Cloud Computing, Net Neutrality, Regulation & Economics

The Wall Street Journal columnist Holman Jenkins, Jr., wrote an interesting piece last week entitled What Price the Cloud?

In it, he reviewed  the evolving situation regarding heavy internet capacity usage by firms like Netflix and Google, who, of course, want no pricing actions taken against them.

Jenkins wrote, in reference to "once-great firms like Digital Equipment and Wang Labs,"

"The scariest part: Even leaders who grasp what's happening to them often can't change cost structures and business models fast enough to survive."

That's actually a misunderstanding. DEC and Wang really never had a chance once the PC began to spread. No change in cost structure for producing a Wang system could save the company, because the product was just archaic in the face of a multi-functional PC of the late 1980s.

I'm rather surprised Jenkins made this mistake. Schumpeterian dynamics don't typically allow for accommodation by older firms to the newer trends which supplant them. There is little or no effective response. Rather, the older approaches simply disappear.

Still, the core of Jenkins' piece involves whether repricing of bandwidth will hurt companies like Netflix. Everyone's nightmare, of course, is that the cable companies begin to meter individual usage and charge for such usage volumes over a certain level. Jenkins notes how the introduction of ever lower-priced smart phones is driving up bandwidth demand from mobile sources.

He refers to an A.T. Kearney report which finds current economics of the internet unsustainable without some transfer of bandwidth costs to those that generate traffic. But for me, the key passage is this one,

"...but who's to say consumers can't judge for themselves if the restrictions are worth the price?"

Just the other day, I went online and selected three Netflix movies to view on my television. Into the instant queue they went, and I watched them, with no particular interruption, that afternoon (Although, I should note that Netflix has had some recent problems, disappearing from my Tivo unit for a day or so, and freezing up the system on occasion. I suspect usage overload).

What's that worth? For a flat monthly fee, I could watch 30 movies/month. I think that comes out to about 50 cents/film, and considerably less on a per/hour basis for entertainment.

If my cable bill rose by $10 for this level of service, will I really care? Is $10 so much that I'd revert to mailing discs back and forth to Netflix? Unlikely.

I saw the excellent movie Barney's Version in an art house theatre last weekend with a friend. It cost about $25 all in. The price differential between first-run movie experiences and arm-chair selection and viewing off of Netflix remains enormous. Temporarily raising the price of using bandwidth, until the traffic generators respond with more efficient delivery to economize on bandwidth usage, probably won't be crippling for most consumers.

What's really at issue here is this. Having learned the ability to buy, perhaps at artificially low prices, cloud-based experiences involving high-speed transfers of video and other high-volume communications applications, will consumers just return to old, pre-cloud habits, or will they willingly pay something for the ability to maintain their new levels of cloud-based information consumption?

But, in the short term, Jenkins is entirely correct when he writes of Apple, Netflix, Amazon and Google,

"All are betting heavily on the cloud. All need to start dealing realistically with the question of how the necessary bandwidth will be paid for."

Current enjoyment of on-demand, large swatches of bandwidth for free can't last much longer. The electronic highway is getting crowded, and sooner or later, tolls will have to be charged to allocate usage, or we'll all experience an inability to view full motion video in a manner that's appealing or worthwhile.