When we heard this WSJ story, which quotes AT&T exec John Donovan stating that the telco is looking at charging app developers for the data consumers use while playing with their apps, we knew it was going to be a clustercuss. Our friends at GigaOM have equated the idea to a long con designed to double charge for network access that will ultimately limit innovation and screw customers. We wanted to get a second take from our resident mobile development expert, Jeff Bacon. His response was surprising. -Ed.
I’m not sure on which side of the fence I fall on the net neutrality debate. There’s been trillions of dollars of value generated in sales and companies over the last two decades of the internet’s life. Most of that value has been with the companies developing products and services that are primarily delivered on the internet. The dream of starting a company with sweat equity and low cash and building it online into a hugely profitable enterprise has been largely dependent on the availability of a relatively free service delivery medium (i.e. the Internet or mobile web).
On the other hand, the carriers and network infrastructure providers have spent many billions of dollars to build out their networks — and must continue to spend billions of dollars to maintain and upgrade them to provide the service level required for all the internet businesses to operate. They are hamstrung by having to charge real money for consumer access to their services while the businesses that run on top of their network can deliver services to consumers for free. Google can generate a > 25% average profit margin (over 5 years) while AT&T is stuck at ~7% average profit margin (over 5 years). Should AT&T be forced to continue to operate at lower profit margins so Google can operate at high ones? If AT&T wants to increase those margins it can charge companies making money off their networks, or it can pass along the cost to consumers. Is it better to double or triple the cost of internet or to spread some of the wealth generated by Internet companies to the infrastructure they rely upon to do business?
The risk in charging companies for access to the infrastructure is, of course, that small companies may not be able to afford it. This can stifle innovative startups that are trying to find their way and create new and unique services. On the other hand, the internet bubble of 2000 and the ridiculous valuations on un-profitable companies right now may indicate that forcing entrepreneurs to have a viable business model sooner to be able to afford the real cost of operating their business/service might not be a bad thing. Ultimately, there should probably be a balance between providing neutral and free access for businesses to the infrastructure and sharing the profits of successful companies with the infrastructure providers. Maybe a system like the SEC uses for determining when a company needs to file financial statements (based on revenue and number of shareholders) which forces most companies to a tipping point of going public when they reach those levels, would work for this situation as well. After a certain level of network utilization, fees could kick in which forces businesses to actually make money to pay for the infrastructure they’re using to create a successful business.
As to the suggestion that this cost would ultimately be passed onto the consumer anyway, I would expect developers to do what’s in their best interests. If they can generate more revenue by not passing it on and therefore getting more customers, then they may eat it. If they need to pass on the costs to be profitable, then they’ll pass it on. Correctly pricing a product or service is not based on the costs to produce the product or run the service – those costs just provide a floor for profitability. Pricing should be based on market demand and consumers ability to pay.
It’s a battlefield littered with problems on all sides and there’s no easy solution. Every simple blanket solution (like charging every business for critical infrastructure access) probably causes more harm than good, but I do think some middle ground could be found that would not stifle innovation and still provide compensation to the infrastructure companies for providing essential services that mobile web businesses are using to build multi-billion dollar businesses on.
In the end, it all depends on how the fees are charged. If AT&T does it right, they allow small companies to generate a business for free and only charge when the reach a certain threshold. Instagram (as an example) would then be forced to actually have a business model as they scale growth. AT&T could also allow developers not generating revenue free access, but as soon as revenue is generated, or generating over X amount of revenue, then they’d have to pay. That would allow services to get a foothold and see if they could be successful, but also force them to put a real business model plan in place to account for some extra costs of doing business once they get above X in revenue.
Until AT&T actually come out with a plan — not just an single comment without detail by one executive — I can’t say that it’s a bad idea. Once they propose a plan and we can evaluate the caveats of it, then we can say if it’s good or bad.