Follow-up: Netflix vs. sewage

Update:  There is a follow-up post available here.

Last week, I posted a reply to Alan Roth’s post over at The Hill comparing the economics of Netflix with D.C. sewage treatment.  Although Mr. Roth sent his follow-up later that same day, I have not had a chance to respond until now.  Here is what he said:

Thanks for your comment and for giving me the opportunity to reply and clarify. Unfortunately, I think you ARE missing something — or at least, not understanding my basic point.

For starters, despite the title of your blog entry, this has nothing to do with net neutrality. Netflix’s own CEO acknowledges as much in his shareholder letter, where he says that the FCC’s recent Open Internet order dealt with ISPs’ relationships with their retail customers, not their business arrangements with upstream wholesalers. He then goes on to make an argument about who should bear what costs.

My analogy likewise relates to the issue of equitable cost-sharing among the users of a network. And whatever you might want to say about who provides how much “value” and to whom, the fact is that the data bits in question here are largely flowing in one direction, just as the sewage being treated at Blue Plains is flowing in one direction.

You’re right that Netflix has built or rented its own lines up to the interconnection point with the local ISP — just as the suburbs have built their own sewer lines up to the interconnection points at the DC border. But the expense of taking both the data and the sewage to their ultimate destination is vastly greater in the last mile than in the first. If WASA’s retail ratepayers had to foot that whole bill themselves, you could be sure that one of two things would happen: Either DC would tell the ‘burbs, “sorry, ain’t gonna take your sh*t no more,” or DC would stop investing in its sewage treatment capacity at Blue Plains and elsewhere in its system. Or both.

Not a good outcome there. If reasonable, thoughtful people in the DC metro area have been able to agree that the sharing of capital, operating, and maintenance costs for that ultimate destination is both appropriate and economically sensible, it’s hard to believe that Netflix — which currently pays the US Postal Service hundreds of millions of dollars each year to have a postal worker deliver its DVDs to its customers’ homes — doesn’t think it should have to pay a cent to get the same end product to those homes via a different delivery infrastructure.

But I do appreciate your willingness to engage in a healthy dialogue and to allow me to draw out the analogy a little further.

Here is my reply:

I guess we’re still at an impasse on the issue of who is paying for what. In the long run, it is the customers that are paying for the total cost of service provided, both for sewage and for video on demand.

In the case of sewer services, the retail customers pay their suburban sewage provider money to make their sewage go away. They don’t really care how it happens; they just want it to happen. According to your description of the process, “how it happens” involves a two-step process: (1) the local D.C. suburb maintains the lines to local houses that first take the sewage away and (2) WASA maintains the Blue Plains facility that treats the waste. I agree with you that it is totally appropriate for WASA to require payment from local suburbs for step (2) as a “subcontractor” (probably not the technical, legal relationship, but seems to be functionally equivalent). I think we also can both agree that the suburbs probably pass on their costs for step (2) directly to their retail customers.

In the case of Netflix, however, the retail customers pay TWO entities: (1) their ISP and (2) Netflix. You are correct that a similar, two-step process occurs with the video delivery as with the sewage: (1) the ISP maintains the lines to local houses that bring the bits in and (2) Netflix maintains the servers and the connections to the “regional front doors” (to use your phrase) that provide the streaming. (Also, of course, Netflix pays the underlying content owners for the use of their works.)

Again, however, unlike with D.C. sewage, the retail customer is paying both actors directly: both the ISP and Netflix are receiving a monthly payment from the customer.

Given this state of affairs, I’m more than a little confused by your argument that the ISPs have the moral high ground in demanding payment from Netflix. All ISP’s are providing here is a connection to the wider Internet (to the “regional front doors”). Retail customers then pay Netflix for the rest because Netflix is providing the rest. On what basis do the ISP’s challenge Netflix’s contention that it “should pay only to transport its bits to a regional gateway, after which the costs of delivery to the end point would fall on others”? Doesn’t that precisely reflect how retail customers are being billed?

The only justification I can see for your position is if subsidies are involved-in other words, ISP’s are somehow lowering their retail customers’ bills for Internet service because they are paid by content providers. If that’s true, however, that is very different situation from the D.C. sewage situation to which you analogize.

Feel free to jump in with comments.

The smell of a bad net neutrality argument

NOTE:  There are follow-up posts available here and here.

Forget the obvious jokes about broadcast content being an open sewer:  Alan J. Roth over at the Congress Blog actually, literally thinks that Washington, D.C. sewage treatment has a lot to teach Netflix:

I have two jobs. One of them – the full-time job that pays the bills – involves directing government affairs for a trade association of internet service providers (ISPs) and telecom companies. The other – a volunteer position – is my service on the Board of Directors of the District of Columbia Water and Sewer Authority (WASA).

And what is this connection that Mr. Roth has seen betwixt his two modes of employ?

I read Netflix CEO Reed Hastings’ January 26th letter to his shareholders [link here] offering his views on who should bear the costs of transporting and delivering his company’s high- volume, bandwidth-hogging Internet video service to its customers. A light bulb went on in my head: There’s a lesson that Hastings and his customers could take from how the Washington area pays for sewage disposal.

At this point, I’m dubious but curious.  Roth goes on to explain that the District owns a major sewage treatment plant in Blue Plains that serves suburbs beyond D.C.:

The suburbs’ sewage gets to Blue Plains via the same kind of “regional front doors” that Hastings described in his shareholder letter. A series of interconnection points link the suburbs’ sewer lines with the “last mile” that WASA operates through DC on the way to final treatment.

So there’s the analogy:  Roth thinks that sewage line’s “last mile” can be compared with with broadband’s last mile.  What’s his point?

Unlike Netflix’s self-serving suggestion that it should pay only to transport its bits to a regional gateway, after which the costs of delivery to the end point would fall on others, [the regional sewer services in D.C.] approached the costs of last-mile delivery differently. Each wholesale customer – that is, each suburban authority sending sewage to DC – pays a pro-rata share of the capital costs for Blue Plains and related transmission facilities, based on an agreed-upon allocation of the plant’s capacity. Operating and maintenance costs are shared based on each suburban customer’s actual flow of sewage to the plant.

By contrast, the “Netflix model” proposes to spread the costs created by Netflix customers to other consumers who derive no benefit from Netflix’s video bits. If WASA operated this way, suburban retail ratepayers would be billed by their own wastewater authorities for the relatively smaller costs of transporting their sewage to the interconnection points at the DC line. After that, DC retail ratepayers would have to pay all the costs of not only transporting suburban sewage to its ultimate destination at Blue Plains, but also for all the costs of processing and treating the suburbs’ waste there.

If I understand Roth’s analogy correctly, he has completely misapplied it.  Consider:

1.  Netflix is the analogue to the Blue Plains treatment plan.  Netflix provides the value (clean water/streamed video) that the consumer ultimately wants.  Local ISP’s are, in contrast, merely the D.C. suburbs with in-home connections but without adequate sewage treatment facilities.

2.  Netflix has built (or rented) its own sewer/data lines right to the point where the suburb/ISP takes over.

3.  Why shouldn’t the ISP only be paid for “the relatively smaller costs of transporting their sewage to the interconnection points”?

Am I missing something here?  Or is this argument really as self-defeating as it seems?