In order to draw some strong policy implications it would be necessary to rank different business models according to a set of criteria, such as total or consumer welfare. This represents a highly complex task as there is no single economic model underlying the different business models considered. Therefore the report does not attempt to rank the business models but instead discusses a number of trade-offs which the decision to regulate the Internet would likely involve.
The implementation of a strong form of net neutrality (definition 2) prevents
“Best Effort Plus” and “Quality Classes – Content Pays”, but still allows the other two business models. This implies that some benefits of new business models can be reaped with net neutrality regulation whereas other efficiencies cannot materialize:
“Congestion-Based Model”: Congestion-based pricing can be thought of as an extension of network management which is currently only achieved
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on a technological level. Therefore, the implementation of this model would bring some modest gains in the overall efficiency of the network.
Moreover, the model would require little regulatory oversight and exhibit low risk with regards to anti-competitive behavior as compared to other business models considered. So the efficiency gains could potentially be realized at a low regulatory cost. However, this model does not allow for product differentiation and thus deprives end users and content providers of the benefits of this type of differentiation. In particular, it does not prevent that certain highly delay-sensitive content is crowded-out of the market at high congestion times. Therefore, the implementation of this model would bring at best only modest gains in overall efficiency of the network.
“Quality Classes – User Pays”: In comparison, the “Quality Classes – User Pays” model allows for different quality classes which opens possibilities for new content. However, charging users rather than the content provider for the higher quality levels is likely to lead to lower value and lower incentives to invest for the platform than in the business models
“Best Effort Plus” and “Quality Classes – Content Pays”. The regulatory risk related to foreclosure strategies seems smaller, though: the ability of a dominant ISP to favor a vertically-integrated content provider is lower.
It should be noted that a combination of the two business models would also be feasible under this type of net neutrality regulation. In this sense, the gains due to congestion pricing can be combined with efficiency gains achievable in other business models.
In contrast, the implementation of definition 3 or 4 would also enable the adoption of a business model which prices the content provider for higher qualities. Under the “Quality Classes – Content Pays” model new content is also facilitated via higher qualities – just as in “Quality Classes – User Pays”. As regards comparison between the two models involving quality classes, the following trade-off applies:
the increased risk of foreclosure where content pays for higher quality must be weighed against inefficiency related to pricing the consumer side. It is difficult to argue in general which of the two effects outweighs the other. One must take into account, however, that in the European environment foreclosure risks are mitigated by a number of factors. First, the ability to foreclose is limited by access pricing regulation prevalent in Europe. Second, the ISP’s incentives to foreclose in Europe are also limited relative to, for example, the US because European ISPs seem in general less vertically-integrated into content than their American counterparts. Third, if consumer welfare rather than total welfare were to be used as the criterion for determining the desirability of the business models, then it is
likely that the “Quality Classes – Content Pays” model would be preferable over
“Quality Classes – User Pays” model. All these factors seem to favor to some extent the model where content pays (BM2) relative to where the user pays (BM3), although it is uncertain, if they are sufficient to mitigate the risk of foreclosure to a level where the first could be considered unambiguously preferred over the second.
Finally, under the “Best Effort Plus” model any net neutrality regulation could only apply to traditional services not to novel innovative services. This model would thus not prevail under any form of all-encompassing net neutrality regulation. Also under this approach to industry regulation, benefits from quality differentiation can be reaped for society. With content providers sharing parts of the additional infrastructure costs for new services with the ISPs, the end user may experience lower charges compared to the same offering under the status quo. However, it should be noted that this outcome might also be replicated with a combination of the two models where quality classes are allowed (BM2 and BM3).
Ultimately, the crucial comparison involves “Best Effort Plus” versus a combination of the quality classes models BM2 and BM3. The models are very different in their assumptions and consequently a clear delineation of the different risks and benefits is highly complex. Both models tend to increase the participation of end users and both open the way for content demanding higher quality of service. But it is beyond the scope of this study to assess which model leads to more end user participation, to more content innovation and/or to more infrastructure investment. In the longer run, the gap between the two models might partially decrease as the significance of the traditional services in the “Best Effort Plus”
model might gradually diminish and unregulated novel services determined by commercial contracts and market forces will dominate the future Internet.
However, to the extent that the “Best Effort Plus” model is characterized by exclusive agreements, the difference persists.
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