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Net Neutrality Could Harm Consumers and App Providers, Not just Service Providers, Stratecast Says

By Gary Kim, Contributing Editor

Net neutrality (News - Alert) has the potential to distort the parameters built into operator business cases in such a way as to increase the expected risk, say analysts at Stratecast. "And because it distorts the operator investment business decision, net neutrality has the potential to significantly discourage infrastructure investment."

An operator denied the opportunity to generate service revenue would be forced to adopt other methods for
covering deployment costs: These could include simply passing along the costs to the consumer; creating service bundles that limit consumer choice; or passing the cost along to content providers. 

In the case of cost allocation to the consumer, these costs could be substantial: net neutrality could impose anywhere from $10 to as much as $55 each month on top of an average broadband access charge of $30, Stratecast estimates. To the extent that consumers were unwilling or unable to incur such costs, net neutrality could, ironically, have the effect of actually reducing broadband penetration.

If rules prohibiting any sort of bit prioritization are instituted, Stratecast forecasts that where average revenue per user would top $150 a  month by 2015, revenue will remain flat at about $75 a month. 

Stratecast also forecasts that service provider costs would rise between $20 billion and $40 billion annually, principally because networks would have to be over-provisioned to alleviate congestion, rather than using more-typical traffic management techniques. 

If it were simply a matter of an extra $20 billion a year in overhead, operators could reasonably be expected to absorb the increases and might not pass them on to the consumer, Stratecast argues. But cost is not the only issue. Lower revenues also would weigh on investment decisions.

Lost operator revenue could still be anywhere from four to five billion dollars as soon as 2011, even assuming that net neutrality conforms to a narrow non-discrimination interpretation. Strict non-discrimination would be far worse, resulting in scores of billions of lost revenue, or even more. 

In truth, nobody knows what might happen if all ability to prioritize bits were prohibited. The key thing, says Stratecast, is that there would be so much uncertainty that service providers would likely behave as though the downside were quite large in magnitude. 

Application providers also might be negatively affected, though that does not seem to be the belief. Stratecast estimates application providers might lose $20 billion to $100 billion a year because network investment does not keep pace with application requirements. 

In the short term, application providers might gain. In the long term, to the extent that bandwidth demand grows, they would lose. In fact, Stratecast argues application providers will make more money by 2015, by far, if strict network neutrality rules are not put into effect, and access providers continue to invest heavily in access bandwidth. 

In essence, says Stratecast, net neutrality acts like a tax on the Internet, imposing overhead on network operators which, in turn, decrease network investment, while also reducing the expectation of future average revenue per user. 

At some real level, it is the expecatation of what will happen that initially is important. Network service providers will assume higher operating cost, lower returns from network investment and more-limited revenue upside, which will cause them to behave as though those outcomes are likely. 

The increased estimation of risk will cause more-cautious behavior. There is a danger of reduced broadband access investment. But even if aggregate investment did not decrease overall, it likely would shift to areas where there is greater chance of higher returns. That should mean more investment in mobile, less in fixed infrastructure, as well as investment in features not subject to the network neutrality rules. 

Ironically, the purpose of net neutrality regulation, to ensure a level playing field, would largely result in harm to network operators, application providers and consumers. Network operators would be harmed directly and immediately as their opportunities to generate increased revenues from subscribers became attenuated. 

In the absence of cost recovery operators could simply refuse to invest or slow their investment in improved or more extensive infrastructure. Most analysis that shows positive benefits to the application providers simply assume that operators will continue to invest; an outcome that Stratecast models throw into doubt.

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Marisa Torrieri