Pricing and Architecture of the Internet: Historical Perspectives from Telecommunications and Transportation

With telecommunications in a slump, the search is on for ways to re-invigorate this key industry. The main problems are clearly economic much more than technological, and many of the proposed remedies would lead to new architectures for the Internet that would provide for greater control by carriers. They would drastically reduce the role of the end-to-end principle, the main foundation for the success of the Internet, in which functionality resides at the edges of the network. The proposals to restrict voice over Internet (VoIP) are just one part of this trend. Historical precedents from telecommunications for introduction of differentiated services and sophisticated charging methods on the Internet are discouraging. The almost universal trend has been towards decreasing price discrimination and simpler pricing. The history of transportation presents a different picture, with frequent movements towards increasing price discrimination and more complicated pricing (although with many noteworthy reversals). Charging according to the nature of the goods being transported has been and continues to be the norm. Since the incentives to price discriminate are increasing, and the ability to do so is also growing, it is conceivable that telecommunications might break with its historical record and follow the example of transportation. It is therefore of interest to examine the evolution of pricing and quality differentiation in transportation. Some historical sketches on the evolution of pricing in transportation are presented. Their implications for telecommunications, and especially for Internet pricing and architecture, are discussed.