Its only extortion when a little guy does it...

[this is a post I made to my class blog in microeconomics]
I'm not sure if this is really "economics" news or just "AT is a bunch of extortionists" news, but the CEO of AT (presumably the AT that resulted from the recent acquisition of AT by SBC) wants to charge websites for access to consumers . The gist of the matter is that ATT wants websites, especially those with high-bandwidth items like digital movies, to pay them for the use of their network. Sounds like a reasonable proposition, right?

Wrong.

They want content providers to pay for access to a network which consumers have already paid for! In ATT's ideal world, they're charging the consumer a nice sum for internet access, and if you're a business, they add in a hefty surcharge for "guaranteed bandwidth" which is anything but. In this Financial Times article Ed Whitacre, CEO for AT is quoted as follows:

"I think the content providers should be paying for the use of the network – obviously not the piece from the customer to the network, which has already been paid for by the customer in Internet access fees – but for accessing the so-called Internet cloud."

and later:

“Now they might pass it on to their customers who are looking at a movie, for example. But that ought to be a cost of doing business for them. They shouldn’t get on [the network] and expect a free ride.”

In the past and up to present, the way the model works is that both content providers and consumers pay for a connection to the Internet, with some measure of reliability theoretically present in this connection. In other words, if you pay for dialup, you don't expect to download the entirety of the iTunes Music Store overnight. Conversely, if you pay for a T3 line (a kind of high-speed internet connection used by businesses--UTSA probably uses a few of them for our outbound connection), you expect to have a guaranteed bandwidth of 45Mbps. For comparisons sake, your DSL line at home maxes out around 768kbps, less than 2% of the throughput of a T3. Key point: nobody gets a "free ride"--you pay for these connections, and you usually pay a LOT.

In practice, these rates don't mean much to the average consumer, because up until now, files downloaded (including web pages) have typically been considerably smaller than the connection's speed limit. In other words, if you're downloading a page that's 100K, and your bandwidth allows you to download 768kbps, you'll get that page in its entirety in a little over a second. We are on the verge of a new broadband economy, however; as digital media becomes more and more commonplace, more consumers will start using their internet connections for everything from digital phones that use the internet to make calls to downloading high-definition movies for playing on a Tivo or other set-top box.

What Ed Whitacre is talking about doing is using this shift in the usage patterns to basically extort money from content providers. If Blockbuster pays them X gazillion dollars to give their traffic priority, and Netflix decides not to, then what this means to the consumer is that you can rent Blockbuster movies over the internet and watch them that day, but if you like netflix (as I do) you'll have to wait a week or so while that movie downloads to your computer/Tivo.

AT problem is that they've built out this huge fiber network, starting during the dot-com years, that isn't paying for itself, largely because they went whole-hog into the proposition instead of building it out in stages in conjunction with demand. So now they want to extract more money from some subset of their customers, and content providers are the easiest target (largely because they've already screwed the consumer as much as they possibly can.) Essentially, this is laziness and ineptitude on the part of AT management. There are many much better ways of dealing with this problem, such as decentralized distribution (aka peer-to-peer networks such as bittorrent).

This reeks of big business and anti-trust violations. I'm going to go out on a limb and predict that implementation of this business model will result in a DoJ antitrust investigation (assuming Bush is out of office when its implemented.)

(if anyone is interested in the tech side of this debate, email me and I'll be glad to clarify any of the geekspeak)