In the midst of the U.S. debate over net neutrality, the challenge by Vonage to Shaw's $10 surcharge is, as Cynthia notes, a significant development. Though it turns out that Shaw has been doing this since at least last May (see Mark Evans' post), Vonage's challenge raises the issue at a crucial time in the development of U.S. Internet policies.
Let's take a look at the basic economics and competitive dynamics. In Canada, Vonage's unlimited North American-calling plan costs $39.99, presumably in Canadian dollars. That makes Shaw's $10 surcharge a 25% increase in the price a Vonage customer would pay. As far as I can tell, Shaw's IP voice service costs $55 as part of a bundle and $65 a la carte. That means an existing Shaw customer could save $15/mo. by using Vonage service absent the surcharge. But if that customer becomes convinced that reliability will remain an issue with Vonage service--something strongly suggested by the wording on Shaw's web site-- and therefore chooses to pay the QoS surcharge, then the savings is cut by two-thirds, to just $5/mo. That starts to look pretty marginal when you consider convenience and comfort-level issues related to using a new-fangled "VoIP" phone service from a non-local company.
And while it can be argued that Shaw is offering benefits to Vonage and its customers by introducing this QoS capability, Vonage's complaint raises the question "What is the justification for a recurring charge to the customer for a service that it appears may consist of a one-time configuration of the Shaw-approved cable modem used by Shaw's high-speed Internet customers?"
My guess is that the justification reflects the thinking of Shaw's marketers and competitive strategists, not the actual cost of providing the QoS service. That's not inherently an "evil" thing to do, but it can be competitively lethal in situations like this, where independent service providers' business models and customer service are fundamentally dependent on the actions of competitors that control access networks as vertically integrated duopolists.
From a competitive pricing perspective, Shaw's $10 QoS surcharge seems pretty smart. But it also can be seen as evidence that network owners have both economic incentives and abilities to manipulate pricing to squeeze margin and economic vitality from competitive offerings. And, as I discussed yesterday, I think that's a fundamental problem for the Internet's future. And, even in cases where actions taken by a network operator may not be purposely anti-competitive, their network management decisions (and problems) can end up hurting competitors' services more than their own.
It's interesting that this is happening in Canada. Last week I was chatting with a Canadian telecom analyst who was explaining how high Canadian cell phone charges are compared to their U.S. counterparts, mainly because there are only "two and a half" competitors in Canada's market. This contrasts with a U.S. market that has witnessed strong price competition and a viable resale market since the days when the high-priced cellular duopoly regime was blasted open by PCS licensing that increased the number of competitors to 5 or 6. And while four players dominate the U.S. mobile market today following waves of consolidation, this appears to be enough players to at least not reverse the process of reasonably healthy competition in the price/value equation that the mobile market has manifested in recent years.
But, in the broadband space, the U.S. has a pretty solidified duopoly market structure. Unfortunately, as the Shaw surcharge suggests, the fundamental economic dynamics and incentives of an unregulated, vertically integrated, duopolistic access market may be fundamentally incompatible with the operating principles and goals of an open Internet.
There are several ways policymakers can respond to this fundamental incompatibility:
1. Do nothing on network neutrality and also actively or passively endorse barriers to entry for new access platforms, including fiber and wireless municipal broadband networks (including public/private hybrids such as that planned for Philadelphia), new wireless services not owned by dominant network players, Broadband over Powerline, and other potential facilities-based alternatives.
2. Impose enforceable and effective net neutrality rules, which some believe is doable, but that incumbents oppose (whether with an in-your-face style or in a more low-profile manner). Even among strong open-Internet advocates, there are some doubts about the wisdom and feasibility of pushing for this approach.
3. Retaining or adopting policies that strongly encourage facilities-based competition in the hope that access alternatives will emerge that significantly lessen the bottleneck/gatekeeper control of today's vertically-integrated access duopolists.
In today's Washington, where bills get passed in the middle of the night when even those voting haven't read them, its tough to predict which route Congress will take. It's also tough to be optimistic that a course of action will be based on sound policy analysis and genuine concern for creating and maintaining healthy markets and, where necessary, adopting rules to protect the public interest from market failures.
But, to indulge in some optimism nevertheless, its possible that the uncovering of systemic corruption we're now witnessing in Washington will have some positive side affects in the telecom arena, perhaps bringing more sunshine and possibly even some real strategic vision into the lawmaking process. The fact that Republic and Democratic Senators recently came together to introduce a bill freeing up unused broadcast spectrum for unlicensed broadband applications provides at least a glimmer of hope in that regard.
But introducing a bill is many steps away from passing a law, so the jury's still out on both substance and process in the telecom policy space, and also regarding the broader and deeper problems that threaten the health of our democracy. Given the importance and power of the Internet, these two issues are, in my view, fundamentally intertwined.
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