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Will Net Neutrality Cost More Than Cable?

NEW YORK (TheStreet) -- Advocates of "net neutrality" say the issue is about user freedom. Opponents say it's about property rights. (Net neutrality treats all data on the Internet the same, so no one can pay or charge extra to get priority treatment for certain data.)

Both frames are false. The truth is that, since the Web was spun, there has been a growing cost disconnect between its core and its edge.

Companies like Google (GOOG) represent the core. In building scaled data centers, they take full advantage of Moore's Law, which predicts that the number of transistors on an integrated circuit will double every two years -- which has been the case since 1965. They also took full advantage after Wide Division Multiplexing let companies dramatically increase the capacity of optical fiber by changing the electronics at each end of a line.

In my book on Moore's Law, I discussed this. A glut of fiber entered the market in the late 1990s, but WDM let that fiber carry much more traffic at the same cost -- orders of magnitude more. There was no way for anyone, not even Enron, to corner such a market.

A lot of fiber went dark as a result, costing more to "light" than it was worth. Google and a few other companies came in early the next decade to scoop up the bargains. As a result, the cost of moving data across long distances has plunged by 90% just since 2007.

While the core Internet has been able to take full advantage of Moore's Law, the edge has not. This is not because edge technology hasn't improved. It has. By adding fiber within their networks, by supporting WiFi and by shortening the distances signals travel over copper, cable and phone monopolies have brought faster speeds without big price increases.

But when you run fiber, you have to send out trucks with people. When you repair fiber, you have to do the same. When you add customers, you also have to roll trucks. Trucks and people are not subject to Moore's Law. Their cost keeps going up.

While the 1996 Telecommunications Act foresaw the edge as a competitive market, with re-sellers buying and distributing bandwidth in competition with infrastructure owners, cable and phone companies basically had those rules repealedduring the Bush years, creating effective duopolies in most U.S. markets.

This has limited the profit impact of cost differences between the edge and the core. Phone and cable companies have maintained their prices by adding "services" to their bundles. While net neutrality advocates like to predict that edge companies are about to charge sites for carriage, the money actually flows the other way, from edge ISPs to content companies.

Services like "TV Everywhere," which I wrote about last month, let cable networks buy much more content than they can ever show, and charge consumers for it in their Internet bills. Combining content with service is the means by which edge ISPs hope to reduce "cord cutting" and maintain profitability in an age of rising truck costs.

Stock quotes in this article: GOOG, CMCSA, NFLX, AMZN, AKAM 

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