I believe we’re at a key crossroads in the evolution of the Internet, our economy and society as a whole. And, as I’ve discussed, I believe a combination of New Growth Theory and Modern Monetary Theory can help us choose the fork in the road that leads to increased human freedom and prosperity.

But I also believe that, in order to realize this brighter future, we must address an unfortunate but very real and fundamental clash of values and business models in our communication sector. So, before I go any further in discussing my policy proposals, I want to briefly review the nature and significance of this conflict.

On one side of the conflict are the relatively small number of dominant vertically-integrated local access providers, with cable operators like Comcast and Time Warner gaining increased dominance on the wireline side, while AT&T and Verizon do the same in wireless. On the other side of this values-conflict are the many individuals and organizations that rely increasingly on the Internet to communicate and exchange an ever-expanding range of goods, services and other forms of value.

The “Cable TV” model: network operators restrict our choices & connections

The business model preferred by dominant access providers is one in which they sell not only connectivity (in a market with little or no competitive alternatives), but also content and services delivered over the network. These “bundles” of connectivity and content/services might be provided as discounted packages, with customers lacking options for “unbundling” the packages offered by network operators.

Essentially what the dominant ISPs would like to do is to extend the historical “cable TV” model to the Internet era.   As most of us know (and very likely resent), the cable TV model requires customers to subscribe to a “basic” cable service–which typically includes dozens or even hundreds of channels we don’t want or watch–in order to purchase various “premium” services. While customers can choose which premium services to purchase, they typically cannot subscribe to premium services without first purchasing a basic package. And, perhaps most importantly, they are not able to access video content that cable operators have not chosen to make available to them.

In this “cable TV” model, end-users’ service options are limited by the network operator, who engages in separate negotiations with the providers of content and service delivered on its network. If these two parties do not agree on terms, the content or services in question is not available to end users.

The Internet model: empowered end-users with freedom to connect

The model of service provision that has helped make the Internet a powerful catalyst for economic, political and social empowerment is fundamentally different.  Under this model, the provision of connectivity is distinct from and not bundled with the provision of applications and services. This provides a fundamental “freedom to connect” to all end users, whether they be companies selling goods or services, or individuals wanting to communicate and exchange information ideas, inspiration or whatever.

Unlike the cable TV model, if end users of the Internet want to communicate and/or exchange value, they don’t need approval from the local network operator, nor are they required to include that operator as a third-party in any financial arrangement they make among themselves.  Once they pay their local provider for Internet access, end users are free to use their network connection to access whatever (and whomever’s) content and services they find most attractive.

Since Internet services are generally built around low-cost, standards-based software and relatively modest and scalable variable costs for connectivity and storage, the barriers to entry are relatively low (e.g., WordPress.com blogs like this one, which provide virtually anyone with a multimedia voice on the Internet, are available for free). That means that a good idea, a new and valuable service, or an important piece of information can “go viral” and be accessed by millions and even billions of end-users in a matter of days, hours or even minutes (i.e., without spending years and millions of dollars negotiating for “cable carriage”).

Given these low entry barriers, the aggregation of sustainable anti-competitive market power in the “Internet service” market is relatively difficult to achieve, at least compared to the cable TV and “Internet access” markets, where the evidence is quite clear that very high fixed costs and entry barriers have dramatically constrained market entry.

The Internet is the 21st century’s public road network

In an April 2006 testimony before the House Committee on the Judiciary Telecom & Antitrust Task Force, Columbia Law professor Tim Wu, a pioneer in making the case for network neutrality, drew an apt parallel between the Internet and our nation’s network of public roads.

Today…you can start a business on the internet with relatively little capital. But in a world where AT&T or Verizon decides who gets priority access, entrepreneurs get a different message. Its not who has a better product: it’s who can make a deal with AT&T, Verizon, Comcast or Time-Warner.

It is inevitable that a discriminatory infrastructure will affect competition and innovation in the markets that depend on it. Imagine, for a moment, that private American highway companies reserved a lane for Ford cars. That would be good for Ford, but obviously would affect competition as between Ford and General Motors. It would also slow innovation—for it would no longer be the best car than wins, but the one that signs the best deals and slows down their competitors. The race is no longer to build a better car, but to fight for a better deal with the highway company.

That’s the threat to innovation on the internet.

So, as I see it, the reality we face today is that:

1) the “cable TV” model is desirable from the perspective of companies that control our nation’s dominant local access networks, which were originally built decades ago to deliver monopoly telephone and cable TV services, using the public rights of way and subject to (and often protected by) various levels of government regulation.

2) the “neutral Internet/public road” model is preferred by most everyone else, including the millions of individuals and businesses that use the network, and the content and service providers and device makers wanting to serve these end users; and, as New Growth Theory tells us, this “gatekeeper-free” Internet model is best suited to support the free and open communication that drives the “combinatorial explosion of ideas,” which in turn drives economic growth and improvements in human welfare.

Given the importance of this issue to our future, and the fundamental nature of this conflict, two things come to mind in terms of communication public policy:

1. The preferences and needs of the vast majority of the nation’s citizens and businesses should be given priority over the preferences of a relative handful of private service providers and their shareholders.

2. At the same time, the welfare and property rights of access providers should be respected in developing public policy and, to the extent possible, incumbents should retain the freedom to pursue their preferred business models as long as this does not interfere with the rights of the rest of us to do the same (as it does when incumbents use the power of money to buy state legislation restricting community-owned broadband networks).

That strikes me as the right balance we should try to strike in crafting Internet policy, and it’s what I’ll be shooting for in my own proposals, which I’ll outline in more detail in a forthcoming post.