Tuesday, May 4, 2010

Frost & Sullivan: Net Neutrality Distorts the Operator Investment Decision

According to recent research from Frost & Sullivan on the effects of net neutrality on consumers and the economy, net neutrality has the potential to distort the parameters built into operator business cases in such a way as to increase the expected risk.

Because it distorts the operator investment decision, net neutrality has the potential to significantly discourage infrastructure investment. This is because investments in infrastructure are highly sensitive to expected subscriber revenue. Anything that reduces the expectation of such revenue streams can either delay or curtail such investments.

"Broadband has been described as the new infrastructure on which the economy of the 21st century is being built," explains Mike Jude, Ph.D., Program Manager, Consumer Communications Services for Stratecast, a division of Frost & Sullivan. "As such, its ubiquity, ease of access and cost to consumers are all of great concern to public policy and regulation."

In particular, regulators and legislators have expressed concern that operators may be tempted to discriminate in favor of their own services or those of third party partners to the detriment of competitive offerings.

Net neutrality is, in fact, complex. In the presence of net neutrality, operators would likely reduce investment due to the increased risk. If operators maintained investment and simply recovered the costs associated with doing so from another source, those costs are ultimately borne by the consumer. An operator denied the opportunity to generate service revenue would be forced to adopt other methods for covering deployment costs: These could include simply passing along the costs to the consumer, creating service bundles that limit consumer choice or passing the cost along to content providers.

"To the extent that consumers were unwilling or unable to incur such costs, net neutrality could, ironically, have the effect of actually reducing broadband penetration," cautions Jude.

Net neutrality acts like a tax on the Internet. It imposes overheads on network operators, which, in turn, decrease network investments, providing less opportunity, not only for the operators, but also for those that use the operators' networks as well.

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