Dave is trying to explain end-to-end for a putative intelligent senator
There is another way of looking at this that may appeal to regulators, which is a separation of powers issue.
Moving bits is (or should be) a commodity business, and thus should be consistently profitable for the right kind of company (after all, Walmart makes big bucks running a commodity business). The thing that made me uneasy about Netparadox was the bit that implied you can't make money with a well-designed network. It was a good soundbite, but wrong on a deeper level.
I think that is the wrong message to be sending. You can make money delivering a commodity product well. In fact, you can make more reliable money that way than running a 'content' business, which involves betting large sums on the fickle tastes of the public, then spending larger sums trying to persuade them that they really want to watch your 'content', not someone else's.
If someone owns both businesses, they will be tempted to cheat by making the bit-moving business favour their offerings over other people's. In the long run, this is foolish, as they will undermine the value proposition of the commodity 'moving bits' business, and undermine the real competitiveness of the content
The temptation is, as Dave say, inevitable, but it should be resisted as it will destroy the ongoing low risk business with a steady return in favour of supposed short term gains from the high risk business. (Lessig and Winer call this 'strategy tax').
If there is competition in provision, this will work itself out, as the companies that make this kind of mistake will be dumped in favour of smarter ones.
The problem is when there aren't available alternatives because of a regulatory monopoly (only one local phone co; only one cable co). This is where regulation to ensure separation of powers comes in.
Lessig argues convincingly that it was this kind of regulation to ensure open access to the phone network that allowed the net to grow in the first place:
But there is one part of the Internet where end-to-end is more than just a norm. Here the principle has the force of law, and the network owner cannot favor one kind of content over another or prefer one form of service over another. Instead the network owner must keep its network open for any application or use the customers might demand. Competitors must be allowed to interconnect; consumers must be allowed to try new uses. In this part of the Internet, "open access" is the rule.
This part of the Internet is--ironically enough--the telephone network, where because of increasing regulation imposed by the D.C. Circuit Court of Appeals in the 1970s--leading to a breakup of AT&T by the Justice Department in 1984 and culminating with the Telecommunications Act of 1996--the old telephone network has been replaced with a new one over which the owner has very little control. Instead, the FCC spends an extraordinary amount of effort making sure the telephone lines remain open to innovators and consumers on terms analogous to the terms required by an end-to-end principle: nondiscrimination and a right to access.
The FCC is convinced that this regulatory burden is severe and costly to maintain. And no doubt it is costly. But the question is not simply how much the regulation costs; it is also about its benefit. What is the benefit of effectively enforcing end-to-end on the telephone system?
In my view, the benefit has been the Internet. Though the Internet proper was initially a network among universities, had it not been for the ability of ordinary consumers to connect to the Internet, that network would have gone nowhere. (Universities are fun, but they aren't enough to fuel commercial revolutions.) Ordinary consumers connected to the Net across phone lines. And had it not been for the open-access rules that the government imposed upon telephones, the telephone companies would most likely have behaved just as every network owner in history has behaved--to control access and use architecture to minimize competition. If it hadn't been as cheap to dial a local bulletin-board system (BBS) as it was to dial a local friend; had the Baby Bells kept the power to force customers to a Baby Bell ISP; had the government not insisted that competitors be connected and had it not policed pricing to ensure nondiscrimination--had it not, in short, used the power of law to force a competitive neutrality onto the telephone system, the telephone system would not have inspired the extraordinary innovation that it did.
By keeping the network neutral, by keeping it open to innovation, the FCC has made possible the extraordinary innovation that the Internet has produced. Open access was the rule; a regulation produced that rule.
Lots more detail on this in Lessig's book The Future of Ideas