Revenue sharing on the Internet: A Case for Going Soft on Neutrality Regulations

Revenue sharing contracts between Content Providers (CPs) and Internet Service Providers (ISPs) can act as leverage for enhancing the infrastructure of the Internet. ISPs can be incentivised to make investments in network infrastructure that improve Quality of Service (QoS) for users if attractive contracts are negotiated between them and CPs. The idea here is that part of the revenue of CPs is shared with ISPs to invest in infrastructure improvement. We propose a model in which CPs (leaders) determine contracts, and an ISP (follower) reacts by strategically determining the infrastructure enhancement (effort) for each CP. Two cases are studied: (i) the ISP differentiates between the CPs and puts (potentially) a different level of efforts to improve the QoS of each CP, and (ii) the ISP does not differentiate between CPs and makes equal amount of effort for all the CPs. The last scenario can be viewed as neutral behavior by the ISP. Our analysis of optimal contracts shows that preference of CPs for the neutral and non-neutral regime depends on their monetizing power - CPs which can better monetize their demand tend to prefer non-neutral regime whereas the weaker CPs tend to prefer the neutral regime. Interestingly, ISP revenue, as well as social utility, are also found to be higher under the non-neutral regime. We then propose an intermediate regulatory regime that we call "soft-neutral", where efforts put by the ISP for all the CPs need not be equal same but the disparity is not wide. We show that the soft-neutral regime alleviates the loss in social utility in the neutral regime and the outcome further improves when CPs determine their contracts through bargaining.