Editors note: Two independent perspectives were combined below (the first one is by Berin Szoka, president of TechFreedom; the second one is by Brent Skorup, Research Fellow at Mercatus Center). Please see bio associated with each for disclosures. 

We’ve already seen four net neutrality controversies this year … and it’s still only February.

There was speculation  recently that broadband providers like Comcast and Verizon were throttling Netflix performance (apparently Netflix said that wasn’t happening). Before that, it was objections to AT&T’s “Sponsored Data” program, which would let content providers subsidize customers’ mobile data usage. And then of course there was the court decision last month, gutting most of the FCC’s net neutrality rules and heightening sensitivities.

Now it’s the Comcast-Time Warner merger, which is not only stoking fears about net neutrality but about content providers.

Berin Szoka  is the president of TechFreedom. Prior to that, he was a Senior Fellow and the Director of the Center for Internet Freedom at The Progress & Freedom Foundation. Szoka previously practiced internet and communications law, and served on the Steering Committee for the D.C. Bars Computer & Telecommunications Law Section. Disclosures: TechFreedom is supported by foundations, web companies, and both broadband and edge providers.

Everyone assumes that cable companies have all the market power, and so of course a bigger cable company means disaster. But content owners may be the real heavyweights here: It was Netflix that withheld high-quality streaming from Time Warner Cable customers last year, not vice versa. As WIRED recently noted. “Netflix is hardly without leverage” (Time Warner lost over 300,000 subscribers). Similarly, it was ESPN that first proposed to subsidize its mobile viewers’ data usage last year. And don’t forget that it was Apple, not AT&T, that demanded exclusivity on the first iPhone.

But whatever one thinks about the market power of such “edge” providers, it’s not a net neutrality problem.

We need to move away from the fear-mongering and exaggerations about threats to the internet as well as simplistic assumptions about how internet traffic moves. The real problems online are far more complex and less scary. And it’s not about net neutrality, but about net capacity .

The “Net Capacity” Problem

The debate is really about who pays for and who profits from the increasingly elaborate infrastructure required to make the internet do something it was never designed to do in the first place: stream high-speed video.

Currently, video streaming accounts for most internet traffic (Netflix alone takes up about 28% ) and is expected to continue growing. But speed isn’t the primary issue. The internet isn’t just one big “information superhighway ; being able to drive 75 MPH on the highway won’t shorten your commute if you spend most of your time just waiting to get onto interchanges. The real issue is getting traffic across the internet.

To make sure consumers benefit, we need to solve the network capacity problem. Yes, we need to ensure broadband providers can’t do something nefarious to kill off new services. But we also need to ensure content providers dont undermine incentives to invest in the capacity they themselves need or block the business model experimentation that may be needed to drive that capacity.

That’s where a “two-sided market” for consumer service on the front end and capacity on the back end can help. And there’s already plenty of regulatory oversight to police that market.

A Two-Sided Market for Capacity

While many were quick to assume that broadband providers were throttling Netflix traffic, the explanation could be far simpler: The company simply lacked the capacity to handle the “Super HD” video quality it began offering last year. A two-sided market means broadband providers would have an incentive to help. (The same is true for subsidized data plans, which is why it was initially ESPN’s idea, not AT&T’s.)

The economics are fairly simple if you bar a market for capacity, you’ll get less of it.

Net neutrality activists often fear that because small content creators couldn’t compete in such a market, it would in turn reduce the diversity of internet content. (For example, some argue that users would “naturally gravitate” to the big brands who can afford to pay the bill if Comcast and Verizon do decide to charge them more for streaming video over their pipes.)

But the video market is already very different from the rest of the web. Because it doesn’t make sense to build one’s own streaming infrastructure when you can embed a YouTube player that better delivers streaming capacity anyway, the “small guys” creating video content already work through large platforms such as Netflix and YouTube. In short, these intermediaries help to solve the capacity problem, countering whatever market power broadband providers might have.

Here’s how the other side of a two-sided market would work:

1. The broadband provider negotiates with Netflix, YouTube, Amazon, Hulu or some other video platform over creative ways (e.g. AT&T’s Sponsored Data or Netflix’s Open Connect) to increase capacity and pay for it on a wholesale basis.

2. The video platform can negotiate with its video programmer partners over whether it’s worth it for them to have their content delivered over this premium capacity.

3. Either the video platform or the content creator works out a business model with consumers that makes the prioritized data worthwhile. That might mean offering a premium Netflix package at a higher price, or different flavors of unlimited mobile YouTube (one subscription-based but ad-free or another with more personalized ads, for example).

The point is: one way or another, end users are going to have to pay for the capacity needed to bring them the video services they use. The more closely that funding matches the services used, the better the market will meet the need for capacity.

The debate is really about who pays for and profits from the internet doing something it was never designed to do: stream high-speed video.

There Are Smarter Ways to Police Net Neutrality

If anyone’s “picking winners and losers” among the little guys besides users themselves, that is it’s the video platforms, not broadband providers. It’s up to content creators to decide whether to participate.

And that not a lack of “net neutrality” may be the real problem. Just as music publishers long resisted internet distribution of music, so too have big video publishers thwarted internet video distribution. Intel for instance had to abandon a planned internet video service because it couldn’t get the rights it needed from content owners. As the CEO of CBS put it last week: at the end of the day, if you have the right content youre always going to have the power.

But what if broadband providers did try to thwart online video? It wouldn’t work. Netflix can shame broadband providers into providing the capacity they need. And it’s not in any of these companies’ best interests to anger their end-users.

The FCC also has broad power to address net neutrality concerns. While it can’t ban premium carriage deals altogether (because that would amount to “common carriage”), it can require that the terms of any such deals be reasonable and non-discriminatory which, on top of antitrust law, should be more than adequate to address concerns about broadband providers having too much leverage in the market for capacity.

Which brings us back to the Comcast-Time Warner merger. The FCC rules actually still apply to Comcast, because Comcast agreed to abide by them as a condition of its acquisition of NBC Universal back in 2011 even if the rules were struck down in court. So if the merger happens, those rules will protect Time Warner customers, too, and the FCC can regulate Comcast even more heavily than other broadband providers. In short, there’s a cop on the beat    and a potentially very tough one at that.

We need to give two-sided markets a chance here. Instead of letting ideology trump common sense, we need to focus the government’s attention on how to address and prevent clear market failures. Technological innovation always goes hand-in-hand with innovations in business models. Without the flexibility to experiment, new technologies (like LTE mobile video broadcasting ) may never take off, and people may end up decrying supposed net neutrality problems that are really all about net capacity.

The practice of one party subsidizing a customer’s consumption is common in many industries. Particularly for media, information, and publishing, companies a business model that represents or touches every major tech company these days.

Brent Skorup is a research fellow in the Technology Policy Program with George Mason Universitys Mercatus Center (top officers there include Tyler Cowen as General Director and CEO). Skorups research includes radio spectrum rights, antitrust, new media regulation, and telecommunications. He was formerly the Director of Operations and Research at the Information Economy Project at George Mason University School of Law, a research center that applies law and economics to telecommunications policy. Disclosures: Mercatus scholars, who select their own projects, do not do directed research or research for hire. 

ISPs and carriers like AT&T, Comcast, and Verizon face what economists call a “two-sided market.” In this case, they and other tech firms can receive revenue from two major sources: content providers (through sponsorship or ads), and consumers (through subscription fees). While TV broadcasters traditionally relied almost entirely on the former, cable programmers like HBO and Showtime rely almost entirely on the latter.

But most technology firms use a combination of both ad support and subscription fees. So it makes sense for AT&T, Comcast, Verizon, and others to do what most media firms (and that includes app creators) do: develop a balanced revenue stream from both the content side and the customer side to ensure profitability while making the service affordable.

These kinds of two-sided models are a pro-consumer way to encourage people to use online services. Content-side companies like Amazon, for instance, already pays wireless carriers for customer data charges via its virtual Whispernet network. By agreeing to pay for customers’ Kindle downloads, Amazon makes its ebooks more accessible; instead of paying onerous international data roaming charges, Amazon foots its customers’ wireless bill for downloads while traveling.

Other companies like Facebook and Google have also paired up with wireless carriers abroad to make online content free, providing access to their products to millions of new users. Facebook offers Facebook Zero, a text-only offering of the social media service for people with basic cellphones. Similarly, Google offers Free Zone access to Google services on cellphone plans in places like the Philippines no data plan needed. Closer to home, U.S. customers can access Facebook without a data plan by using T-Mobile’s prepaid GoSmart brand.

Sometimes the carrier pays the content provider, sometimes the content provider pays the carrier, and sometimes there’s no money exchanged at all since the partnership improves the attractiveness of both companies. Such agreements are a delicate balancing act dependent on changing consumer preferences.

Unfortunately, this kind of market innovation is viewed as controversial or even harmful to consumers by some policy and internet advocates. But these concerns are premature, unfounded, and arise mostly from status quo bias: Carriers and providers haven’t priced like this before, so of course change will create some kind of harm!

Yet it’s important to remember that subsidy programs are a conventional business practice that brings down the cost of services for consumers. Nobody’s access is degraded. In an increasingly connected world, it’s a welcome development that carriers and ISPs are proposing market-oriented solutions to bring more people online while gaining a new revenue stream for network upgrades.