Despite a strong push from the telecom industry for ‘price discri...

paper posted Tues. Seeking ways out of its slump, the telecom industry is proposing remedies -- such as restricting VoIP -- that will lead to new Internet architectures and give carriers greater control, said mathematics prof. Andrew Odlyzko. While historical precedents from the telecom arena don’t bode well for the introduction of differentiated prices and sophisticated charging regimes on the Internet, he said, incentives to price-discriminate have increased on the transportation side. That may be prompting telcos to try to break with tradition and follow the lead of the transportation industry, Odlyzko said. Price discrimination has been practiced in both industries for a long time, he said, and it now has popped up in the current controversy over VoIP. VoIP’s biggest advantage is said to be its greater efficiency in the use of network resources, Odlyzko said, but it arguably is less efficient in the use of basic transmission services than traditional telephony. Most existing VoIP implementations don’t compress voice signals to provide higher quality, Odlyzko said, and because of the current structure of the industry, most U.S. VoIP calls travel over extremely long distances while telephone long distance calls mostly are shorter. Current VoIP technologies “find few savings,” he said, leading to slow uptake. In the long run, VoIP “is bound to win” because it will offer new features as well as the advantage of not having to run a separate network, he said. Now, however, the main incentive for VoIP comes from its ability to get out of the “elaborate maze of cross- subsidies, discriminatory pricing policies and taxes that are built into the current telecom system.” The question, Odlyzko said, is whether the telecom industry can survive in the broadband era without another maze of cross-subsidies and price differentials. “That the Internet has thus far developed with an open architecture and simple pricing does not mean that it can do so in the future,” he said. Incentives to price-discriminate are growing as fixed costs increase and marginal costs drop, Odlyzko said. At the same time, he said, the ability to price-discriminate also is being pushed by the development of digital rights management tools and the increased use of licensing rather than outright sales. The telecom industry views the Internet as a major cause of its slump, Odlyzko said: Services such as e-mail, search engines and Napster “are all great but appear not to provide any direct revenues for carriers.” Moreover, he said, the introduction of artificial restrictions on the Internet -- such as the Digital Millennium Copyright Act and the broadcast flag -- is forcing the entire information technology industry to restrict what users can do online. But there are countervailing factors to the increased threats to the Internet’s architecture, Odlyzko said, including: (1) Public policy concerns about stifling the Internet’s tremendous power to spark innovation and economic growth. (2) Govts. can take a hands-off approach or promote closed architecture, but “content is not king” and there’s far more money in providing basic connectivity. (3) The increasing heterogeneity of the telecom network means users will be able to mitigate restrictions by bypassing service providers and using their own networks. But, Odlyzko said, perhaps the most powerful limitation on proposed new Internet architectures and associated discriminatory practices is that “people react extremely negatively to price discrimination.”