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Innovation, Net Neutrality and Reality

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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One of the most comical features of the net-neutrality debate is that both sides say the other is trying to stifle innovation. Both are probably wrong: true innovation is a threat to both of them, and its speed probably depends on whose victory will have the most onerous consequences.

The word "innovation" was present in almost every response from Internet service providers to President Barack Obama's proposal that the Federal Communications Commission treat the Web as a public utility. Here's a typical comment, from David L. Cohen, executive vice president at Comcast:

The internet has not just appeared by accident or gift -- it has been built by companies like ours investing and building networks and infrastructure.  The policy the White House is encouraging would jeopardize this engine for job creation and investment as well as the innovation cycle that the Internet has generated.

The other side in the debate counters that allowing Internet providers to charge content companies for "fast lanes" to consumers kills innovation by freezing out start-ups without the resources to pay for priority service. Some argue that even the talk of such a scenario is already hurting some young companies because investors get worried about their business models.

In other words, the combatants mean two different kinds of "innovation." Providers are talking about their ability to upgrade networks so they can carry more traffic at faster speeds. Their opponents focus on new services for consumers that might require a lot of bandwidth. In both cases, the i-word is applicable, but it's not the type of innovation that could change the face of the industry. Not the disruptive kind.

Innovation with a capital "I" is the kind a small European start-up called Skype brought to telecommunications when it launched its Voice Over Internet Protocol service in 2003.  Two years later, the Economist wrote:

It is now no longer a question of whether VOIP will wipe out traditional telephony, but a question of how quickly it will do so. People in the industry are already talking about the day, perhaps only five years away, when telephony will be a free service offered as part of a bundle of services as an incentive to buy other things such as broadband access or pay-TV services. VOIP, in short, is completely reshaping the telecoms landscape. And that is why so many people have been making such a fuss over Skype -- a small company, yes, but one that symbolizes a massive shift for a trillion-dollar industry.

Traditional telephony is treated as a public utility in the U.S., but I doubt that it mattered one way or another to the founders of Skype. Telephone operators fought it all the way, and Skype had a particularly hard time getting on mobile networks because it competed with their voice plans. Where it succeeded -- Verizon was an early adopter -- that was because it made deals with the carriers, not because the government intervened on its behalf. Skype turns a profit, but its first-mover advantage has evaporated: Other companies provide the same service, and those same wireless carriers are moving their voice traffic to data connections to cut costs. In Skype's case, both the disruptive start-up and the incumbents have innovated successfully and to consumers' benefit -- perhaps because their competition wasn't disrupted by regulators in the name of "fairness," be that the desire to help consumers pay less or to protect telecoms' investments in infrastructure.

If the government leaves the Internet alone -- letting broadband and content providers hatch whatever devilish plots they feel are in their interest -- some startup, or a few of them, will inevitably come up with the next idea that will be far outside the current debate. It might involve advances in compression technology, making all talk of fast and slow lanes irrelevant because they could suddenly allow the existing infrastructure to carry more traffic, or breakthroughs in mesh networking, which might allow people to get broadband connections without using much of that infrastructure. Whatever the game-changing innovation might be, both sides in the current dispute would be forced to deal with it, pitching in with incremental innovations.

Add government intervention to the scheme of things, and all that does is give one sides a temporary advantage. Potentially, it might mean underinvestment by the Internet providers and slower service for their customers because there will be no reason for content startups to find ways to hog less bandwidth. I think that would slow down the emergence of a disruptive technology because developing it wouldn't be a priority for new entrants, but you don't have to agree with me. The disruption is inevitable in any case.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net