I was pitching toll-free internet surfing to a friend in Business School when I first heard about net neutrality; the principle that all data on the internet should be equally accessible. Besides ruffling my capitalist feathers, it sunk my noble intentions of making educational sites accessible to socially disadvantaged internet users without active subscriptions. Last month’s repeal of the 2015 Open Internet Order in the United States found me on the other end of the spectrum, researching the luxury industry.
Superfluous as the luxury industry may seem, it plays a crucial role in driving innovation and product adoption, both for physical goods and experiences. Luxury consumers with their high disposable incomes provide early wins for new products, whose early-life economics forestall mass market appeal. As such, luxury consumers push innovative products to the cusp of economic viability. This is evident in the adoption of mobile phones, automobiles and higher education, which were initially accessible only to the rich. Luxury matters.
Though the world has changed in the last decade and fundamental goodness is fast becoming a huge influence on the luxury customer’s shopping choices, a discriminatory internet balanced with transparency could hold some aces for luxury brands in customer targeting and product innovation.
The lowest hanging fruit is the opportunity to create high streets on the flat plains of the digital world through value-added services. As digitization disrupts the luxury industry, brands still struggle to balance online presence with exclusivity, threatening a key element of their value proposition. On a non-neutral internet, luxury brands could more easily maintain exclusivity, as ISP’s offer value-added services to high-value online service providers and consumers. Economic wisdom should drive ISP’s towards value-added services as against the socially expensive throttling of non-priority routes to sub-optimal speeds. This makes zero-rating the more likely outcome, for which costs would fall more on online service companies than on subscribers. In evidence of this value-capture gap, AT Kearney reported in 2010 that revenues from B2B connectivity services were $62 billion (5% of internet B2B value chain) versus $262 billion (36%) in B2C. Since then, online services segment has grown 45% CAGR while connectivity has managed 6%. Still, in line with the net neutral definition of the internet as a utility, users who demand beyond bare necessities ought to pay more; just a little more. This discrimination effectively segments the digital demand curve, where invite-only luxury websites now struggle to filter low-spending subscribers from high-value customers too busy to subscribe in three clicks.
On the horizon, digital innovation in the luxury space could benefit from a non-neutral internet. Virtual reality and seamless omni-channel integration lie squarely in the future of customer engagement in luxury, and subsequently every other industry. Advances in the fields of virtual reality and IoT require a more sophisticated data highway than the best of the incumbent 4G. Streaming immersive VR experiences of fashion shows (or neurosurgery) from halfway around the world requires more heavy lifting than ISP’s can currently handle, necessitating a more sophisticated iteration of the internet.
Enter 5G, offering test speeds hundreds of magnitudes of 4G, with more versatile multi-device connectivity. However, 5G technology would be capital intensive in R&D and infrastructure deployment, since transmission would most likely be relegated to the high-frequency band of the spectrum, where signals can travel faster but not very far. To optimize transmission, cell towers must be deployed in dense clusters. More importantly, effective value capture on 5G networks would require sophisticated business models, due to the complexity of device interconnection. If the necessary investments are pursued at the expedient pace, stiff competition and regulation in telecommunications markets could stifle ISP’s and other keystone players, while less invested players reap the rewards. Hence, European telecoms companies keen on 5G technology lobbied against a neutral internet in 2016, in efforts to shorten the payback period on their investments. This could in part explain why the development of 5G has stalled, with high uncertainty on the path of keystone players in infrastructure.
All said, corporations need healthy returns to justify investments and unless this is facilitated through tax breaks or government sponsorship, internet discrimination affords ISP’s (and infrastructure players) a medium for extracting the most value from the content-hosting and user sides of the digital complex. Even if the $1.2 trillion luxury industry could not absorb the annual $200 billion required to make 5G a reality, luxury consumers remain the earliest adopters of new beneficial technologies from cars to mobile phones.
Finally, optimizing big data for maximum user value requires ultra-fast, real-time analytics. In the world of a single user, this implies (unfairly but optimally) that certain streams of data would benefit from prioritization. Data discrimination becomes especially important as big-data analytics as a service gains popularity. At its most advanced, BDaaS would ensure that luxury consumers are catered to in real time in such areas as shopping choice presentation and optimal routing in driver-less cars. I even dare imagine the implications for payment systems, with the speed of Security-as-a-Service expedited through fast internet lanes and big data analytics. But why not simply price out the slow lane services? The open internet order had boundless clauses that could veto such economic tools.
Granted, a non-neutral internet shifts power downstream from the $1.6 trillion online services segment (45% CAGR since 2009) to the $577 billion ISPs (6% CAGR). But in that world, ISPs can capture more value from online service providers and consumers through discrimination, a fundamental tool of luxury, a fundamental tool of capitalism. In fact, the birth of conspicuous luxury in the 18th century and the rise of capitalismwere declared inseparable by the controversial Werner Sombart, whose anti-capitalist stance would have supported net neutrality.
Perhaps the net neutrality debate is only another reflection of the limits of capitalism and may require a combination of political and economic tools for resolution. For the sake of innovation, we might have to accept that the internet has outgrown its socialist origins in America, the bed rock of capitalism. If for one moment, we can step out of the one-zero digital mindset, there is a middle ground where ISP’s and customers can be happy. Two Stanford Professors have a potential solution to protect users in a non-neutral internet, rooted in deregulation that lets each user control the choice of service discrimination... like we currently do with web cookies.