Antone Gonsalves in the InternetWeek newsletter commented recently about Verizon CEO Ivan Seidenberg's keynote at CES, in which Seidenberg joined AT&T's CEO Ed Whitacre in calling for content providers such as Google to pay the telcos for "use of their pipes" as if the fees they collect from their subscribers were not enough. While Gonsalves on his blog says he's neutral on the topic, he seems to have adopted some of the telco's language with statements such as:
Google, Yahoo and others are building multi-billion-dollar businesses on the Web with out paying a dime to operate the networks that feed their moneymaking services to consumers.
I think this is a mistatement of how the Internet is financed. Here's what I wrote in response:
I agree with you that the Internet is too important to let a handful of companies control what applications and content get delivered, but disagree that Google and Yahoo are not “paying a dime” for operating the networks. Companies that deliver content pay substantial sums for their connection to their ISPs. A portion of those fees go to support the Internet backbone, just as do a portion of the fees paid by Verizon’s subscribers. In addition, the largest content providers, such as Google, operate their own worldwide networks, carrying the data most of the distance before it is handed off to Verizon for delivery over the “last mile.” This system has worked successfully for years, with the content provided by companies such as Google and Yahoo providing the incentive for consumers to pay Verizon for broadband connections.
What has changed is that Verizon’s and SBC’s stockholders are worried that the profit margins of providing a “dumb pipe” are less than what they used to make selling local and long distance phone service, and their stock prices have been declining. Therefore the phone companies are looking for new, higher-margin businesses. There are two avenues they seem to be considering. One is to become content providers themselves. If they do that, they can enhance their competitive position by giving their packets priority over those provided by their competitors. The other is to force their competitors to pay them “protection money” to ensure that their packets will get equal treatment. You can see this at work already with Verizon’s FIOS service, where a very small percentage of the fiber bandwidth is offered as Internet connectivity and most of it is reserved for Cable TV. Once everything goes to IP they need to find a new excuse for not releasing that bandwidth to competitors.
There is an opportunity for your magazine to report on the economics of the Internet, For example, how much does it really cost to deliver a packet from the Google server farm to a Verizon customer, and how is that cost divided between the two companies. Also, how is it that Verizon and SBC complain they can’t make a decent profit delivering 1 mbit/sec or so when consumers in Korea get more than 10 times the bandwidth for less money?
Comments
You can follow this conversation by subscribing to the comment feed for this post.