With the election season over, the issue of net neutrality is–once again–a political punching bag. The core of the issue is that Netflix and other content aggregators provide an awesome customer experience on someone else’s dime. Want to unwind when you come home and binge watch Breaking Bad? Sure, everyone does! But someone has to pay for the massive surge in demand at nights, and they are not happy.
This is not just an internet issue. Ridesharing companies such as Lyft and Uber charge you special pricing for that ride home when demand for rides spike. What about your Thanksgiving airline ticket home? Is it more expensive than an off season ticket to Maui?
Every single capacity-constrained industry struggles to manage demand, and mainly they manage it with pricing that responds to demand. For example, you pay demand charges when your building’s energy use spikes on a hot afternoon.
But do you pay—or, would you pay—extra to stream an episode of Game of Thrones on a Friday night? If the Internet worked like the electrical grid, you might.
Timothy B. Lee, at The Washington Post, has done a fine job explaining how the flow of data across the Internet used to work, how the data is starting to flow now, and how the pricing for that data flow is starting to change. Of the many recent changes to this market, the most significant has been Netflix agreeing to pay Comcast so that streaming Netflix data isn’t interrupted. And we’re talking about a lot of data: 31.6% of all Internet traffic in North America is Netflix data. Some fear that this deal sets the stage for a tiered Internet, where data from large content providers like Google, Alibaba, and Netflix gets priority access, at a price, to the “fast lanes” of the Internet piping, while other data is slowed down on the sidelines.
Though the Internet has access to plenty of bits of data, its bottleneck is a generally limited amount of piping bandwidth to transport that data from a web server to your iPhone (particularly now, as internet service providers backwards integrate). Will the Internet need its own form of ancillary services to widen its bottleneck of piping bandwidth?
Want to sound really smart at Thanksgiving and annoy your brainiac aunt? Just tell the people at your table that the electricity market figured this issue out long ago. You might show them a version of the future where the Internet looks like the electricity system for insight and a bit of a chuckle.
First, commercial electricity buyers spend 30% or more of their bill on the maximum rate of consumption in the form of demand charges. In Internet terms, this is your maximum download rate. A household of teenagers all watching their own show on their own device will be more expensive than an old couple watching Downton Abbey together. On the Internet, the couple subsidizes the teenagers; in electricity markets everyone pays their fair share.
Second, electricity has time of use charges, which vary dramatically — by an order of 300% from the lowest price to highest price period in California. In Internet terms, this means that an intense Minecraft session at 3am should cost one third less than a session at a 6pm peak.
Third, in electricity, buyers get paid for reducing their usage at peak times. In Internet terms, consider a grad student downloading a massive data set at 7pm. She might be presented with a demand response offer that would provide a monetary incentive (or a lower rate) if she could defer this download task for just a few hours.
Fourth, in electricity, the “pipes” are regulated in all 50 states while what flows through the pipes is mostly a market structure. In the most abstract, this means that the Comcasts of the world would have a fair and regulated return set by the government, be paid by Netflix, expected to invest for peak demand, and have clear incentives to provide societal benefit in the service they provide.
This sounds crazy? Of course it does. It’s the regulated electricity system!
Your Aunt might not understand, but this is your world. By understanding it, you drive value for your building and organization. But think again about Netflix and the net neutrality debate. What things did the electricity system get right? What did the Internet get right?
