One of the axioms of the Internet is that bits are free. That is, once you pay for the cost of putting something online, the cost of distributing each copy of the original material is zero. People who actually work with online material know that this is balderdash (there is the cost of customer service, maintenance of the hosting service, potentially a cost for royalties, etc.), but certainly there is a difference in the economics of print and digital publishing. Relatively speaking, print has moderately high fixed costs and very high variable costs; digital material has even higher fixed costs, but tiny variable costs. This basic economic formulation has given rise to the world of the Internet as we know it today with a plethora of free services, some of astonishing value, of which Google is simply the most prominent. But it wasn’t always this way and it may not be that way forever. There are powerful parties who have an interest in placing a price on bits, and if and when that happens the Internet will evolve into something different.
A bit of history. For those who have been involved in the online game for a long time, such names as CompuServe, The Source, Dialog, BRS, and America Online (in its original form) will be familiar. All these companies started out in the pre-Internet era, and some survive to this day, albeit in reduced form (Dialog, AOL). These organizations managed their own networks and charged a fee for use, a fee that varied with the kind of content that was offered and the amount of time a user remained connected to the network. When the Internet came along, some of these organizations attempted to replicate this model, but soon it became obvious that this new vast network of networks would change everything.
As I recall, the game-changing business model was invented by an Internet service provider (ISP) called Netcom, which came up with the radical idea of providing residential dial-up access to the Internet for a fixed monthly charge of $19.95. Early adopters jumped on this, and not long afterward the AT&T WorldNet service matched the offer, bringing its brand name and marketing authority to a mass market. AOL responded with a fixed-rate service of its own (which, amazingly, still exists) and rapidly became the world’s largest ISP. Allowing for technical advances and a new cast of players, this is the world that most of us live in today. We pay for residential Internet access with a fixed fee, a fee that varies by ISP and speed. Like a subscription to Netflix, once you pay that fee, there are no incremental costs. This financial model gave rise to a great number of free content services, which has put enormous pressure on traditional content providers, who struggle to monetize their investments. We should bear in mind that the open access movement is based on the notion of free access to the Internet, a notion that reflects a particular period of history, which may be coming to an end.
If Netcom, AT&T, and AOL were responsible for creating one paradigm (abetted by Tim Berners-Lee, Mark Andreesen, and many others), the principal creator of the new paradigm was Steve Jobs, who transformed the world of computing with the iPhone. Mobile access to the Internet now exceeds access from PCs. A new ecosystem is growing up around smartphones (app stores, Twitter, Instagram). Although this ecosystem is primarily a consumer phenomenon at this time, scholarly publishers are getting into the act, too. I recently saw a group of proposals from scholarly content-management platform companies, and every one included a section on how a scholarly client would be able to make its content (journals) available on mobile devices. Now you can flip through the abstracts from a journal of biostatistics on your Droid phone or watch an animation of a medical procedure on your iPad. It truly is a new world, is it not?
There is no Internet without Internet access, however, and the ISPs that provide mobile access are not content to work with the business models of their brethren in the landline business. Mobile telecommunications companies are now placing data caps on subscribers, something you will experience soon, if you have not already, when you traipse over to an AT&T or Verizon Wireless dealer. The data caps are set fairly high (my daughter, who streams Pandora when she drives, has yet to hit the ceiling), but they are not really intended to tax the user. The real target is Net Neutrality and the opportunity to collect rents from two sides–that is, the real target is the Internet companies (Google, eBay, Yahoo, etc., etc.) that have enjoyed unfettered access to their many users.
Net Neutrality is a complicated topic, which is based in politics, not technology or economics. Its core principle is that everyone should be able to use the Internet on an equal basis. Thus a blogger can speak to the world with as much force as, say, the journalists at Fox News or CNN. Without Net Neutrality, large providers of content-based services would be able to purchase preferential access to users, most likely in the form of more bandwidth. It should be apparent that ISPs don’t like Net Neutrality, as they would like to charge more to content providers that use up a larger portion of the capacity of their network.
It’s never good to underestimate the marketing ingenuity of the telecommunications companies. I imagine a marketer driving to his local shopping mall, which charges a fee for parking. He then steps into the supermarket, buys several items, and gets his parking ticket validated before leaving the store. The shopping mall customer is supposed to be charged for parking, but in fact the fee is paid by the supermarket, which benefits from having the customer visit the mall. That customer then goes into work at Huge Wireless Telco, Inc. and declares that he has found a way to subvert Net Neutrality.
Switch to the world of mobile Internet access and you will see how this works. You pay, say, $30 each month for a wireless data plan, which comes with a cap on how much data you can consume (perhaps 2 gigabytes). But the producers of Internet content don’t want you to stop using their service when you get close to the cap any more than the supermarket wants you to stop shopping because you have to pay a parking fee. So the wireless telecommunications company approaches the biggest producers of Internet content and asks them to pay for the equivalent of a parking fee validation. Thus Google, eBay, Yahoo!, and their ilk would have to pay a price so that their services would not count for the individual’s data cap. We should not be surprised that these companies will fight the wireless ISPs very hard to prevent this from happening.
Let’s recap before moving to the response to the wireless ISPs:
Internet access has been unlimited for some time now, but that time may have passed.
More and more Internet access comes from mobile devices.
The wireless ISPs have found a way to put an end to unlimited access to the Internet.
Hence the model of “free information” is going to come under challenge, as content costs become implicated with bandwidth charges.
The Holy Grail is to break the chokehold that the ISPs have on Internet access. It is little remarked upon that the single largest share of revenue from the Internet has been delivered to the pockets of the ISPs–that is, the revenue from Internet access from Verizon, AT&T, Comcast, and their ilk vastly exceeds the revenue for Google, Yahoo!, and the other Internet media companies. (Ecommerce, as in Amazon and eBay, is a separate matter.) Thus Internet companies seek to break the hold that the ISPs have on their users. No company has put more energy into this than Google, which has investigated a number of ways to cut into the ISPs markets including bidding on spectrum and developing its own “phone” service, Google Talk.
Even more ambitious is Google’s invasion of the landline ISP market with Google Fiber. (You can tell Google is a youthful company by the choice of name. When I first heard about Google Fiber, I was puzzled why Google was getting involved with a dietary supplement.) While the low-cost and high-speed connections of Google Fiber are not directed to the wireless market, once the infrastructure is in place, it would not be a major engineering feat to hang WiFi access on top of it, thereby providing a direct challenge to the wireless ISPs. When you combine Google Talk with WiFi, there is no need to have a phone subscription of any kind.
More romantic is Google Loon, an experimental WiFi network being set up in New Zealand. Loon consists of interconnected hot air balloons that would provide WiFi network services to specific areas on the ground. It is being touted to provide Internet access to the developing world and rural areas, but it takes little imagination to think of Loon as someday coming to a neighborhood near you. Look! Up in the air! It’s a bird! It’s a plane! No, it’s Google!
This is the battle that is currently being waged: the chokehold ISPs vs. the advocates of Net Neutrality. The cost of content on the Internet will vary depending on the outcome. If I may editorialize, with all the current talk about “new” business models, it’s easy to forget that we all live in the world that Ted Vail built. The AT&T monopoly has formally been put to death, but it continues to live on in the form of the practice of Internet access. We don’t have “new” business models; we have “current” business models. Strategic planning in the content industries must take into account the much larger game being played by economic giants.