ISPs must sabotage your broadband to survive

Dick Pountain uses economics theory to explain why ISPs are forced to throttle your bandwidth

Dick Pountain
22 Oct 2012

Turning information into money has become a most pressing problem. Much of our information torrent still arrives free of charge, but its owners are desperate to find ways to make us pay for it.

This desperation manifests itself in many ways, some of which don’t appear connected with information at all. For instance, those vicious legal spats between Apple and Samsung over patents are ultimately about the ownership of information: Apple’s claimed ownership of the idea of touch-based tablet computers, expressed in the form of patents on specific features.

Bandwidth is a valuable commodity, and extracting maximum profit from such commodities is a science that involves strange paradoxes

The arena of telecommunications is a vast battlefield on which two information wars are raging: the last war, not quite over yet, between the old landline-based giant telcos and the new mobile phone operators for your voice-call traffic; and a new war, heating up, between those mobile operators and IT companies such as Apple and Google, which seek to grab all their data traffic via paid-for smartphone and tablet apps.

According to research outfit Ovum, SMS text traffic is worth around $150 billion each year to the mobile operators, but over a third of iPhone users are already switching to IP-based messaging services such as Pinger. Like the old telcos, the mobile operators risk being reduced to merely owning the pipes through which other people’s profitable content flows.

Apple is currently having a rather good war, having ruthlessly preserved a proprietary grip on its own hardware ecosystem, and exploited this to make users pay for apps and content through online stores. Its carpet bombing of Adobe Flash – by excluding it from the iPad – is a tactical victory, damming off one whole stream of free content from the internet.

However, one battle isn’t the whole war. I recently described my experience of using a 3G iPad in Italy, but what I didn’t mention was that the deal I get is grossly inferior to the 3G connection for my laptop (€24 per month for 10GB as opposed to €19 per month unlimited). I grumbled to the chap in the TIM shop, but that’s the only deal for iPads: the company presumably analysed the traffic profile of iPad owners and decided that’s the only way to profit from them.

Bandwidth is a valuable commodity, and extracting maximum profit from such commodities is a science that involves strange paradoxes. You might think the most profit could be obtained by producing the largest amount of a highly desirable commodity, but that’s far from the truth. Pricing is everything, and often maximum profit is achieved by restricting supply to raise the price.

The archetypical case is the De Beers family’s rigid control over the world’s supply of diamonds, but the oil industry is a pretty good example too. For most of the 20th century there was a large surplus of oil reserves, but oil companies wouldn’t pump so much as to lower the price too far. Daniel Yergin’s massive tome The Prize: The Epic Quest for Oil, Money and Power describes in entertaining detail the hoops they jumped through to prevent new fields being exploited by rivals. Contrary to much free-market dogma, companies don’t enjoy price competition, and very large companies will go to great expense to avoid or subvert it.

The great theorist of such pricing policies was the eccentric economist Thorstein Veblen, the man who gave us the term "conspicuous consumption". He delighted in provoking with mocking and ironic terminology, and the term he chose for this case was "sabotage". A partisan blowing up a railway line; a striking worker dropping a spanner in his machine; an ISP throttling your internet feed; they’re all doing the same thing: deliberately reducing production to achieve certain ends. Veblen defined sabotage as "a conscientious withdrawal of efficiency" and didn’t regard it as a pejorative term – on the contrary.

"The common welfare in any community which is organised on the price system cannot be maintained without a salutary use of sabotage," he states, advocating "such restriction of output as will maintain prices at a reasonably profitable level and so guard against business depression".

Our current economic crisis is largely one of overproduction. The alternative to sabotage is to do away with prices and make everything free, but that invites massive overconsumption (the so-called "tragedy of the commons"). Eventually things would have to be rationed by other means, often not nice ones. That it’s better to pay people enough to buy stuff ought to be obvious, but seems to escape politicians and employers alike.

Read more about: