Utopia, except for the phone companies

Is there a viable business model for commercial ISPs in an end-to-end Internet? Telephone carriers looking forward to an Internet-based future don't seem to think so. Instead, the carriers are looking for ways to be in the loop as content or services providers.

But there might be other options.

A purist's Internet is an end-to-end service. You set up a service, while I access and use it. Maybe I pay you for using it. As long as I use standard Internet protocols no ISP between you and me knows that you are offering the service, that I'm using it or that I'm paying you to use it.

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Is there a viable business model for commercial ISPs in an end-to-end Internet? Telephone carriers looking forward to an Internet-based future don't seem to think so. Instead, the carriers are looking for ways to be in the loop as content or services providers.

But there might be other options.

A purist's Internet is an end-to-end service. You set up a service, while I access and use it. Maybe I pay you for using it. As long as I use standard Internet protocols no ISP between you and me knows that you are offering the service, that I'm using it or that I'm paying you to use it.

No ISP gets part of whatever fee I'm paying you. I pay my ISP for Internet connectivity, and you pay yours for Internet connectivity. If there are other ISPs in between they do not receive any specific chunk of the money we pay to our ISPs. Our ISPs might buy connectivity from them, but the fee for that connectivity does not change based on what our ISPs collect from us. So ISP service is basically a commodity, and it's hard, although not impossible, to make money selling a commodity.

It costs a lot to build an ISP, particularly one that can offer very high-speed service. That takes fiber-optic cable, and fiber is expensive to buy and install. Customers, especially residential customers, are reluctant to pay enough to make installing such networks economically viable.

There is an alternative to the carriers installing the fiber themselves that is getting more popular and might get even more so depending on the outcome of an upcoming Supreme Court case.

If carriers cannot afford to put in fiber or are unwilling to do so because they don't think customers will make it worthwhile, then why not have someone else install the fiber and lease it to ISPs? The Nov. 17 New York Times carried a story about plans by 18 cities in Utah to install a fiber infrastructure called UTOPIA (Utah Telecommunications Open Infrastructure Agency) that would reach 248,000 households and 34,500 businesses. A lot of other municipalities would like to do the same, but this concept caused the phone companies to pull a nutty and get laws adopted in 10 states so far that block governmental entities from competing with local telephone companies.

The legality of such restrictions is now in front of the U.S. Supreme Court as Nixon v. Missouri Municipal League. Arguments in the case are scheduled to be heard Jan. 12. Information on the case can be found at here and here.

The California One Gigabit or Bust Initiative represents another type of effort. This is an effort to fiber up every educational institution, business and home in California by 2010. As a non-governmental project it does not have the same legal issues, but still would create an infrastructure instead of waiting for the phone companies to do so.

The background studies for the California project foresee very large returns to society for installing very high-speed networks, but not enough of these returns would flow to the carriers to make it possible for them to do the job on their own. A related question is: What value do the phone companies bring to the table in this case? You can guess my answer to that.