The Washington Post is running a story today about a speech by a senior executive at Verizon. He objects to the "free lunch" companies like Google are supposedly getting by riding their services over the backbone networks built by telecommunications companies.

I was trying to figure out what he was talking about and then I realized what a bunch of nonsense it is. This is a common example of frustration by a commodity provider who wishes they had a bigger slice of the value chain. Everyone pays for access to the network, don't they? And so who is John Thorne trying to fool by pretending that Google gets its Internet access for free and, no less, is somehow stealing it from the telecom companies?

The speech is apparently part of Verizon's debate with the government over regulation. "Will another set of restrictions -- the continental minefield of franchise agreements and the free-ridership of Google and its brethren -- choke off investment in broadband deployment?" he said. In fact, Verizon can charge Google anything it likes for bandwidth, but there is the little problem of markets. Imagine an iron mining company who complained about all those aviation manufacturers who are getting a free lunch by selling expensive airplanes that are made with their cheap steel. What would happen if they raised the price of steel? Well then companies would buy less and make fewer airplanes, of course. How would it profit the steel producers?

But like most corporations, backbone providers don't want a real market economy or, God forbid, a level playing field, do they? All they want is for the regulations to go their way, and this seems to be what Verizon is looking for. Being able to write your own laws is a time-tested corporate strategy.

In this case, Verizon wants the right to charge content companies for using their network when they have no contract with them. Let me explain. Let's say you sign up for a subscription with Verizon for Internet access. You pay them and they deliver the service to you. Let's say Google pays Qwest for their access (I have no idea who uses who here, but let's pretend for illustration sake). When you access a Google web page, the data travels to you first over the Qwest network and then crosses over to the Verizon network at a "peering point." Verizon has no contract with Google, only with Qwest. Peering agreements exchange data traffic between the parties at generally even levels: to simplify, 1 MB going from Verizon to Qwest is considered equal to 1 MB going the other way. As you know, the Internet sends traffic over the fastest route, so sometimes Verizon will be bearing traffic that neither begins nor ends on their network. Over the long run this averages out.

But now Verizon is watching Google make piles of money from the data that is being sent through their network, while all they get is your subscription fee and/or a bit of peering revenue. They don't like that; they want more. They can't charge you more money directly because then they will lose your business; they don't want to charge Qwest for the same reason. But they can see that big pot of money sitting in the atrium of the Googleplex. So instead, they want to write a new law (actually, in this case to eliminate a few laws) that will give them the right either to go over there and take some, or prevent Google from sending their data over the Verizon network to you. And this isn't just about Google: it would extend to all other kinds of content providers as well. Essentially, this double-dipping amounts to back-room censorship of what you can access on the Internet because of the greed of your ISP, and the free and open Internet ends in shipwreck.

In his book The Roaring Nineties, page 106, Joseph Stiglitz shared some illuminating insights into this phenomenon of who wants what kind of regulation. He writes:

...much was revealed about those pushing for deregulation and a smaller government when one examined their attitudes towards corporate subsidies and government protection. As Chairman of the Council of Economic Advisers, I observed three almost unfailing principles among those who came to us for help.

First, business people generally oppose subsidies, for everyone but themselves. For their own sector, there were always a host of arguments for why some government help was needed. From unfair competition abroad to an unexpected downturn at home, the stories were endless.

Second, everyone was in favor of competition, in every sector but their own. Again, there were a host of arguments for why competition in their sector would be destructive, or why it needed to be managed carefully.

And third, everyone was in favor of openness and transparency, in every sector but their own. In their sector transparency might lead to unnecessary disturbances, erode its competitive edge, and so forth.

In many regulatory arrangements, companies will receive up-front hand-outs that oblige them to return the subsidy later through some other market mechanism. Stiglitz writes about how they are often more than happy to take the hand-out and then have the gall to go to court against the government in order to avoid upholding their side of the bargain.

Verizon's beef is really sour grapes that they are not in a more profitable business. Developing their business to deliver more profitable value through innovation is hard, but using their well-developed lobbying and regulatory machinery to get the government to solve their problem is much, much easier. It is as Mrs. Grundy (680212), a Slashdot user, wisely observes:

"Maybe the telecoms are using that little-known rhetorical device called hyperbole. Or perhaps they are trying to say that companies like Google have found a more profitable use for bandwidth than they have and they would like a piece of the pie. A free piece of the pie."