Net neutrality to preserve the status quo

Holman Jenkins is right. The big industry money fighting to get the FCC to impose net neutrality comes from powerful incumbents who want to preserve the status quo:

Google has been one of the most influential net-neut proponents. It recently secreted its top lobbyist, Andrew McLaughlin, into a White House job as deputy head of telecom policy. But Google also understands, as its chief Eric Schmidt recently put it, "It's very, very important that the telecom operators have enough capital to continue the build-outs."

Google's trick will be to lobby for the optimum of Internet socialism—"tiered" pricing may be OK, in which some consumers pay extra for a bigger pipe. But usage-based pricing that would give consumers a reason to think twice before clicking on a Google-sponsored ad? It would be the end of Google's business model.

And Google has allies. The greatest fear of Microsoft, Amazon, eBay and Yahoo is having to plumb their deep pockets and offer competing payments to broadband carriers to speed their bits to consumers. They much prefer spending their money to sprinkle server farms around the globe, assuring fast, reliable access for their customers in a way that no newcomer can easily replicate.

What if some startup Google sought to achieve the same goal by outsourcing its data management to the telecos, say, by mounting servers in their premises to help deliver Web applications more quickly? This would be a win-win for both parties. Data that travels within a carrier's system is cheaper to deliver than data that must be handed off between two or more carriers.

I often disagree with Jenkins, but today I think he’s right on the money. The successful dot-com incumbents are quite happy with the current Internet distribution and cost structure, and want to avoid any change that might threaten their power of incumbency.

Another point he alludes to only in passing: the dot-com winners don’t want to change an allocation of spoils between their high margin, highly scalable (network effects) business to give more to the capital-intensive operators that supply the essential last mile infrastructure they must have.

Both GOOG and T have gross margins of 60%. However, Google’s operating profit (EBIT) is 26.7%; AT&T (due to high SG&A plus depreciation) has an operating profit ratio of 18.6% and Verizon a mere 11.9%.

Latest in a series of outsourced economic policy criticism as a cost-cutting move during difficult times.