Hastings acknowledged that “[d]elivering Internet video in scale creates costs for both Netflix and for ISPs.” But Netflix, he argued, should only have to pay “to haul the bits to the various regional front-doors that the ISPs operate.” After that, ISPs should “carry the bits the last mile to the consumer who has requested them, with each side paying its own costs.”
For a sophisticated business executive, Hastings’ solution to paying for the costs of his business model is convenient to his bottom line but remarkably simplistic. And an interesting analogy to Hastings’ proposition can be found in the Washington area’s payment arrangements for transporting sewage and processing it at WASA’s wastewater treatment plant, with a significantly fairer and more productive economic outcome.
Here’s how. WASA is an independent agency of the District of Columbia Government, providing retail water and sewer service to the District’s residents, businesses, and visitors. But Montgomery and Prince George’s Counties in Maryland, Fairfax County in Virginia, and some smaller suburban jurisdictions also rely on WASA’s Blue Plains sewage treatment plant because they don’t have enough capacity of their own. Just as much of our suburban waste would have no place to go without WASA and Blue Plains, Netflix’s video bits would have nowhere to go if ISPs didn’t transport and deliver them to their final destination.
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. More than 25 years ago, the District and those suburbs recognized that the capital investments, operating costs, and maintenance necessary to keep the system working for everyone required a fair and equitable payment arrangement. The result was an agreement among those jurisdictions to share those costs – the 1985 Blue Plains Intermunicipal Agreement, or IMA.
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 IMA 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. Sound fair, DC residents?
Hastings suggests “each side paying its own costs” – and he simultaneously criticizes the prospect of ISPs charging consumers on “pay-per-gigabyte models instead of the current unlimited-up-to-a-large cap approach.” What he really means is making those consumers who use the Internet only for e-mail and web-surfing (like my 78-year-old mom) pay hidden costs for others who place enormously disproportionate demands on ISPs’ networks but don’t want to pay the true cost of their service.
That position may hold a certain surface appeal to those who’d like to off-load the costs they generate to other unsuspecting consumers, but Hastings’ model is not one that’s likely to encourage needed broadband infrastructure investment, any more than a similar approach would have led WASA and DC ratepayers after these many years to keep investing in and upgrading a treatment plant that’s now the envy of the wastewater world. (Yes, there’s a wastewater world.)
Before Netflix gets to shift its customers’ costs to others, its CEO should have to explain to all consumers why that’s fair to them. Until then, the long-recognized economic principle of charging “costs to the cost-causer” should apply just as much to data bits flowing through fiber optic pipelines as – well, you get the picture.
Alan J. Roth is the USTelecom Senior Executive Vice President. He also serves on the DC Water and Sewer Authority board, and has been a longtime local advocate for the District.