The Tiered Internet and “Virtual Redlining”

If Senator Stevens or Representatives Rush and Wynn ever thought about the impact of “tiered access” (or, as I prefer, Whitacre tiering) on rural areas and minority communities, they’d probably switch their votes. Because the flip side of charging for “premium” access is that the third party has to want to pay for it.

If you are a big company, will you pay extra to reach “undesirable” customers like rural customers or minority communities? Of course not! If you have to negotiate with every ISP for premium access, you are only going to want to pay for the “good” customers. And happily, because the ISP is under no requirement to protect customer privacy, the ISP can provide you with precisely the right target demographic.

Welcome to the new world of “Virtual Redlining.” Made possible by Senator Stevens, Bobby Rush and Al Wynn. I hope they have fun explaining to their constituents why, even when they buy the “high speed” pipe, their content downloads slower than the exact same content in the nice neighborhoods of NYC and LA.

First, just to remind folks what I’m talking about and to eliminate confusion, “Whitacre tiering” (named for AT&T CEO Ed Whitacre) means a broadband provider charging a third party for “premium” access to the provider’s subscribers, regardless of the customer preference. This is different from when a broadband provider offers a customer different speed packages (such as $20/month for 1.5 mbps or $50/month for 5 mbps), which I call “customer tiering.” It is also different from when a third party content company invests in network infrastructure or Akami-type caching to move its content faster (“provider provisioning”).

Previously, I’ve explained why I think Whitacre Tiering would hurt businesses using the Internet, destroy incentive to invest in new delivery systems, and even hurt the ISPs themselves by introducing new inefficiencies and transaction costs for an indeterminate reward. The analysts over at Light Reading Insider recently came to similar basic conclusions with reagard to the difficulty in capturing new revenue from Whitacker Tiering (at least as far as I can tell without purchasing the full report for nearly a grand). According to the Executive Summary, Light Reading concluded that while theroretical revenues from charging third parties or from capturing even a modest segment of the market for pushing bits faster from the likes of Akami could run to $10 Billion, the cost of implementing such systems would drive potential real profit down to $2 billion, further reduced by customer churn and new elements of uncertainty added to internet business models.

(Light Reading takes no position on whether to legislate net neutrality or not, just a warning that there is no pot of gold at the end of the tiered rainbow and that broadband companies should move cautiously. I, on the other hand, would prefer if the handful of companies controlling a critical chunk of national infrastructure did not screw it up because they turned out to be “inefficient monopolists,” as the econ folks like to say. But I’m silly that way.)

As someone with no formal training in economics besides an “Econ 102” course taken in college, I’m always pleased to see other people confirm my work. Makes me feel all warm and fuzzy. It also gives me confidence enough to push to the next part of the analysis — the birth of virtual redlining.

WHAT IS VIRTUAL REDLINING?

When businesses avoid particular neighborhoods (or jack up rates to those neighborhoods) we call that “Redlining.” It comes from the quaint habit from back in the days of real paper maps of outlining real estate maps in red ink and then proclaiming: “the part on the other side of the red line we don’t serve.”

Why would anyone not want to serve an area? Traditionally, because they think they can’t make a profit or because the customers on the wrong side of the “redline” are somehow “undesirable.”

To take a recent example, the county next to mine, Prince George’s (PG) County, is a majority black county (and, in an ironic twist of fate, represented by COPE supporter and general sell-out Al Wynn). It is a fairly wealthy county, with a median income well above the national average. It has some “bad neighborhoods,” mostly extensions of the bad neighborhoods of the Anacostia section of DC, but most of the county is standard middle to upper middle class folk who just happen to be black.

For years, PG County has tried to attract a high-end retailer, but couldn’t. Why? Because it turns out race really does matter on these things, despite what the neo-cons like to prove with elegant equations. When the folks in corporate headquarters ran the zip codes for PG County through their computers and out popped “majority black county,” that was all she wrote. (PG County finally landed a “Wegman’s,” so they may now attract some of the other high-end stores.)

Now lets move to the world of the tiered internet. Large companies start to pony up. Where do they buy “premium access?”

Answer: only where they think it matters. Companies like Disney or iTunes or whoever else wants to pay for “premium service” will not pay extra to reach “undesirable” or “less cost effective” customers. Why should they? They need to maximize revenue just as much as the phone companies and cable companies do. Why on Earth would I, as a company, pay extra to reach customers I don’t think will pay top dollar for my product? Or, if I am advertiser supported, why would I pay top dollar to reach customers my advertisers won’t pay to reach?

We’ve already seen this in mass media. Advertisers pay a hefty bounty for white male audiences age 18-35. Companies segment the market and sell at different prices to different advertisers. Nobody wants to reach the over 50 crowd, so radio no longer plays music aimed at that demographic. Hip hop format stations have one set of advertisers, top 40 another set, etc. etc. with different prices paid based on the desirability of the audience and the region.

So will the retailers who didn’t think it worthwhile to settle in PG County (represented by Al Wynn, btw) pay Verizon or Comcast extra money to get “premium tier” service to the county? Maybe, but I doubt it. Of course, I live in a nice neighborhood in neighboring Montgomery County. Third parties will fall all over themselves to get to my zip code. But more rural counties or more “urban” neighborhoods of DC can probably forget about “premium tier service.”

Hey, Al Wynn and Bobby Rush, along with rural guys like Stevens, have cheerfully agreed to allow physical redlining at the behest of the telcos. What’s a little virtual redlining after that?

Of course, because there are no rules protecting privacy on “information service,” high end customers in the “bad zip codes” may still get “premium service.” Odds are good third parties will want to reach customers willing to pay for the highest available speed (available to the customer). And the telco or cable co can monitor your personal data and surfing habits, crunch them through their datamining algorythms, and market individual subscribers like fine hors de vours to the discriminating thrid party. So it’s not entirely hopeless for getting “premium service,” provided you don’t mind the rather intrusive process.

Still, I can’t help but feel sorry for the folks, mostly in rural neighborhoods or represented by people like Rush and Wynn, destined to get virtually redlined. I imagine it will feel awful to folks in Alaska or rural Texas to know that godless (but much richer) blue state folks in New York City and LA get faster downloads even when they buy the same size pipe, because people actually want to reach urban customers rather than rural customers. Kinda sucks for rural businesses too, I imagine.

Similarly, I am not sure how Mr. Rush and Mr. Wynn plan to explain to their constituents why folks in the “good” neighborhoods get faster downloads. But I sure wish I could be there when it happens.

I, of course, am a high-income white guy in a covetted zip code. I’m gonna have folks pushing premium tier content on me no matter what.

So if Mr. Stevens, Mr. Rush and Mr. Wynn wish to sell out their constituets, I suppose it’s not my problem. I didn’t vote for ’em.

Stay tuned . . . .