Progress Snapshot

Volume 6, Issue 6 March 2009

Innovation at the Core Drives

Innovation at the Edge (& Vice Versa)
by Berin Szoka*

Mobile broadband speeds (at the “core” of wireless networks) are about to skyrocket—and
revolutionize what we can do on-the-go online (at the “edge”). Consider four recent stories:
1. Networks: MobileCrunch notes that Verizon will begin offering 4G mobile broadband
service (using Long Term Evolution or LTE) “in up to 60 markets by mid-2012″ —at
an estimated 5-12 Mbps down and 2-5 Mbps up, LTE would be faster than most wired
broadband service.
2. Devices: Sprint plans to launch its first 4G phone (using WiMax, a competing standard to
LTE) this summer.
3. Applications: Google has finally released Google Earth for the Nexus One smartphone
on T-Mobile, the first to run Google’s Android 2.1 operating system.
4. Content: In November, Google announced that YouTube would begin offering high-
definition 1080p video, including on mobile devices.
While the Nexus One may be the first Android phone with a processor powerful enough to
crunch the visual awesomeness that is Google Earth, such applications will still chug along on
even the best of today’s 3G wireless networks. But combine the ongoing increases in mobile
device processing power made possible by Moore’s Law with similar innovation in broadband
infrastructure, and everything changes: You can run hugely data-intensive apps that require
real-time streaming, from driving directions with all the rich imagery of Google Earth to mobile
videoconferencing to virtual world experiences that rival today’s desktop versions to streaming
1080p high-definition video (3.7+ Mbps) to… well, if I knew, I’d be in Silicon Valley launching a
next-gen mobile start-up!
This interconnection of infrastructure, devices and applications should remind us that
broadband isn’t just about “big dumb pipes”—especially in the mobile environment, where
bandwidth is far more scarce (even in 4G) due to spectrum constraints. Network congestion

*
Berin Szoka is a Senior Fellow and Director of the Center for Internet Freedom at The Progress & Freedom
Foundation. The views expressed in this report are his own, and are not necessarily the views of the PFF
board, fellows or staff.

1444 EYE STREET, NW  SUITE 500  WASHINGTON, D.C. 20005

202-289-8928  mail@pff.org  @ProgressFreedom  www.pff.org
Page 2 Progress Snapshot 6.6

can spoil even the best devices on the best networks. Just ask users in New York City, where
AT&T has apparently just stopped selling the iPhone online in order to try to relieve AT&T’s
over-taxed network under the staggering bandwidth demands of Williamsburg hipsters, Latter-
Day Beatniks from the Village, Chelsea boys, and Upper West Side Charlotte Yorks all
streaming an infinite plethora of YouTube videos and so on.
Unfortunately, the “neutralists” think that regulation, rather than innovation, is the better
solution to dealing with the constant tension between the capacities of networks and the
bandwidth demands of new applications. But as Adam Thierer noted in making the The 5-Part
Case against Net Neutrality Regulation in his debate last week with Ben Scott of the radical
“media reform” advocacy group “Free Press”:
Innovation at the core of networks is every bit as important as innovation at
the edge: We don’t want stagnation at the core or networks, and the
applications that ride on them, will suffer.1

Funding the Future of Broadband

All this begs the critical question: What funds the networks of the future? What policies need to
be in place to make sure they are delivered? If we believe Free Press and other pro-regulatory
forces backing the FCC’s pending plan to impose Net neutrality regulation, freezing innovation
at the core through “common carriage” regulation is the best way to ensure greater network
innovation and investment. That’s essentially the argument they advanced in their filing to the
FCC in the net neutrality proceeding (summarized here). Does that make any sense? When was
the last time increased regulation of anything led to increased investment and innovation in
this or any other sector?
Importantly, the sort of mandatory dumb pipe approach that Free Press and the FCC favor
would limit potentially beneficial forms of network experimentation with new approaches to
delivering bits in a more rapid, more reliable, or more secure fashion. Free Press apparently
thinks speedy, reliable and secure networks just magically appear, like manna falling from
heaven. But networks don’t get built thanks to divine intervention or magic tricks.
Someone actually has to convince investors and shareholders to invest billions in risk capital on
what are essentially high-tech crap-shoots.
Will massive investments in LTE or WiMax 4G wireless networks pay off as carriers compete
with each to attract customers? That’s a very risky bet, since consumer wireless broadband
service prices aren’t set by the cost of the networks but by what the market will bear: How
much would you pay per month for a mobile data service capable of running applications that
just aren’t feasible in today's mobile environment? That probably depends on whether there’s
a “killer app” to make the greater speed of 4G plans worth the premium over 3G. So, why
would network operators try to strangle innovation at the applications layer (as Free Press
fears)? Faster web browsing is great, but what will really make buying a 4G phone and service

1
Adam Thierer, Free Press, Robert McChesney & the "Struggle" for Media, Technology Liberation Front, Aug. 10,
2009, http://techliberation.com/2009/08/10/free-press-robert-mcchesney-the-struggle-for-media-marxism/
Progress Snapshot 6.6 Page 3

plan worth the price premium are innovative mobile applications like mobile Google Earth,
Microsoft’s Photosynth, 3-D gaming, immersive virtual worlds, and so on.
Rolling the dice on multi-billion dollar next-generation networks becomes an even scarier
proposition once regulatory risk is factored into the equation. Would you like to be the guy
who has to convince your board, your employees, your shareholders, and the rest of the world
that a multi-year, multi-billion investment in a commercially unproven technology is worth the
risk when you have an FCC ready to wrap its tentacles around those networks and apply vague,
open-ended regulatory notions like “Net neutrality” to them?
Consider recent innovations announced by Verizon and Google.

Verizon’s 10Gbps Super-Fast Fiber Demonstration

Verizon recently conducted a successful field-test of a passive optical network system known as
XG-PON “that can transmit data at 10 Gbps) downstream and 2.4 Gbps upstream, four times as
fast as the current top transmission speeds supporting the company’s all-fiber FiOS network.”2
Brian Whitton, executive director of access and video technologies at Verizon said, “This further
validates our strategic choice of fiber-to-the-premises as the best way to build a future-proof
network.” It certainly does—assuming you can recoup the initial cost of building and deploying
that network. But regulation which treats such advanced networks as nothing more than dumb
pipes would undercut such innovations by dampening the incentive to further invest and
innovate in this fashion.
That’s not to say Verizon and other network operators will need to block traffic or betray
“neutrality” principles as Free Press fears. Even today, Verizon has done what Free Press seems
to think would never happen without regulation: Verizon recently announced it would begin
allowing users to place Skype calls directly over the 3G network (which was previously only
possible on Verizon phones over a Wi-Fi network). As the Los Angeles Times explained:
By embracing Skype, Verizon is betting that any revenue it might lose from
customers downgrading their voice-calling plans will be more than made up by
added sales of data plans and a share of the revenue from Skype subscriptions.3
So Verizon gets a cut of the revenue—so what? How, exactly, is this obviously non-neutral deal
bad for consumers?

Verizon’s Deal with HBO & TV Everywhere

The Los Angeles Times mentions another deal cut by Verizon that should illustrate just how
important innovation is at the business model layer—i.e., in figuring out how to support the

2
Verizon Corporation, Press Release, Verizon Conducts World's First 10 Gigabit-per-Second Fiber-to-the-
Premises Field Test, Dec. 16. 2009, http://newscenter.verizon.com/press-releases/verizon/2009/verizon-
conducts-worlds.html
3
Jon Healey, Verizon Wireless, HBO and how best to adapt to disruptive technology, LA Times Blog, Feb. 17,
2010, http://latimesblogs.latimes.com/technology/2010/02/verizon-wireless-hbo-and-how-best-to-adapt-to-
disruptive-technology.html
Page 4 Progress Snapshot 6.6

content and services taken for granted by users. In response to the accelerating shift of
consumers towards “cutting the video cord” as Internet-delivered video has become a more
clear alternative to traditional cable or satellite video service, HBO has cut a deal with Verizon
to make its content available to FiOS subscribers just as it does with other cable operators.
Again, this is exactly the kind of partnership that may be needed to sustain content production
in a world where the traditional cable model is breaking down quickly. Yet, for all their talk
about the need for “new business models,” Free Press wants to ban this sort of innovation.
When the cable industry has attempted to expand upon the model of its deal with HBO to give
subscribers online access to a far wider range of video programming through “TV Everywhere”
service, Free Press has accused the cable industry of “Colluding to Kill Online TV” and
demanded immediate antitrust action and “structural rules like compulsory licenses.”

Google’s 1Gbps Fiber Pilot Project

While Verizon’s December announcement about 10-Gbps FiOS speeds drew relatively little
attention, Google generated lots of excitement when it announced earlier this month that it
would build a 1 Gbps fiber network to serve up to 500,000 customers. Google says it’s not
entering the broadband business but considers this a “business model nudge and an innovation
nudge.”4 If it succeeds in raising the bar for broadband service and demonstrating what users
could do with greater bandwidth, great!
But let’s not forget that the economic engine that drives Google (and will cross-subsidize this
experiment) is advertising, which is under fierce attack. Verizon and other Internet Service
Providers (ISPs), by contrast, have to rely on subscription revenues to not just to pay the costs
of that infrastructure but also the risk premium associated with building out new, faster
networks in advance of consumer demand. Unfortunately, all the recent hysteria about the use
of “deep packet inspection” for behavioral advertising seems to have made it very unlikely that
ISPs will be able to supplement subscription revenue with ad dollars any time soon. But that’s
exactly the kind of business model innovation that could defray some of the costs of deploying
4G wireless or super-fast fiber networks.
Even with the cross-subsidy of advertising for this promising pilot project, Google’s high hopes
may be wrecked again by the same kind of extortionary demands that have long faced cable
operators (and, more recently, fiber competitors) when dealing with local governments.
Google faced just such absurd demands with its municipal Wi-Fi scheme in San Francisco,
ultimately helping to crater the deal.

A Framework for Promoting Openness, Investment & Innovation

Google and Verizon are, of course, just two of the many key players operating at the cutting
edge—and convergence of—infrastructure, devices, applications and content technologies and
business models. But the two companies seem to have found common ground in working

4
Miguel Helft, Google Set to Showcase Fast Internet, N.Y. Times, Feb. 10, 2010,
www.nytimes.com/2010/02/11/technology/companies/11google.html
Progress Snapshot 6.6 Page 5

together—perhaps through their high profile partnership to make Motorola’s Droid handset,
which runs Google’s Android operating system, the flagship of Verizon’s smartphone offerings.
Most notably, the two companies managed to work through most, though not all, their
differences on the deeply divisive issue of net neutrality to forge a common set of principles for
how to address technical disputes about network management: through self-regulation,
especially through expert technical bodies like IETF, “with governmental involvement limited to
dealing with bad actors on a case-by-case basis where industry mechanisms are unable to
resolve conduct that is anticompetitive and harms consumers.”5 These principles, presented to
the FCC in January, provide a clear alternative to the kind of “prophylactic” regulatory regime of
full-blown “line-sharing” or “forced-access” mandates contemplated by Free Press. These
principles are also strongly reminiscent of the consensus proposal reached by a non-partisan
group of 50 lawyers, economists, engineers and others PFF brought together in 2005-6 in the
Digital Age Communications Act (DACA) project: Address actual harms through case-by-case
adjudication ex post under the consumer welfare standard of antitrust law.6 Perhaps it’s time
to dust off DACA as a “third way” on net neutrality.

Related PFF Publications

FCC Comments of Barbara S. Esbin In the Matter of Preserving the Open Internet
Broadband Industry Practices, Barbara Esbin, Jan. 14, 2010.
Net Neutrality: A Further Take on the Debate, Barbara Esbin, Progress on Point 16.26,
Dec. 2009.
The First Amendment, the Internet & Net Neutrality: Be Careful What You Wish For,
Robert Corn-Revere, Progress on Point 16.28, Dec. 17, 2009.
Net Neutrality, Slippery Slopes & High-Tech Mutually Assured Destruction, Adam Thierer
& Berin Szoka, Progress Snapshot 5.11, Oct. 2009.
The Law is Whatever the Nobles Do: Undue Process at the FCC, Barbara Esbin & Adam
Marcus, Progress on Point 16.18, Aug. 4, 2009.
The Day That Internet Freedom Died, Adam Thierer & Berin Szoka, Forbes.com, Sept. 22,
2009.
Jurisdiction: The $64,000 Question, Progress Snapshot 5.12, Barbara Esbin, Nov. 2009.
Wireless Investment, Innovation and Competition: Advance or Retreat?, Barbara Esbin,
Brett Glass, Kathleen Ham, Thomas Hazlett, Wayne Leighton, Ruth Milkman, Craig
Moffett & Gregory Rosston, PFF Capitol Hill Briefing, Progress on Point 16.29, Dec. 2009.
Broadband Competition: Is the Glass Half Empty or Half Full?, Barbara Esbin, Robert
Atkinson, Larry Darby, Jeffrey Eisenach, George Ford & Thomas Hazlett, PFF Capitol Hill
Briefing, Progress on Point 16.16, July 2009.

5
Google and Verizon Joint Submission on the Open Internet, GN Docket No. 09-191; WC Docket No. 07-52, Jan
14, 2010, www.scribd.com/doc/25258470/Google-and-Verizon-Joint-Submission-on-the-Open-Internet.
6
Randolph May, James Speta, Kyle Dixon, James Gattuso, Raymond Gifford, Howard Shelanski & Douglas Sicker,
DACA’s Regulatory Framework and Network Neutrality: A Statement of the DACA Regulatory Framework
Working Group, March 2007, www.pff.org/issues-pubs/communications/other/031707dacastmt.pdf
Page 6 Progress Snapshot 6.6

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its
implications for public policy. Its mission is to educate policymakers, opinion leaders and the public about issues
associated with technological change, based on a philosophy of limited government, free markets and civil liberties.
Established in 1993, PFF is a private, non-profit, non-partisan research organization supported by tax-deductible
donations from corporations, foundations and individuals. The views expressed here are those of the authors, and do not
necessarily represent the views of PFF, its Board of Directors, officers or staff.

The Progress & Freedom Foundation  1444 Eye Street, NW  Suite 500  Washington, DC 20005
202-289-8928  mail@pff.org  @ProgressFreedom  www.pff.org