Current Threats to Innovation: Centralizing Control and Throttling
In the absence of an open Internet (bolstered by strong network neutrality protection) the battle for success over the next generation of Internet applications threatens to be reduced to a bidding war. Network owners can pick and choose winning applications and communications standards based on their developers’ ability to pay for transit rather than market competition. For example, the dominant online phone provider (using Voice Over Internet Protocol, or VOIP; see Figure One), operating in a discriminatory Internet regime could become the market leader not because of its competitive or inventive offerings, but because it has paid the network owner for stable Internet access to consumers. While the first generation of Internet applications competed on a level technical playing field, network owners today are taking aim at the next generation of user-generated applications on the Internet. ISPs want a slice of content- owner profits and are acquiring technology that will allow them to transition from their current position as gateways to the Internet, into the more powerful and controlling position as gatekeepers to digital platforms.
VOIP: Enabling Canada to Compete
Canada’s Voice Over Internet Protocol industry is made up of large VOIP providers, such as Primus and Vonage, and several small VOIP providers. While the smaller companies lack the developed customer base of larger VOIP providers, they provide competition in pricing and product features. For instance, Unlimitel, an Ontario-based VOIP provider, competes by offering ‘no commitment’ plans, in contrast to larger companies like US-based Vonage, which requires subscribers to commit to monthly plans.
The open Internet is critical in the VOIP industry. Under a discriminatory communications regime, an ISP could require those who run VOIP services to pay a greater premium for a faster connection or superior Quality of Service. Such a requirement would radically alter the relationship between companies like Vonage and Unlimitel. Rather than competing based on pricing, product features, and customer service, these VOIP companies would compete based on which firm could pay the highest ISP premiums. In such a competitive landscape, the market shift for Unlimitel would be significant; that is, if Unlimitel could not afford the premium connection, it would be forced to remain on a basic connection that could not handle the demands of providing VOIP service. As a result, this pricing would degrade Unlimitel’s quality of service, while Vonage’s would improve or remain the same.
The threat of a discriminatory Internet puts Unlimitel — as well as other potential small businesses and startups that are reliant on the open Internet — at a disadvantage to existing, better-resourced, and possibly foreign competitors. The open Internet empowers Canadian-based online service providers to compete against their bigger, foreign rivals.
Several Canadian ISPs are actively intruding into the ‘value chains’ — that is, all of the links in the conceptualization, financing, production, distribution and consumption of a product — of application developers and content providers. At present, network owners are paid for the use of their pipes at both ends — by the consumer for his/her residential connection at one end, and by the content provider's web hosting provider at the other. Network owners are unsatisfied, however, with the return on the straight sale of bandwidth. Instead, they are beginning to create a third revenue stream by withholding or limiting access to Internet subscribers or imposing new Internet usage fees on users. If ISPs are allowed to discriminate, priority access will go to the content provider with the deepest pockets, and the rest will be left to squeeze into whatever remaining bandwidth exists.304
Under such a discriminatory access regime, network owners like Bell, Shaw, and Rogers will force content providers like Google, NetFlix, and Wordpress, along with application developers, to pay a fee to access subscribers — a price that has nothing to do with how much bandwidth the content provider uses and everything to do with how much capital they have relative to other content providers. From the ISP’s perspective, this service would materialize on the basis of an artificial scarcity of bandwidth where only the very well financed content providers can ride in the 'fast lane.' If this business model were to take off, the current low cost of equal entry into Internet business would cease to exist.
Bandwidth Throttling as a Threat to Innovation
Canadian ISPs currently discriminate against particular applications, instead of behaviors or technical conditions in the network. This means that some application developers and businesses are inherently at a disadvantage — especially those that use maximally efficient means of transmitting data, such as peer-to-peer (P2P) data sharing systems, or, innovative forms of data transmission where users can share data directly with each other instead of going through a centralized server. The bias against services like P2P requires innovators to either invest substantial amounts into bandwidth and server infrastructures, or be resigned to providing goods and services in a delayed fashion that can weaken the overall value of those goods and services.
Why do ISPs Want to Centralize Control and Discriminate Against Certain Services
Incumbent ISPs are motivated to centralize control because of the Internet’s transformative economic impacts. ISPs’ focus on “pursuing innovations that fit their resources, their capacities, and their economic position” means they do not innovate as fast as the mass of non-incumbent innovators.305 Because many prospective research portfolios will not align with the big ISPs’ own goals and ends, they miss and will continue to miss opportunities.
The past has shown us that big ISPs typically employ excellent network engineers who can broaden the scope of their networks, but that these same ISPs are less apt at identifying how users will adopt the network, the reasons behind that adoption, or the value users find within the network itself.306 What users, on the other hand, seem to recognize, is that fast data speeds facilitate previously unthought-of applications and content provision types.307 An incumbent business is more path dependent, and therefore less attentive to technologies and processes that are incompatible with its “capabilities at the technological level, at the organizational level, or with respect to its economic position in the market.”308
Big ISPs are further threatened as their complementary products and services (e.g. TV content broadcasting, telephone service) are threatened by disruptive Internet services that restructure those product groups’ basic profitability (e.g. streaming video services and VOIP reduce costs of business and thus may not generate as much profit for ISPs as their traditional broadcasting/phone services have).
Incumbent ISPs are at a particular disadvantage when they rely on flat-rate pricing strategies. Under flat-rate strategies, significant changes in Internet usage (e.g. adoption and high usage of streaming video) that reduce profitability of complementary products (e.g. broadcast television) are not balanced by increased Internet transmission revenues.309 In other words, ISPs do not make more money as users increase their bandwidth use. This gives big ISPs an incentive to push for different pricing schemes, such as usage-based billing, where users are charged more for using more bandwidth over a certain monthly cap. This type of billing scheme, however, discriminates against some of the most innovative uses of the Internet that require significant bandwidth.
As discussed in “The Technical Case for Openness,” Canadian Internet traffic is widely throttled by ISPs for extended periods of time, with throttles varying in effectiveness and accuracy.310 The imprecision of these throttles limit businesses’ and innovators’ knowledge of the actual risks of operating online; it is somewhat unclear whether their data traffic will be throttled or not. As noted by the Free Press in their filing to the FCC, innovators and the investors supporting them want to be confident that their products will not be “stifled by the activities of the network operators (often competitors, through vertical integration of content, applications, and services) who control end-user Internet access service.” Investors in innovative products want to know that “the success or failure of their investments lie in the hands of the developers themselves, and not gatekeepers poised to stand in the way”.311
The actions of ISPs are especially problematic because the end-users are rarely aware of the sources of slow Internet connectivity — that is, “a network provider can exploit customers’ incomplete information about the true source of poor performance.”312 The attitudes of Canada’s dominant carriers indicate a callous indifference towards those wanting to use the Internet for innovative content distribution systems. This is perhaps best exemplified in their treatment of P2P technologies. Such technologies grant market entrants a way of disseminating content easily and quickly without the need for expensive servers, expansive data transfer volumes, or other elaborate telecommunications infrastructure. Instead, content distributors can generate content and make it available to prospective consumers, but the discriminatory throttling of the P2P distribution channels hinders these distributors’ competitive edge in the market. At the moment, the CRTC has not acted to stop such discriminatory treatment of data.
Under the current regulatory regime, innovators must determine whether their application, content distribution choice, or other innovation is ‘time-sensitive’ or not, and then determine how ISPs will interpret the CRTC’s traffic management ruling. In the e-commerce field, convenience is a key enabler (see the “Special Section on E-Commerce” for more information): when potential customers are prevented from quickly accessing a business’s goods, this delay greatly reduces the convenience of the transaction for the customer, and thus threatens the financial success of the offering.313 As such, timing is of paramount importance for online commercial transactions — the delay of the good(s) decreases the value and the practicality of selling the good(s) in question.
E-Commerce and the Open Internet
The value of e-commerce and online shopping is a critical part of the Canadian economy. Since 2001, Internet sales have increased steadily as Canadian businesses and citizens use the Internet more often to sell goods and services, and to obtain product information. In 2009, around 39% of Canadians 16+ used the Internet to place over 95 million orders. This was up 7% and 25 million orders from 2007. Similarly, 51% of Canadians between 16-34 made an online purchase of a product in 2009, equating to $15.1 billion worth of goods and services — an increase of $2.3 billion from 2007.314 The increase in value of goods and services purchased online was both a result of more shoppers and higher-order volumes.
Yet it is not just the monetary value of e-commerce that makes it a pervasive force in the online environment. E-commerce is not exclusively about sales, but more broadly concerns the exchange of values between businesses and customers, and this exchange is made possible with Internet use. That is, e-commerce successfully acquaints customers with the offerings of brick and mortar businesses (i.e. businesses with a physical presence, like a store) and complements traditional shopping — as demonstrated by the 52% of Canadians who used the Internet to “window shop” in 2009.
Further, 69% of those who window-shop online reported that they subsequently made a purchase from a store.315 Online shopping plays a fundamental role in the sales of many brick and mortar businesses, particularly those selling electronics, appliances, furniture, clothing, jewelry, and accessories. 316
Ensuring that Canadian businesses are able to utilize online tools to develop high quality customer relationships is critical in an online economy. Constantinides, Romero, and Boria emphasize that Web 2.0 tools permit interaction between e-tailer personnel and customers. Such interactions “can enhance customer confidence and trust (e.g. live agents, virtual communities) and improve customer service (e.g. chat or live agents, VOIP applications). At the same time, the shopping experience is improved both by richer stimuli and by different tools that allow a more enjoyable and easier interaction with the web site.”317
Discriminatory practices affect businesses of all types, but educational, cultural, arts, entertainment, and recreational industry sectors may be disproportionately impacted, given their often-limited resources for online commerce and branding. If we keep in mind that e-commerce is about more than just sales (in that it is about enhancing value propositions across any division of a business using Internet-enabled systems), the e-commerce activities of retail, trade, transportation, warehousing, and manufacturing industries may also be negatively impacted by discriminatory treatment of their traffic. Given the importance of on-demand supply chains, the inability to pay ISPs for rapid data transit pertaining to inventory queries and shipping orders could have adverse consequences for smaller firms within each of these industries.
A tiered Internet, that degrades access to retail goods, customer services, or communication tools, would impact sales, trust, and brand effectiveness. Under a tiered Internet infrastructure, restricted access to content and services will reduce incentives for businesses to transfer their services online, especially when this tiered system discriminates against the key tools they depend on to develop and spread brand awareness and build consumer trust. Such a discriminatory digital communications regime would have the effect of reducing Canadian businesses’ productivity in the marketplace and eroding their ability to compete against companies in other jurisdictions that enjoy the benefits of non-discriminatory Internet infrastructure.
Economic activity has been steadily moving online. Businesses large and small have and will continue to benefit from the operational efficiencies and opportunities for innovation that the Internet offers, but any interference with the fast and secure exchange of information online will negatively affect the competitiveness and profitability of Canadian businesses, and the Canadian economy in turn.
Innovators should not have to worry that ISPs will discriminate against their chosen means of making products and ideas available, based on an ISP’s identification of these means as ‘problematic’ (i.e. not cost-effective for the ISP). Small businesses, innovators, and Internet users should be the ones to decide what constitutes non-time sensitive traffic, rather than the ISPs that lack any meaningful investment in the success or failure of Canadian entrepreneurs.
As it stands today, no business of any size is guaranteed fair treatment of their data traffic by Canadian ISPs. Entirely legitimate uses of P2P technologies abound: CNN relied on P2P technologies to stream President Barack Obama’s inauguration, and Blizzard Entertainment (the creators of the popular World of Warcraft video game franchise) uses P2P for distributing game patches.318 One infamous, high-profile example of throttling P2P in Canada occurred when the CBC attempted to disribute episodes of “Canada’s Next Great Prime Minister.”319 Even when using P2P in a legitimate manner, businesses cannot guarantee that ISPs will treat their data fairly.
ISP interference undermines the basic networking logic of equal participation operating at the heart of the Internet. The result of such interference is an incremental closing of Canada’s Internet, and this insidious enclosure endangers innovation and weakens the competitiveness of those small and large businesses that would operate in Canada.
The Open Internet and Video Game Developers
The open Internet plays an important role in the video game industry. The Canadian gaming industry is among the world’s largest, placing just behind Japan and the United States.320 Ubisoft, a Montreal-based company, is a market leader, developing games such as Assassins Creed and Splinter Cell.
For video game developing companies like Ubisoft, latency times are critical to the multiplayer gaming experiences. The multiplayer function is a key element in most games released today and thus traffic delivery is essential to proper functionality. Delays in delivering traffic that result from a discriminatory Internet structure will negatively impact a game’s playability and create unfairness between competitors.321
Given that degraded or non-functioning multiplayer functionality can significantly threaten a company’s ongoing presence in the market, if traffic discrimination were to expand, Ubisoft and other gaming companies would need to divert resources away from the research and development of innovative games to address latency issues — for instance, paying ISPs to maintain present levels of service.322 Failing to do this would undermine the community-related benefits of online gaming, thereby reducing product attractiveness to consumers and weakening sales in turn.
304. For an excellent discussion of this kind of anti-competitive practice, where subscribers are held as ‘hostages,’ see Adam Rothchild’s discussion of the peering disputes between Comcast, an American ISP, and Level 3, who is responsible for delivering Netflix traffic to Comcast customers. Rothchild, A. (2010, December 2). Peering Disputes: Comcast, Level 3, and You. Voxel. Retrieved from http://www.voxel.net/blog/2010/12/peering-disputes-comcast-level-3-and-you
305. Van Schewich, B. (2010). Internet Architecture and Innovation (p.323). Cambridge, Mass.: The MIT Press.
306. Anderson, C. (2009). Free: The Future of a Radical Price. New York: Hyperion.
307. For an example of this, see Middleton, C. (2003). "What If There Is No Killer Application? An Exploration of a User- Centric Perspective on Broadband.Ted Rogers School of Information Technology Management Publications and Research. Retrieved from http://digitalcommons.ryerson.ca/trsitm/2
308. Van Schewich, B. (2010). Internet Architecture and Innovation (p.323). Cambridge, Mass.: The MIT Press.
309. B. Van Schewich. (2010). Internet Architecture and Innovation (p.264). Cambridge, Mass.: The MIT Press.
310. Bode, K. (2010, December 14). Rogers’ New Throttling System Cripples Speeds - And Inadvertently impacting non-P2P applications. DSLReports. Message posted to http://www.dslreports.com/shownews/Rogers-New-Throttling-System-Cripples...
311. Scott, B. (2010, December 14). Preserving the Open Internet Broadband Industry Practice. Free Press. Retrieved from http://www.freepress.net/files/Free_Press_09-191_Comments.pdf
312. Van Schewich, B. (2010). Internet Architecture and Innovation (p.260). Cambridge, Mass.: The MIT Press.
313. Grewal, D. Iyer, G.R., & Levy, M. (2004). Internet retailing: enablers, limiters and market consequences. Journal of Business Research, 57, 703-713.
314. Statistics Canada. (2009). E-commmerce: Shopping on the Internet (2005-2009). Retreived from http://www.statcan.gc.ca/daily-quotidien/100927/dq100927a-eng.htm
317. Constantinides, E., Romero, C., & Boria, M. (2008). Social Media: A New Frontier for Retailers? European Retail Research, 22, 1-28.
318. Blizzard Entertainment. (2011). FAQ. Retrieved from http://us.blizzard.com/en-us/company/about/legal-faq.html
319. Cash, A. (2010, April 3). Bell’s Web Choke. Now Magazine. Retreived from http://www.nowtoronto.com/news/story.cfm?content=162439
320. Lasalle, L. (2010, July 16). Canada is among top video game developers with its homegrown titles. The Globe and Mail. Retreived from http://www.theglobeandmail.com/news/technology/canada-is-among-top-video...
321. Brun, J., Safaei, F., & Boustead, P. (2005). Fairness and playability in online multiplayer games. University of Wollongong: Faculty of Informatics. Retreived from http://ro.uow.edu.au/infopapers/232
322. Wawro, A. (2010, August 9). Analysis: Is net neutrality good for gaming? GamePro. Retrieved from http://www.gamepro.com/article/news/213652/analysis-is-net-neutrality-go...
Email this Report to Your MP
Dive into the Report
- An Action Plan for a Connected Canada
- Canadian Views on the Open Internet
- The Technical Case for Openness
- The Open Internet: International Comparisons
- Canadian Culture in an Open Internet Age
- The Open Internet: Open for Business and Economic Growth
This Report Sponsored By:
And our supporters from the pro-Internet community.