Neutrality, Diversity and Growth - An economic analysis of future Internet policy

Concerning the increased demand of services, content providers are ready to offer such content and meet the demand of customers, which in turn (at least from a static perspective) more than welcome any improvement.

ISPs, on their side, are challenged to find the income streams required to carry out the investments needed to meet the quality requirements of customers and content providers as well as to increase capacity and reduce the effects of network congestion.


A tiered internet, advocates of net diversity say, would then come into play by giving to network operators the possibility of recouping their investments in NGNs, without put too much burden (or no burden at all) on consumers, meaning that end-users are not charged more than before as a way for ISPSs to recover the costs of the undergone investments.


The model built by Stratecast indicates that operators, in the presence of net neutrality, would likely face higher costs and reduce investment due to the increased risk. In addition, "to the degree that operator costs are increased due to Net Neutrality, the model indicates that those costs are ultimately borne by the consumer".


An operator denied the opportunity to generate service revenue would be forced to adopt other methods for covering deployment costs: these could include simply passing along the costs to the consumer; creating service bundles that limit consumer choice; or passing the cost along to content providers.


In the case of cost allocation to the consumer, these costs could be substantial. Just to provide an example, the model by Stratecast estimated the consumers’ access fee to "vary between an extra $10 a month to as much as $55 a month". 
To the extent that consumers were unwilling or unable to incur such costs, net neutrality could, ironically, have the effect of actually reducing broadband penetration. We then have a business case problem since network operators would react by curtailing network investment.


Up to this point, we have analyzed why the possibility to charge content providers can be justified by a dynamic efficiency rationale: the possibility of investing and recouping the costs from other players. 
This dynamic efficiency argument should now be analyzed by a competitive perspective. In other words, when we look at the problems that the changing competitive environment in which network and broadband operators play, we see that the investment-recoupment rationale is even more justified.