Original URL: http://www.theregister.co.uk/2008/10/15/neutrality_in_europe_analysis/

Google's coup: The internet's first rule book

With love from Brussels

By Andrew Orlowski

Posted in Broadband, 15th October 2008 12:07 GMT

The regulator's rule book for deciding what is permissible on today's roads is very thick indeed. The content, behaviour and performance of "stuff on roads" is massive, and grows by the day. Try hot-rodding your lawnmower – or deciding that on Thursdays, you will only make left turns, and see how far you get.

By contrast, the regulator's rule book for deciding what is permissible on the internet - its content, behaviour and performance - couldn't be simpler. There isn't one.

And that’s the case for most countries in the world. Of course, there are established state laws on business, copyright, and defamation that have been extended to the internet, but that’s not the same thing. So the evolution of the technology is the consequence of the private agreements we enter into, between ourselves and the network operator, as the consenting adults we are.

So today’s internet is an anarchy, where users can drive what they like. And despite the fact that bad, anti-social applications can run riot - and they do - people seem to like it this way. It’s an anarchy which carries the overwhelming consensus of internet users. No one (actually, almost no one) is Marching With Placards demanding that some state agency protect us from ourselves, and write a book of rules specifically for what should be technically permissible.

For almost twenty years, internet engineers have persuaded regulators not to intervene in this network of networks, and phenomenal growth has been the result. Because data revenues boomed, telecoms companies which had initially regarded packet data networking with hostility, preferred to sit back and enjoy the returns.

But that’s changing fast. Two months ago the US regulator, which scrupulously monitors public radio for profanity, and which spent months investigating a glimpse of Janet Jackson’s nipples, decided it needed to start writing technical mandates. And so off it went.

Unnoticed by almost everyone, so did the EU.

"It’s the revenge of the unemployed Telecomms Regulator”, one seasoned observer in Brussels told us this week. “The internet really put them out of business. Now they're back."

Here’s a glimpse into the hitherto unreported politics going on in Brussels. The decisions being made are historic: the consequences dictate the future architecture of our networks, with implications worth billions of Euros.

A whole new rule book

The driving force behind the new rules is surprising. It's not the business world's natural bureaucracies, the telecoms companies with their ancestry as state-owned or state-regulated monopolies. It's actually Google.

The power play is over how data intensive, high quality services such as video will be delivered. Only a handful of large US companies make any significant revenue from the web. In Web 2.0 land, start-ups talk of being in the "pre revenue phase".

While Google monopolises the "web economy", effectively setting the price of doing business on the web, it's a small pot compared to incumbent operators, either mobile or fixed, who send almost every household at least one utility bill a month. Even with the turnover, or "churn" of the mobile business, that's a stream of income web companies such as Amazon.com and eBay can only dream about.

Google's plan is simple. It will simply remove the ability of infrastructure companies to make money. Google can avoid competing with access networks, because it doesn't need to. By pouring billions into content networks instead - its own private internet - it can stand by and watch those last mile businesses become increasingly unprofitable.

Today, providing an access network for the consumer to use data is not a profitable business: there just aren't enough people willing to pay for it. But TV and mobile telephony have proven demand. So the operator can use the profits from cable TV or mobile to invest in the data capacity. We're seeing the fruits of this cross-subsidy model in the UK, with fast wireless broadband now available on pay-as-you-go for under a tenner a month. These national data networks couldn't have been built if the operator didn’t have the prospect of steady income from telephony - only a fool or a gambler would have have invested the capital.

Google's strategy was in evidence in its "bidding" for a chunk of wireless spectrum in the US this year. Google tabled a bid not to win the auction, but so it could enforce rules on the eventual winner, Verizon. And these rules (eventually watered down in a compromise) made it much harder for the winner to cross subsidize data using those traditionally profitable voice revenues.

It's under the flags of "open access" and "net neutrality" that the battle is being conducted - and now neutrality has arrived in Europe.

What's on the table

Last year the Commission formally proposed the establishment of a new pan-European watchdog, the ETMA or European Telecom Market Authority, taking over many of the powers of the 27 member states' national regulators such as OFCOM. This year, discussions on telecommunications reform ("The Telecoms Package") began in earnest, and this included the establishment of a super-regulator.

In September, the Commission published an amendment to the Universal Service Directive, or to give its official title, Directive 2002/22/EC of the European Parliament and of the Council.

A new Article, 22.3, proposes:

In order to prevent degradation of service and slowing of traffic over networks, the Commission may, having consulted the Authority, adopt technical implementing measures concerning minimum quality of service requirements to be set by the national regulatory authority on undertakings providing public communications networks.

This establishes a role for the new super-quango: deciding what's acceptable performance. It's a benign-sounding intervention, but nevertheless it's a precedent - the draft of the first chapter of a book that has never before been written.

However it was at the European Parliamentary committee stage that Google scored its coup, asking the Socialist delegation to include language almost identical to the requirement that split the FCC down the middle. Here's the EP's draft text:

A national regulatory authority may issue guidelines setting minimum quality of services requirements, and if appropriate, take other measures in order to prevent degradation of service and slowing of traffic over networks, and to ensure that the ability of users to access or distribute lawful content or to run lawful applications and services of their choice is not reasonable restricted.

The key change is that Parliament wants local regulators to set the rules, not the Commission. But at a stroke, Europe inserted itself in the role of deciding what content is lawful, and what applications are legal.

The French Presidency has suggested the following compromise:

In order to prevent degradation of service and hindering or slowing of traffic over networks, and to ensure that the ability of users to access or distribute lawful content or to run lawful applications and services of their choice is not unreasonably restricted, Member States shall ensure that national regulatory authorities are able to set minimum quality of service requirements on undertakings providing public communications networks.

The Commission may, having consulted the Authority, adopt technical implementing measures concerning minimum quality of service requirements to be set by the national regulatory authority on undertakings providing public communications networks.

Amazingly, the historic decision to regulate was inserted without any groundswell of support from the public: petitions, or interventions from Google-sponsored law academics, as was the case with "net neutrality" in the US. Judging from our mailbag, users are concerned with mis-selling, peak/off peak throttling and Phorm, rather than the absence of a Rule Book.

One of the paradoxes of regulating freedom is that once it's written down, we discover we have less than we had before. From the successful anarchy we have today, the scramble is now on to define "Lawful Applications", and "Non Discriminatory" network management, which open up a Pandora's Box of issues.

But will it fly?

Thanks to the intervention of a heavyweight, almost certainly.

Last month Viviane Reding, the Commissioner for Information Society & Media, put the issue on the agenda:

"A cynical observer may note that in the end this whole Net Neutrality debate is about hard cash. Dollars and Euros. That it is about trying to use regulation as a means to get a better position around the negotiation table. That this is just about arm wrestling between big network providers and successful providers of internet services," she said, accurately.

An accurate summary indeed. But observers noted that rather than dispassionately viewing the competing interests, Reding has already anointed one side as the Good Guys.

"Net Neutrality is seen as the Guardian Knight that will allow the proverbial '2 guys in a garage' to be able to amaze the world with the next big thing."

(One of the guys in the garage she referred to was Skype. Last year eBay wrote off over $1bn from its books and admitted that Skype had never been profitable and would never become a significant business.)

What it means for you

Not surprisingly, one of the few voices raised in objection to the change is from the Free Software movement.

The Foundation for a Free Information Infrastructure (FFII) which fights software patents, says "net neutrality" is false marketing. "This is an invasion of the regulator in the software market, and it should be fought back vigorously" the group says in a statement.

Better no rules, than rules that are decided undemocratically, by powerful lobby groups behind closed doors.

Others fear opening a Pandora's Box, too.

Pierre Larouche, Professor of Law at Tilberg University, in the Netherlands, is a veteran of legal skirmishes with large telcos in Europe, and remembers the disdain with which they viewed the new internet.

"Edge innovation was disbelieved by the big telcos."

However he's skeptical that tentative regulation will help.

"We're defining it in terms of a regulation: but it's a nothing.

"There are fears of vertical integration - but if the retail access market is competitive, the people will jump over the Walled Garden."

Abuses of power that historically have been dealt with by Competition Law, become "consumer issues", justifying ever-deepening intervention. So the rules become ever more detailed and prescriptive.

"It's the Dangerous Dogs Act," thinks Martin Cave, Professor at Warwick Business School and the leading authority on regulation practice.

"The case for legislation is at best not proven."

But in practical terms, it's a power play. Richard Bennett, the American engineer, who helped draft the twisted-pair Ethernet and Wi-Fi standards, was also in Brussels this week to discuss the regulation.

He noted that private internets now deliver much of the new video content, by bypassing the public internet. Akamai has 34,000 servers installed at ISPs' data centres delivering 20 per cent of internet content by volume.

Another is Google, which is investing $1.5bn a year in infrastructure.

"Why is it OK for Google, Akamai and Limelight to build fast lane access but not legitimate for telecom operators to build infrastructure that does the same thing?" he asks.

"Preserving the value of that infrastucture is important to Google. If a telco introduces QoS (quality of service), that nullifies it."

He describes pre-emptive legislation as "the prohibition of a sale". Examples of services prohibited by the neutrality legislation including Gaming ISPs which guarantee low ping times for gamers. Leave it to the customers and they'll decide which network architecture works best for them: Google's, a Telco's or some combination.

"The consumer is the ultimate regulator."

What happens next?

EU politics is always more complicated than it appears. Pierre Alexander, a lawyer at Gibson Dunn and Crutcher and editor of European Intellectual Property Law Review, explained that the Commission has no real power here, and may not actually want it. Then again, he points out, its sometimes hides behind the "mandate" of Parliament, and its apparent reluctance to intervene is not always sincere.

The move heads to the Council of 27 members, which can approve it with a Qualified Majority, or reject it with a unanimous vote. The latter is unlikely, he predicts.

The strongest opposition is likely to come from OFCOM, which regards explicit neutrality legislation as unnecessary. Like all NRAs, OFCOM would prefer not to engage in a turf war with a super-quango.

So why did Google blink first?

Left unregulated, we're likely to see the mutual dependence between content providers like Google and telcos continue. Yet there's no doubt Google feels the pressure more urgently. While the web advertising market is now comparable to TV in the UK, Google, unlike others, needs to maintain the spectacular growth of the early years, and it has no particular advantages in serving brand advertisers. Given the general difficulty of monetizing web content, you can see how Google feels it needs a helping hand from bureaucrats.

By posing as the consumer's champion, Google can start to implement its plan for the destruction of value in European telecoms. ®