher education: the Minerva Project.
Chapter
Geopolitics of Knowledge (GPK) is real and of highest relevance because of the social imagery and discourse of knowledge-based societies and the Baconian insight of knowledge as power. Ensuing interplay of powers would inextricably bring about phenomenological relations of master-slave (Hegel) surrounding knowledge. This chapter discusses about the nature and dynamics of GPK today. Two dimensions of GPK are articulated: Knowledge-production and Knowledge-transfer/exchange. Drawing on post-colonial theories, it is argued that the problematization of GPK has mainly been focused on knowledge production such as how politically sensitive knowledge is generated. This chapter further contends that, for contemporary GPK, knowledge transfer/exchange is more intriguing and crucial than its production.
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At the heart of the network neutrality debate is a challenging institutional design problem: the selection of a regime to govern the relations between the stakeholders in the complex value net of advanced communication services, most importantly between platform operators and providers of applications and content. How it is resolved will have far-reaching effects on the future evolution of communication industries. A wide spectrum of arrangements to structure these relations is possible, ranging from a minimally restrictive antitrust approach to highly constraining rules and regulations in a framework of full regulation. Based on a stylized model, the paper examines the innovation incentives of platform operators and content providers in next-generation networks under three scenarios: (1) absence of network neutrality rules, (2) various non-discrimination rules, and (3) full regulation. The discussion reveals that no panacea exists to address the potential problems raised by the network neutrality debate. Alternative specifications of rules will result in different innovation trajectories at the platform and content layers and the system overall. Given the lack of knowledge and the high degree of uncertainty, a strategy of monitoring, combined with a willingness and authorization to intervene if a pattern of abuse becomes visible, seems to be the most appropriate immediate step forward.
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We analyze the effect of net neutrality regulation in a two-sided market framework when content is heterogeneous in its sensitivity to delivery quality. We characterize the equilibrium in a neutral network constrained to offer the same quality vis-à-vis a nonneutral network where Internet service providers are allowed to engage in second-degree price discrimination with a menu of quality-price pairs. We find that the merit of net neutrality regulation depends crucially on content providers' business models. More generally, our analysis can be considered a contribution to the literature on second-degree price discrimination in two-sided platform markets.
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