The Federal Communications Commission (FCC) has mounted a recent push to turn network neutrality "principles" into official regulations—and in doing so has stirred up the net neutrality hornet's nest once again. The issues involved are thorny when you wade deep into the weeds, but consumer-level support for network neutrality seems largely driven by simple principle: AT&T should not be "speeding up" websites with deep pockets, leaving everyone else to languish in the slow lane.

This was famously what AT&T Chairman Ed Whitacre wanted to do back in 2005 when he declared that Internet companies would not be able to "use my pipes free." The scheme that he envisioned was a basic bit of price discrimination; charge extra fees to those who could afford to pay in order to maximize profits.

But here's the thing—price discrimination happens all the time (US college fees vary widely based on one's ability to pay, for instance). And while ISPs are one obvious chokepoint on the Internet, they aren't the only one. Massive search engines like Google can easily become another, and it might not be long before the government needs to think about other forms of "neutrality."

"Should something like net neutrality prevail, the conflict would likely move to a different level," writes one of the leading US academics on Internet growth and economics. "That level might become search neutrality."

Or, as cloud computing takes off, one company (again, this might well be Google) could so completely dominate the market that it becomes another choke point. We might then need to consider "cloud neutrality."

Odlyzko's paper (PDF) comes from a special issue of the Review of Network Economics earlier this year which was devoted to the topic of network neutrality. Odlyzko himself is an internationally recognized expert on network economics who is based at the University of Minnesota and repeatedly puts the kibosh on the idea that networks are about to drown beneath some "exaflood" of data, or that network upgrades are truly expensive.

The special journal issue was put together by Phil Weiser, a tech law veteran who now has a senior job in the Obama Department of Justice, and who has involved himself in recent FCC panels related to the national broadband plan. Point being: these ideas are being circulated by influential thought leaders and being read by those in a position to act on them.

Discrimination and profits

Odlyzko begins by noting that "from the standard economic point of view, there is nothing nefarious about attempting to introduce differential charging." The dream of most businesses is not to set a single price on an item, but to charge each customer the maximum amount that they are willing and able to pay.

This sort of information can be gleaned from all sorts of clues, but can cause extremely negative reactions when customers figure it out. Imagine learning that Amazon was showing you a different price on all items than it showed to your neighbor because the company knows your purchase history and buying practices so well. Actually, you don't have to imagine—something like this happened in 2000 and spawned national headlines and a big backlash.

Fortunately for those who hate the idea, it's often stunningly difficult to implement effectively. As the paper notes, "Starbucks will not suddenly declare that the price of a cup of coffee will be $2, $5, or $7, depending on how much Starbucks thinks a particular individual might be able and willing to pay, based on that person's history of Starbucks purchases as well as income and assets, with a 'standard list price' of $10 per cup for those who insist on remaining anonymous."

The profit potential of such a role is gigantic.

But this sounds exactly like the dream of those into "behavioral targeting," especially the sorts of targeting that rely on tracking Internet users as they browse the Web. Knowing how often and when users visit particular types of pages can tell marketers all sorts of things; someone who regularly visits a high-end jewelry site probably has more money than a Craigslist devotee.

What company is poised to own behavioral targeting? Google. Any company that becomes the go-to source for consumer information and that controls the delivery of special offers, coupons, and discount advertisements "could potentially end up in control of product pricing, essentially relegating the good and service providers to a commodity role. The profit potential of such a role is gigantic."

In order to make this practice truly lucrative, though, a company like Google would need to have a neutral network connecting it to consumers. Otherwise, as Google grows in power and popularity, "the communications network could grab profits by charging differential fees to Google that would absorb most of the benefits."

Is "Google neutrality" next?

Odlyzko's view is that too much attention is paid to the ISPs; the issue of differential pricing could well show up at many points of the Internet stack, along with similar consumer worries. "The basic conclusion," he writes, "is that whether AT&T or Google wins the net neutrality battle, the outcome... may be similar, namely society exposed to the prospect of an unprecedented degree of discrimination. It is doubtful that competition could mitigate the risks."

The real question for deciding these issues isn't economic—it's based instead on public discomfort with particular practices. For instance, differential pricing is often applied to situations where a company can somehow determine when a product is valuable to consumers. In the European mobile telephone market, making an international call is a good proxy for "importance" of that call. Thus, despite the presence of robust competition, international roaming fees in Europe remain scandalously high. The situation so outraged the public that the European Commission moved in 2007 simply to mandate that the telephone companies lower their fees.

In Odlyzko's words, the tremendous fees "offended the public sense of fairness"—a tremendous business "no-no," as the recent furor over bank bailouts and Wall Street reminds us. Once the public was offended, the public (through its representatives) altered the rules of the marketplace.

Right now, the US public is offended about the idea of Internet price discrimination against content websites. The issue raises concerns about democratic speech on the Internet (which has proven to be a tremendous publishing platform for those who could never afford one before) along with concerns about innovation (how can the next Google get started in a garage when the network favors the deeply pocketed?); if those concerns win out, price discrimination of a certain sort might well be outlawed for ISPs, even as we allow it in all sorts of other social spaces.

And that inconsistency isn't necessarily bad; it's simply a reflection of a social sense of "fairness" written into regulation. Odlyzko himself favors net neutrality—he just wants to make sure that people don't get so starry-eyed about the virtues of regulating ISPs that they forget the same arguments might soon apply to other Internet choke points like cloud operators and search engines.

The paper concludes with a clarion call to government watchfulness: "For telecommunications, given current trends in demand and in rate and sources of innovation, it appears to be better for society not to tilt towards the operators, and instead stimulate innovation on the network by others by enforcing net neutrality. But this would likely open the way for other players, such as Google, then emerge from that open and competitive arena as big winners, to become choke points. So it would be wise to prepare to monitor what happens, and be ready to intervene by imposing neutrality rules on them when necessary."

The government certainly has its eye on the mighty company. The Department of Justice has already helped to scupper a proposed Google/Yahoo deal and opposed the first draft of Google's book search settlement.