The Economics of Net Neutrality
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THE ECONOMICS OF NET NEUTRALITY IMPLICATIONS OF PRIORITY PRICING IN ACCESS NETWORKS Zur Erlangung des akademischen Grades eines Doktors der Wirtschaftswissenschaften (Dr. rer. pol.) von der Fakultät für Wirtschaftswissenschaften des Karlsruher Institut für Technologie (KIT) genehmigte DISSERTATION von Dipl. Volksw. Lukas Wiewiorra Tag der mündlichen Prüfung: 10.07.2012 Referent: Prof. Dr. Christof Weinhardt Korreferent: Prof. Dr. Karl-Martin Ehrhart Karlsruhe, 2012 Acknowledgements Foremost I would like to thank Prof. Dr. Christof Weinhardt, who gave me the great chance to start my work at the Institute of Information Systems and Management (IISM) and who sup- ported my studies at the DFG Graduate School Information Management and Market Engi- neering (IME) at the Karlsruhe Institute of Technology (KIT). He offered me the opportunity and freedom to pursue this research. I am also indebted to my co-advisor Prof. Dr. Karl- Martin Ehrhart for his encouragement and his constructive comments throughout my studies at the IME. I would particularly like to thank the other members of the committee, Prof. Dr. Rudi Studer for the interesting discussions on practical implications of my thesis and Prof. Dr. Kay Mitusch for having been so kind to chair the board of examiners. Moreover, I would like to thank the team of IISM and the professors and students of the IME who have helped to improve this work through constructive feedback and who have created an excellent working atmosphere and ensured a vivid social life over the last years. I would also like to thank Sascha Schweitzer and Philip Köhler, who have been my roommates within the last years and both helped to make the process of creating this work an unforgettable journey. In particular I want to thank Dr. Jan Krämer who has been not only an outstanding mentor, motivator and colleague since the day I started my thesis, but also became a dear friend. Furthermore, I want to thank Christoph Helbach for encouraging me in my initial idea to pursue a doctoral degree, Stephan Meyer for his perennial supporting accompaniment and Rebekka Freitag-Li for proof-reading this thesis and giving valuable comments that improved this work a lot. Finally, I would like to thank those people without whom this work would not have been possible. I would like to express my thankfulness to my parents Monika and Ulrich Wiewiorra for their unconditional support in everything I did and their love throughout my whole life, my brother Jeremias Wiewiorra for reminding me of the humorous side of life and Bettina for her love, support, forbearance and her caring encouragement. I owe them more than my deepest gratitude. Lukas Wiewiorra i Preface “The Internet is the first thing that humanity has built that humanity doesn’t understand, the largest experiment in anarchy that we have ever had.” Eric Schmidt (Chairman of Google) VER the last nine years a world wide debate about the future of the Internet has gained O momentum. Many different opinions, arguments and scenarios have been subsumed under the umbrella of the term ‘Net Neutrality (NN)’. A multitude of definitions and theories about this vague concept exists. NN is a politically heavily debated matter in many different countries. Over the recent years the focus of the NN debate has shifted towards a discussion about the effect of prioritization of data in the access networks of Internet Service Providers (ISPs). This thesis systematically analyzes NN from an economic point of view. To this end a frame- work is developed which helps to structure the NN debate. Furthermore, the introduction of prioritization is studied by analyzing potential effects of Quality of Service (QoS) on Content and Service Providers (CSPs) and Internet Users (IUs). The structure of this thesis is composed of six chapters, as shown in Figure 1. Chapter one gives an introduction to the history of the Internet and the concept of NN. Moreover, different definitions of NN are presented and the relevant economic relations in the Internet ecosystem are exemplified. Chapter two presents a so called ‘Non Net Neutrality (NNN)’ framework. This framework allows to structure the NN debate along two basic dimensions and to group the multitude of scientific approaches that exist to analyze deviations from the ‘status quo’. The chapter concludes with a policy decision guideline which was created in an effort to structure and summarize the identified gains, threats and possible remedies of each NNN scenario according to the dimensions of the aforementioned framework. Chapter three deals with the CSP tiering scenario of a possible QoS tiering network regime and presents a theoretical economic model that allows to further analyze specific aspects of iii Preface the NN debate. Chapter four deals with the IU tiering scenario of a possible QoS tiering network regime and presents an empirical analysis based on survey data of 1035 Internet access customers to analyze the perception of QoS and the profitability of IU tiering. Chapter five presents an outlook on how the neutrality principle could evolve to other layers of the Internet ecosystem. Chapter six summarizes the findings of this thesis and exemplifies the implications for the ongoing political process around NN and for the business of ISPs. The chapter concludes with suggestions for future research in the field of NN. Chapter 1 Introduction to the Net Neutrality Debate Chapter 2 A Non Net Neutrality Framework Chapter 3 Content and Service Provider Tiering Chapter 4 Internet User Tiering Chapter 5 Neutrality in the Internet Ecosystem Chapter 6 Conclusions and Future Research Figure 1.: Structure of this thesis iv Contents Preface iii 1 Introduction to the Net Neutrality Debate 1 1.1 History of the Internet . 2 1.2 What is Net Neutrality? . 4 1.3 Non Net Neutrality - Necessity or New Business Model? . 6 1.4 Stakeholder and Revenue Streams in the Internet . 10 1.4.1 Internet Users . 10 1.4.2 Internet Service Providers . 11 1.4.3 Content and Service Providers . 12 1.4.4 Content Distribution Networks . 15 2 A Non Net Neutrality Framework 17 2.1 Neutrality in Internet Access? . 19 2.1.1 The Status Quo . 19 2.1.2 Strict Net Neutrality Scenario . 25 2.2 Two-Sided Pricing . 26 2.2.1 Termination Fee Scenario . 28 2.3 Quality of Service . 33 2.3.1 Content and Service Provider Tiering Scenario . 35 2.3.2 Internet User Tiering Scenario . 39 2.4 Net Neutrality and Regulation . 44 2.4.1 Decision Support for Regulators . 44 2.4.2 Regulation in the United States and Europe . 47 3 Content and Service Provider Tiering 51 3.1 Motivation . 51 3.2 The Model . 55 3.2.1 Content and Service Providers . 55 3.2.2 Customers . 59 3.2.3 Network Congestion . 61 3.2.4 Internet Service Provider . 63 3.3 Short Run Effects on Content Variety and Welfare . 64 3.3.1 Short Run Equilibrium and Content Variety . 65 v Contents 3.3.2 Short Run Welfare Implications . 71 3.4 Long Run Effects on Infrastructure Investments, Innovation and Welfare . 75 3.4.1 Investment Incentives . 75 3.4.2 Innovation at the Edge and Long Run Welfare . 80 3.5 Alternative Model Variants . 82 3.5.1 Model with Competitive Clicks . 82 3.5.2 Model with Congestion Sensitive Consumers . 83 3.6 Minimum Quality Standards . 85 3.7 Implications . 88 4 Internet User Tiering 91 4.1 Motivation . 91 4.1.1 Quality Provision Mechanism . 92 4.1.2 Fairness . 95 4.1.3 Combining Theories . 97 4.2 Methodology . 98 4.3 Model . 101 4.3.1 Control and Performance . 104 4.3.2 Fairness . 107 4.3.3 Effort Expectancy . 110 4.3.4 Status Quo . 111 4.3.5 Target Variables . 113 4.4 Measurement Development and Pretest . 114 4.5 Survey Design . 119 4.6 Data Collection . 124 4.7 Measurement Refinement . 125 4.8 Evaluation . 132 4.8.1 Model Fit . 133 4.8.2 Network Regime Preference . 135 4.8.3 Willingness To Pay for Priority . 138 4.8.4 Monetary Compensation for Best Effort . 140 4.8.5 Status Quo . 143 4.8.6 Profitability of Internet User tiering . 145 4.9 Implications . 150 5 Neutrality in the Internet Ecosystem 153 5.1 Net Neutrality and Content Distribution Networks . 154 5.2 Device Neutrality . 156 5.3 Content and Service Neutrality . 158 6 Conclusions and Future Research 161 vi Contents A Internet User Tiering I A.1 Survey . I A.2 Extensive Model Specification . XVI A.3 Model Fit . XVIII A.4 Estimates . XIX B List of Abbreviations XXV Bibliography XXVIII vii List of Figures 1 Structure of this thesis . iv 1.1 Revenue streams in the Internet . 12 1.2 Quality of Experience . 14 1.3 Akamai live statistics . 15 2.1 NNN framework . 19 2.2 Plusnet service classes . 40 2.3 NN policy decision process . 45 3.1 Model CSP tiering . 64 3.2 Active CSPs for different distributions of CSPs’ congestion sensitivity. 70 3.3 The short run effect of CSP tiering on CSPs’ surplus. 72 3.4 Congestion alleviation vs. congestion aggravation effect of CSP tiering . 74 3.5 ISP’s marginal investment incentives under CSP tiering . 79 3.6 The long run effect of CSP tiering on innovation and welfare. 81 4.1 Combining different theories . 99 4.2 Study procedure . 101 4.3 SEM structure . 103 4.4 Survey structure . 120 4.5 NN vs. IU tiering relative quality . 121 4.6 NN vs. IU tiering dedicated quality . 122 4.7 IU tiering relative quality vs. IU tiering dedicated quality . ..