Ramblings & ephemera

Monopolies & Internet innovation

From Andrew Odlyzko’s “Pricing and Architecture of the Internet: Historical Perspectives from Telecommunications and Transportation“:

The power to price discriminate, especially for a monopolist, is like the power of taxation, something that can be used to destroy. There are many governments that are interested in controlling Internet traffic for political or other reasons, and are interfering (with various degrees of success) with the end-to-end principle. However, in most democratic societies, the pressure to change the architecture of the Internet is coming primarily from economic concerns, trying to extract more revenues from users. This does not necessarily threaten political liberty, but it does impede innovation. If some new protocol or service is invented, gains from its use could be appropriated by the carriers if they could impose special charges for it.

The power of price discrimination was well understood in ancient times, even if the economic concept was not defined. As the many historical vignettes presented before show, differential pricing was frequently allowed, but only to a controlled degree. The main con- cern in the early days was about general fairness and about service providers leveraging their control of a key facility into control over other businesses. Personal discrimination was particularly hated, and preference was given to general rules applying to broad classes (such as student or senior citizen discounts today). Very often bounds on charges were imposed to limit price discrimination. …

Openness, non-discrimination, and the end-to-end principle have contributed greatly to the success of the Internet, by allowing innovation to flourish. Service providers have traditionally been very poor in introducing services that mattered and even in forecasting where their profits would come from. Sometimes this was because of ignorance, as in the failure of WAP and success of SMS, both of which came as great surprises to the wireless industry, even though this should have been the easiest thing to predict [55]. Sometimes it was because the industry tried to control usage excessively. For example, services such as Minitel have turned out to be disappointments for their proponents largely because of the built-in limitations. We can also recall the attempts by the local telephone monopolies in the mid-to late-1990s to impose special fees on Internet access calls. Various studies were trotted out about the harm that long Internet calls were causing to the network. In retrospect, though, Internet access was a key source of the increased revenues and profits at the local telcos in the late 1990s. Since the main value of the phone was its accessibility at any time, long Internet calls led to installation of second lines that were highly profitable for service providers. (The average length of time that a phone line was in use remained remarkably constant during that period [49].)

Much of the progress in telecommunications over the last couple of decades was due to innovations by users. The “killer apps” on the Internet, email, Web, browser, search engines, and Napster, were all invented by end users, not by carriers. (Even email was specifically not designed into the ARPANET, the progenitor of the Internet, and its dominance came as a surprise [55].)

Comments are closed.