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Dave Lehre, a 21-year-old Michigan resident, has just become an instant movie mogul.

Armed with nothing more than a Canon IX2 digital video camera, the editing software on his Apple Mac and a sophomoric sense of humour, Mr Lehre has stumbled on to a global audience online. MySpace: the Movie, an 11-minute home video spoof he shot about the popular internet “social networking” site, has been viewed more than 10m times since it was posted on the web at the end of January.

Thanks to that instant success, Mr Lehre says he has had “lots of offers and stuff like that” – enough to prompt him to assemble the Hollywood trappings of his own publicist, attorney and an agent at the elite William Morris agency. The options include a programme development deal with MTV and a $27m feature-length film from Marvel Comics, he says.

Could internet success stories like this now be at risk?

Like the entrepreneurs behind Google, Yahoo and any number of other successful online start-ups, Mr Lehre was able to count on unfettered access to communications networks that reach anyone with an internet connection – at the last count, more than 1bn people. With that sort of reach, any amateur podcaster, video-blogger or software developer can dream of attracting an instant global audience – even if, in truth, only three other people are paying attention.

Some of the companies that control those networks, however, want to change the rules of the game. Starting in the US, but now also spreading to Europe, telecommunications companies have started to argue that they should have the right to charge internet companies for delivering their videos, e-mails or search results – or, at least, for guaranteeing them a certain level of service quality.

The unspoken threat, critics say, is that non-payers will see the quality of their services degraded, or risk being shut out of the broadband internet altogether. From being a wide-open medium, the internet would instead come to look more like the closed networks run by cable or satellite television companies.

This amounts to nothing less than a fight over the soul of the internet. Created as a network to link academics, its basic architecture was founded on openness. Limiting the ability of users to ride the network could amount to the first serious challenge to that principle, a fencing-in of the intellectual commons.

“It would stop innovation on a lot of fronts,” warns Steve Chen, co-founder of YouTube, an internet video network whose traffic has soared in recent months thanks to amateur productions such as those of Mr Lehre. Without free access to the internet, “I don’t think YouTube would have been able to start its service”. Companies such as Google could have been stopped at birth, he adds.

Agitation from AT&T and other telecoms companies has already pushed this issue to the top of the internet agenda in the US. Under the banner of “net neutrality”, a coalition of internet companies and consumer groups has pushed for legislative action to prevent network operators from levying extra fees on internet companies.

AT&T’s recent proposed acquisition of rival BellSouth has given its opponents a new reason to push for extra regulation. “There’s a very real chance that net neutrality will be imposed on AT&T as a condition of its BellSouth merger,” says Craig Moffett, a telecoms analyst at Sanford C. Bernstein.

Opponents of net neutrality argue that regulating existing communications networks more tightly to keep them open is counter-productive, since it will simply discourage new investment. Better, they say, to move faster in the direction of deregulation: that would stimulate the construction of alternatives, eventually pitting telecoms companies against broadband services that run over cable and satellite systems, wireless networks or even power lines.

According to this view, such competition would provide the surest guarantee that the best “content” can find an audience. Consumers unhappy at lack of choice in the content they receive could simply decamp to rival services.

The questions that have risen to the surface in the US are starting to bubble up elsewhere. “It’s going to be a global issue,” says Jeff Campbell, director of technology and communications policy at Cisco Systems, whose routers direct much of the traffic that passes over the internet. Telecoms companies around the world “aren’t going to invest [in new networks] if they don’t think they’ll get some return from it”.

So far, the argument has been expressed most strongly in Europe by Kai Uwe Ricke, chief executive of Deutsche Telekom. “It shouldn’t be the case that infrastructure providers, like Deutsche Telekom, are always having to make the investments, while others profit on the back of those,” Mr Ricke recently told Wirtschaftswoche, a German business magazine. “These [web-based] companies should realise that it’s us who will in the future guarantee network quality for their new applications.”

Some of the other established European telecoms companies back these views, which come as the European Commission is conducting a complete review of telecoms regulation.

“The issue that has been around in the US is a real one as the emergence of these new internet actors and services introduces a different business model in an industry that has been regulated for more than a decade along a [traditional telecoms] model,” says Ricardo Perissich, head of regulatory affairs at Telecom Italia. “We are all concerned about this new emerging competition and we have raised this issue with the European Commission.”

But as always in Europe, where telecoms regulation set in Brussels is interpreted and applied differently at the national level, there is no consistent view. BT, the UK incumbent, is more circumspect. Having just come out of a punishing regulatory round, the company appears not to want to rock the boat and insists it is happy with the current regime. “Our principle is one of non-discrimination,” says Petri Allas, BT’s corporate strategy director. But he hints that this might change in the future in such a fast-moving industry.

France Telecom rejects the issue altogether. “France Telecom thinks the debate on ‘network neutrality’ is an American debate. In Europe, the regulatory and competitive environment is completely different – the US and European situations are not comparable,” the company says.

To justify what could turn out to be a far-reaching change in the structure of the internet, telecoms companies that want to charge content providers point to the huge costs they face in building the new high-speed networks on which bandwidth-hungry services such as video depend. Telecom Italia, for instance, estimates that over the next three to four years, European incumbents will invest around €80bn ($97bn, £55bn) in high-speed, next-
generation networks.

In the US, both of the dominant local companies, AT&T and Verizon, have also announced similarly ambitious investment plans – yet, even then, only 40 per cent of the homes in the country will have access to a true high-speed network by the end of this decade, estimates Mr Moffett. “The key issue is, who’s going to pay for the networks?” he says. “Wall Street is sceptical about the ability of the telcos to earn a decent return under the current regime.”

The predictable rallying cries of the people on each side of the fence – innovation on the part of the internet entrepreneurs, investment on the part of the communications companies – suggest that this may be an intractable problem for regulators and regulators.

In reality, though, two interrelated but distinct issues underlie this debate, and separating the two provides clues about the best way forward.

The first issue has to do with bandwidth. As more consumers pay for broadband access, and as multimedia services such as video proliferate, bandwidth demands have started to rise exponentially. Yet while telecoms companies use this to justify new fees, they in fact already levy charges on internet companies tied to the amount of bandwidth they use.

“We’re not getting a free ride,” says Mr Chen at YouTube. “Every bit [of data] we push out, we pay for.”

If bandwidth scarcity is at the core of the problem, then network companies have a solution at their fingertips: to increase the fees to online companies for the “peering” rights to connect to the internet. That would add to the overall technology and network costs of start-up companies but it need not kill innovation in its tracks: wannabes like Mr Lehre already have to find ways to cover these costs (in his case, through a sponsorship deal). The telecoms companies could also levy higher charges on the consumers who are the most intensive users of video streaming, online gaming and other
bandwidth-intensive services.

That would also go some way to resolving another complaint that some telecoms executives use to justify charging fees to internet companies: that infrequent internet users are subsidising more active web surfers. Ending cross-subsidisation between different classes of consumer, however, need not involve shifting the costs elsewhere.

The second issue underlying the net neutrality debate is more contentious. Should network operators be able to charge a fee for giving preferential treatment to some of the “packets” of information that travel over the internet, making sure that these reach their destination faster and so assure better service – less jerky video, for instance?

Supporters say that this would merely mean introducing a higher level of service for those internet companies willing to pay a premium: it would have no impact on non-payers, who would still have access to the open internet of today. “It has nothing to do with blocking, limiting or controlling” the internet’s free services, says Mr Campbell at Cisco.

Others contend that giving preference to some “packets” of information would inevitably degrade service for others.

At times of network congestion, “you have to disregard the less valuable packets” in order to ensure that the more valuable ones arrive on time, says Jim Chiddix, chief executive of OpenTV, a maker of interactive television software. Internet routers simply drop the packets that are deemed less important.

The prospect that telecoms companies will start to exercise this power as a matter of course is what most scares internet companies – particularly since the network operators themselves have designs on delivering more of their own online services.

Most, for instance, have their own so-called voice-over-IP, or internet telephony, services, in competition with stand-alone online services such as those provided by Vonage and Skype.

As a low consumer of bandwidth, voice calls do not rely heavily on high guarantees of network quality. When it comes to video, however, there is likely to be far more at stake. Incumbents such as AT&T, Telecom Italia, BT and Deutsche Telekom have announced plans to deliver their own multi-channel television services over their high-speed internet lines, using a technology known as IPTV. What if they give preference on their networks to these video signals over those of non-paying rivals?

That should not be a problem as long as consumers have access to rival broadband services, says Mr Campbell at Cisco. Anyone able to choose among satellite, cable and telephone services would be able to switch if their network no longer provided the sort of high-speed content they wanted. The development of high-speed wireless networks over the next decade by mobile phone operators could further increase choice.

Most consumers, however, may wait a long time before they see rival high-speed broadband services in their own neighbourhood. And in a world where giant network operators face off against each other, will there still be room for a Dave Lehre to make his mark?

Copyright The Financial Times Limited 2019. All rights reserved.

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