In her new book, Captive Audience, Susan Crawford makes the same argument that the lawyers for AT&T made in Judge Harold H. Greene's courtroom in response to the government's antitrust complaint beginning in 1981, i.e., that telephone service was a "natural monopoly." In those days, AT&T wanted regulation and hated competition, which is the same as Crawford's perspective with respect to broadband now. Here is what she said today on the Diane Rehm Show:
Diane Rehm: "Is regulation the next step?"
Susan Crawford: "It always has been for these industries, because it really doesn't make sense to have more than one wire into our homes. It is a very expensive thing to install; once it's there, it has to be kept up to the highest level of maintenance, it has to allow for lots of competition at the retail level--across this wholesale facility--and it has to be available to consumers at reasonable cost. That kind of result isn't produced by the marketplace; it doesn't happen by magic, because ... when you can divide markets, and cooperate, you're not going to come up with the best solution for consumers.
In her book, Crawford candidly says that "America needs to move to a utility model" for broadband ... and "stop treating this commodity as if it were a first-run art film..."
It's time for a stroll down memory lane.
The hottest companies in Washington, DC right now include Netflix, Sprint and T-Mobile. What do these firms have in common? They are all marketplace losers.
A few years ago, the Supreme Court said that the Sherman Act "does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition" (see: Verizon v. Trinko, 2004). Yet this is precisely the course of action that technocrats are taking as a result of accepting invitations from Netflix to conduct a "wide-ranging antitrust investigation" of the cable industry and from Sprint and T-Mobile to find a way to block Verizon Wireless' acquisition of additional spectrum.
Netflix built a successful mail order DVD business when it wasn't very practical to download movies over the Internet. Fortunately for Netflix, consumers can send and receive, but they cannot rent DVDs from the Post Office. There are legal and political constraints that prevet the U.S. Postal Service from diversifying into new lines of business, and these restrictions conferred a significant degree of monopoly protection on Netflix. Incidentally, saving the Postal Service requires diversification, among other things. What was great for Netflix wasn't so good for the postal system (upon which we all depend).
Although some advocates of network neutrality wanted to postalize broadband, the Federal Communications Commission said no. Apparently, we are going to have that debate all over again.
Cable companies obviously will not be prevented from competing against Netflix and other online video providers. But a drive to eliminate any conceivable competitive advantage that cable providers may have would ultimately lead to extensive regulation, including, most likely, infrastructure sharing rules like those the Supreme Court looked at in AT&T v. Iowa Utilities Board (1999). In his separate opinion, Justice Stephen Breyer warned that "rules that force firms to share every resource or element of a business would create, not competition, but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms."
The current administration promised to reinvigorate antitrust enforcement. What that means is a return to the economic stagnation of the 1970s, when antitrust forced consumers to do business with uncompetitive, inefficient firms. It is no exaggeration to speak of antitrust as a form of corporate welfare financed by hidden taxes on consumers. The reality is that government cannot create competition; it can only suppress competitors.
Continue reading "Government cares more about politics than the tech economy" »
More this week on the efforts of Reed Hastings of Netflix to reignite the perennial debate over network access regulation, courtesy of the New York Times. Hastings is seeking a free ride on Comcast's multi-billion-dollar investment in broadband Internet access.
Times columnist Eduardo Porter apparently believes that he has seen the future and thinks it works: The French government forced France Télécom to lease capacity on its wires to rivals for a regulated price, he reports, and now competitor Iliad offers packages that include free international calls to 70 countries and a download speed of 100 megabits per second for less than $40.
It should be noted at the outset that the percentage of French households with broadband in 2009 (57%) was less than the percentage of U.S. households (63%) according to statistics cited by the Federal Communications Commission.
There is a much stronger argument for unbundling in France - which lacks a fully-developed cable TV industry - than in the U.S. As the Berkman Center paper to which Porter's column links notes on pages 266-68, DSL subscriptions - most of which ride France Télécom's network - make up 95% of all broadband connections in France. Cable constitutes approximately only 5% of the overall broadband market. Competition among DSL providers has produced lower prices for consumers, but at the expense of private investment in fiber networks.
Continue reading "Network access regulation 4.0" »
Cecilia Kang of the Washington Post reports that
the telecom industry is forcing policymakers to re-examine what has long been a basic guarantee of government - that every American home should have access to a phone, along with other utilities such as water or electricity. Industry executives and state lawmakers who support this effort want to expand the definition of the phone utility beyond the century-old icon of the American home to include Web-based devices or mobile phones.
The quid pro quo for a monopoly franchise was an obligation to provide timely service upon reasonable request to anyone, subject to regulated rates, terms and conditions. The Telecommunications Act of 1996 eliminated the monopoly franchise, but the obligation to serve remains in the statute books of most states. Telecom providers, aka carriers-of-last-resort (COLR), are stuck with the quid without the quo.
This has become a problem as more and more consumers are "cutting the cord" in favor of wireless or VoIP services. AT&T, for example, has lost nearly half of its consumer switched access lines since the end of 2006. However, most of the loops, switches, cables and other infrastructure which comprise the telephone network must be maintained if telecom providers have to furnish telephone service to anyone who wants it within days.
Continue reading "Landline rules won't work for telecoms, or for Susan Shaw" »
AT&T and T-Mobile withdrew their merger application from the Federal Communications Commission Nov. 29 after it became clear that rigid ideologues at the FCC with no idea how to promote economic growth were determined to create as much trouble as possible.
The companies will continue to battle the U.S. Department of Justice on behalf of their deal. They can contend with the FCC later, perhaps after the next election. The conflict with DOJ will take place in a court of law, where usually there is scrupulous regard for facts, law and procedure. By comparison, the FCC is a playground for politicians, bureaucrats and lobbyists that tends to do whatever it wants.
In an unusual move, the agency released an analysis by the staff that is critical of the merger. Although the analysis has no legal significance whatsoever, publishing it is one way the zealots hope to influence the course of events given that they may no longer be in a position to judge the merger, eventually, as a result of the 2012 election.
This is not about promoting good government; this is about ideological preferences and a determination to obtain results by hook or crook.
The staff analysis makes it painfully clear that the people in charge have learned very little from the failure of government to reboot the nation's economy. For starters, the analysis notes points out that "there will be fewer total direct jobs across the business," notwithstanding various commitments the companies have made to protect many existing jobs and add many new ones. The staff should have checked with the chairman of President Obama's jobs council, for one. CEO Jeff Immelt drives growth at GE through productivity and innovation, not by subsidizing inefficiency (see this). He realizes that when government tries to preserve wasteful methods, firms become uncompetitive and lose market share. That's a recipe for unemployment. The FCC staff analysis has got it completely backwards. When politicians set out to "create" jobs, it is often at the expense of productivity. We don't need that kind of "help" from Washington. In a wonderful column I am fond of citing, Russell Roberts recounts a story that bears repeating here.
The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren't there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman's response: "Then why not use spoons instead of shovels?"
FCC Chairman Julius Genachowski got it essentially correct when he remarked in a recent speech
that, "Our country faces tremendous economic challenges. Millions of Americans are struggling. And new technologies and a hyper-connected, flat world mean unprecedented competition for American businesses and workers." Sadly, he does not realize that a merger between AT&T and T-Mobile provides a vehicle for that.
The combined company would have the "necessary scale, scope, resources and spectrum" to deploy fourth generation wireless services to more than 97% percent of Americans (instead of 80%), according to a filing they made in April. That would make our nation more productive and improve our competitiveness, which is we want. An analysis by Ethan Pollack at the Economic Policy Institute predicts that every $1 billion invested in wireless infrastructure will create the equivalent of approximately 12,000 jobs held for one year throughout the economy, and that if the combined company's net investment were to increase by $8 billion, the total impact would be between 55,000 and 96,000 job-years. The FCC staff thinks this is an irrelevant consideration, because it might happen anyway.
Several commenters respond that even absent the proposed transaction, AT&T would likely upgrade its full footprint to LTE in response to competition from Verizon Wireless and other mobile and other mobile wireless providers * * * * Nothing in this record suggests that AT&T is likely to depart from its historical practice of footprint-wide technological upgrades with respect to LTE even absent this transaction.
They may be right, but this is wishful thinking at a time when millions of Americans are struggling. The best course of action at this point is to improve incentives for corporations to increase capital investment, improve productivity, capture market share and create more jobs. The Feds should obviously approve this merger, because the record clearly shows that the companies are willing to undertake a massive net increase in capital investment, now.
What about the counter-argument that if there are fewer wireless providers, that may lead to consumer price increases down the road? We can worry about that later. Right now, we need to worry about the unemployed. Incidentally, increasing supply in wireless is very simple. The FCC can simply award additional spectrum for mobile communications. Almost everyone agrees that this is the best tool the government has to promote competition in wireless.
The FCC committed another unforgivable error when it tried to blow up this merger. This is not the first time the commission has recklessly put entire sectors of our nation's economy at risk while it conducts idealistic experiments for attaining consumer savings through rate regulation or regulatory mischief in pursuit perfectly competitive markets. The FCC's cable rate regulation experiment in the early 1990s and its local telephone competition experiment in the late 1990s were both total failures and complete disasters.
This agency could use some humility, or some adult oversight.
The Federal Communications Commission issued its Connect America Fund Order to ensure ubiquitous broadband Internet access services on Friday.
When Congress debated the Telecommunications Act of 1996, the section concerning Universal Service (Section 254) was somewhat controversial. Broadly speaking, there seemed to be considerable support in the House of Representatives for limiting Universal Service, and there were some influential senators who wanted to expand it (the House is somewhat more representative of urban areas that contribute subsidies, and the Senate is somewhat more representative of rural areas that receive subsidies). The result was a compromise in which Universal Service is defined (in Sec. 254(c)(1)) as "an evolving level of telecommunications services that the Commission shall establish periodically ... taking into account advances in telecommunications and information technologies and services." Notice how information services are missing in the first half of that sentence. Although the FCC is allowed to take notice of information services, Universal Service has to support telecommunications services only.
This is relevant because the FCC subsequently ruled that broadband Internet access is an information, not a telecommunications service (Order at paragraph 71). The commission also subsequently ruled that a service has to be one or the other, and that it cannot be both ("hybrid services are information services, and are not telecommunications services," ruled the FCC in a 1998 Report to Congress at paragraph #57).
Continue reading "What is the FCC's jurisdiction to subsidize broadband? " »
Chairman Julius Genachowski of the Federal Communications Commission spoke of the need to reduce subsidies for traditional wireline telephone service last week, as well as a perceived need for his agency to use the savings to subsidize broadband services (see the press release and the text of the speech).
Genachowski is absolutely correct about the need for reforming universal service and intercarrier compensation. Unfortunately, his determination to reform telephone subsidies is not for the purpose of generating consumer savings, but about redirecting resources currently at his disposal for the purpose of gaining some measure of control over unregulated broadband networks. Though cleverly disguised, this is actually a third major attempt to (slowly) impose public utility regulation on broadband service providers.
Continue reading "Reforming Universal Service is Plan C for broadband regulation" »
Julius Genachowski is in a hurry.
The chairman of the Federal Communications Commission is arguing that the commission must act quickly to "restore the longstanding deregulatory--as opposed to 'no-regulatory' or 'over-regulatory'--compact" that governed broadband Internet access services prior to a recent court decision. Such an approach is urgently needed to "restore the status quo," he claims.
If the FCC cannot regulate the Internet, it may die. The telephone and television industries are declining, whereas communications industries which the FCC monitors to some extent but does not regulate, e.g., the Internet backbone, broadband Internet access and wireless, are thriving.
Genacowski's plan would reclassify broadband as a "telecommunications" service subject to blunt, onerous, industrial-era regulation under Title II of the Communications Act of 1934 -- which governs common carriers -- and then forbear from enforcing most of Title II's heavy-handed provisions.
Broadband services haven't been subject to Title II regulation for several years, so reclassification would not restore the status quo. It would harken back to a bygone era.
Continue reading "Title II for broadband is desperate and ill-conceived" »
The U.S. Court of Appeals for the D.C. Circuit ruled that the authority the FCC used to regulate Internet access providers is very limited. The ruling is obviously a victory for broadband Internet access providers. But it is also a victory for the rest of us. As the court noted, the legal interpretation the FCC fought to defend "would virtually free the Commission from its congressional tether."
In Comcast v. FCC, the court said it was okay for Comcast to discriminate against peer-to-peer file sharing as necessary to manage scarce network capacity. The opinion was written by Judge David S. Tatel, a Clinton nominee.
The question before the court was whether the FCC has any jurisdiction to regulate Internet access providers' network management practices. The FCC acknowledged it has no express statutory authority, but it argued that section 4(i) of the Communications Act of 1934 (47 U.S.C. Â§ 154(i)) authorizes it to "perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions."
Courts have referred to the commission's section 4(i) power as its "ancillary authority." The FCC successfully used this authority in 1968 to restrict the geographic area in which a cable company could operate, even though the Communications Act gave the commission no express authority over cable television at the time. The FCC acted reasonably when it limited the retransmission of distant broadcast signals by cable operators, according to the Supreme Court, because otherwise the commission's ability to fulfill its statutory responsibility for fostering local broadcast service could have been thwarted.
The FCC couldn't cite a single statutory responsibility that might justify Internet regulation
This and subsequent cases have established the principle that the FCC may exercise its "ancillary" authority only if it demonstrates that its action is "reasonably ancillary to the . . . effective performance of its statutorily mandated responsibilities." In the present case, the FCC couldn't cite a single statutory responsibility impacted as a result of interference with peer-to-peer communications by an Internet access provider.
Comcast v. FCC presents a fairly high hurdle for the FCC to overcome going forward to the extent it seeks to regulate the Internet on the basis of "ancillary" authority.
Public Knowledge is already at work on a backup plan. It recently filed a petition asking the FCC to reclassify high-speed Internet access as a "telecommunications" service subject to common carrier regulation under Title II of the Communications Act -- "the home of some heavy-handed regulation, to be sure," notes Susan Crawford (a former Special Assistant to the President for Science, Technology, and Innovation Policy). She nevertheless supports the idea.
One problem with this approach is the FCC has already taken the position that high-speed Internet access is not a telecommunications service subject to Title II common-carrier regulation. This determination was upheld by the Supreme Court in NCTA v. Brand X (2005). The commission's logic, noted the Supreme Court, was that cable companies do not "offe[r] telecommunications service to the end user, but rather . . . merely us[e] telecommunications to provide end users with cable modem service."
In other words, a product or service does not become "telecommunications" subject to heavy-handed Title II common carrier regulation just because it utilizes telecommunications. Imagine the consequences of taking the opposite approach and saying that if a product or service (insert your own example) includes a telecommunciations component the FCC in its discretion can treat it as "telecommunications."
Public Knowledge's targets don't include any product or service, just broadband Internet access providers. The sweeping power it is urging the FCC to grasp, however, knows no such bounds.
It is fallacy to assume there can be one set of rules for broadband service providers and another set for everyone else. Since they are not monopolies, it will not be possible to relegate broadband Internet service providers to distinct legal categories for monopolies. The courts will have no choice but to ensure that their rights and responsibilities are reasonably consistent with ours, and ours with theirs.
Meanwhile, the FCC like all federal agencies needs a Congressional tether and thanks to the D.C. Circuit Court of Appeals it still has one. If in its wisdom Congress believes it is appropriate for the FCC to have statutory authority to regulate the Internet, it can always supply that.
The National Broadband Plan is going to take a while to digest.
The following recommendations are included in the description of how the FCC plans to subsidize broadband -- which may be necessary if it frightens away private investment with network neutrality regulation which deprives private investors of a fair return on their capital:
RECOMMENDATION 8.2: The FCC should create the Connect America Fund (CAF). (p. 145-46)
RECOMMENDATION 8.3: The FCC should create the Mobility Fund. (p. 146)
RECOMMENDATION 8.4: The FCC should design new USF funds in a tax-efficient manner to minimize the size of the gap. (p. 146)
RECOMMENDATION 8.6: The FCC should take action to shift up to $15.5 billion over the next decade from the current high-cost program to broadband through common-sense reforms. (p. 147-48)
RECOMMENDATION 8.15: To accelerate broadband deployment, Congress should consider providing optional public funding to the Connect America Fund, such as a few billion dollars per year over a two to three year period. (p. 151)
Does the FCC have the power to do all of these things?
This language makes it sound like the FCC views itself as a mini-Congress with the power to tax and spend.
I cannot imagine this is the sort of thing the Founding Fathers had in mind when they provided that "The Congress shall have Power To lay and collect Taxes," (Art. I, Sec. 8) "All bills for raising Revenue shall originate in the House of Representatives," (Art. I, Sec. 7) and "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." (Art. I, Sec. 9)
Tom Tauke, a top Verizon executive:
In my view, the current statute is badly out of date. Now is the time to focus on updating the law affecting the Internet. To fulfill broadband's potential it's time for Congress to take a fresh look at our nation's communications policy framework.
Tauke's top recommendations include:
- A behavioral advertising policy that requires an easy to use process for affirmative consent from a user before that user can be tracked on-line should apply to all players engaged in behavioral advertising, regardless of where they sit in the space and what technology is used.
- Competitive subsidies that are technologically neutral and targeted solely for the benefit of consumers, not corporate intermediaries, would be one alternative to ensuring full national broadband deployment.
- Harm to consumers and competition should not be permitted, from any source. So the level-playing field needs to be big enough to include all of the players.
My own reaction is that the Federal Trade Commission can handle the first item, the Department of Agriculture the second and the Antitrust Division of the Department of Justice the third -- although for Tauke this is beside the point at the present juncture.
Although there are many outstanding people employed at the Federal Communications Commission, we do not need the FCC to accomplish any of these objectives. We could take the $335,794,000 the agency requested for the 2010 fiscal year 2010 for 1,924 full-time equivalents and other expenses and use it to pay for ubiquitous broadband at the fastest speeds or to reduce the deficit.
The most successful industries the FCC regulates are those industries the FCC regulates least, such as cable and wireless. And broadband. As Tauke notes,
Broadband providers have invested hundreds of billions of dollars for deployment of broadband networks. Verizon alone has deployed more fiber than all the countries in Europe. The result: today about 96 percent of Americans have access to at least two providers of wireline broadband and as many as three wireless providers, and more than 55 million Americans can connect to a broadband network capable of delivering at least a 50mbps stream.
The FCC doesn't produce a single broadband connection. It just produces plans and policies of questionable value.
The Washington Post's reaction
to the National Broadband Plan
that was deemed approved
and issued with fanfare by the FCC this week:
BY THE Federal Communications Commission's own account, broadband use in the United States has exploded over the past decade * * * * So it is curious that the FCC's newly released National Broadband Plan faults the market for failing to "bring the power and promise of broadband to us all" -- in reality, some 7 million households unable to get broadband because it is not offered in their areas. Such an assessment -- and the call for government intervention to subsidize service for rural or poor communities -- is premature, at best. * * * * it is hard to see in this field the signs of gross market failure.
The FCC did not vote on the plan, according
to David Hatch at CongressDaily
, to avoid the possibility of a split vote. That could have meant an eye-opening 3-2 vote, if the plan has no Republican support. Which would have been no surprise, since the basic premise that there is a problem in this sphere which government is uniquely suited to fix through "smart" regulation and public subsidies, is wrong.
We have completed a new paper
examining the need for regulatory reform in Illinois for the Illinois Technology Partnership
. Illinois was one of the first states to take the first step in permitting competition in the local telephone market. But it failed finish the job.
In 1985, the Illinois General Assembly declared that "competition should be pursued as a substitute for regulation," delivering new technologies, improved service quality, choice among telecommunications providers and ultimately lower prices for consumers.
The goal of the 1985 act, which was to open the market to competition, has been achieved, but not the task of ensuring that consumers will reap the full benefits of competition -- which requires eliminating legacy regulation that is no longer necessary to protect consumers, harms competition and that limits the deployment of new technologies by advantaging some providers and disadvantaging others.
Meanwhile, Illinois' neighbors have been busy improving the regulatory climate. Indiana, Michigan and Missouri have updated their telecom statutes, and Ohio and Wisconsin are in the process of updating theirs.
We point out that broadband investment is expected to yield significant benefits, and caution that these benefits are at risk if legacy telepone regulation is not reformed. The predicted benefits are:
The state can open up new technological opportunities and economic efficiencies that promise a direct private market economic stimulus of at least $4.6 billion over five years in the form of lower prices for voice services, according to one estimate. According to a report by Connected Nation, Illinois would also experience an additional $6.2 billion in economic impact annually from increased broadband availability and use -- including an estimated 105,622 jobs created or saved per year throughout the state's economy.
The often overlooked risk is that telephone companies, cable operators, wireless providers and others are all competing to be #1 in broadband, and each firm is anxious to invest whatever it takes. But first investors must provide the funding. They will decide which, if any, firms can buy the necessary equipment and employ the highly-skilled people who can make it all work.
Investors are sensitive to potential risks and rewards. Vigorous competition, rapidly changing technology and regulation are the principal risks for any investor in broadband. Of all the risks, regulation is the most critical from a state perspective. All things being equal, if Illinois is highly regulatory and Indiana is not, a firm can lower its risk profile by investing more in Indiana and less in Illinois. Thus, if Illinois clings to the past, it risks diverting investment to more dynamic states like Indiana.
Although Congress directed the FCC to allow broadcasters to offer "ancillary or supplementary services on designated frequencies as may be consistent with the public interest, convenience, and necessity," it obviously hasn't worked.
A column by Holman W. Jenkins, Jr. offers some clues:
Ask the media bankers and investors at a recent FCC roundtable. To a man and woman, they said the FCC's stringent ownership rules have only cut broadcasters off from the capital to remake their businesses for the digital age.
And now, as Jenkins further notes, it's no secret that planning is underway at the FCC to coax broadcasters into voluntarily relinquishing some of their spectrum so it can be assigned for mobile voice and broadband services.
Obviously the FCC goal is to put the spectrum in other hands instead of freeing broadcasters to develop cutting-edge services.
A study by Larry F. Darby, Joseph P. Fuhr, Jr., and Stephen B. Pociask of the American Consumer Institute concludes:
Historical data suggest that for every $1 billion in revenue, "core" network companies provided 2,329 jobs, while non-network "edge" companies provided 1,199 (about half as many). This indicates that Net Neutrality rules that reduce revenues and growth for network companies, and transfer benefits (revenue or growth prospects) to non-network companies, are a barrier to job creation.
Read the study here
While the FCC considers whether to impose nondiscrimination and transparency regulation to all forms of broadband Internet access, Public Knowledge is proposing to subject broadband services to the same pervasive, overlapping, heavy-handed regulatory framework as century-old telephone service (see this and this) -- a framework which a former FCC chairman during the Clinton Administration described as a hopeless "morass."
PK is worried the U.S. Court of Appeals for the D.C. Circuit might rule in a pending case that the FCC doesn't have jurisdiction to regulate broadband. The group also is fretting over a recent observation by AT&T that, "with each passing day, more and more communications service migrate to broadband and IP-based services," leaving the public switched telephone network ("PSTN") and plain old telephone service ("POTS") we all grew up with "as relics of a by-gone era."
Continue reading "Broadband for all, or bigger government?" »
Broadband regulation is justified -- according to Lawrence E. Strickling, who is the Assistant Secretary of Commerce for Communications and Information -- because a recent FCC report indicates that "[a]t most 2 providers of fixed broadband services will pass most homes. Furthermore, "50-80% of homes may get speeds they need only from one provider."
Christine A. Varney, the Assistant Attorney General for Antitrust concurs, noting
It is premature to predict whether the wireless broadband firms will be able to discipline the behavior of the established wireline providers, but early developments are mildly encouraging.
These comments essentially parrot the views of some left-wing advocacy groups who are trying to engineer a revolution in communications policy, such as Free Press and Public Knowledge.
Continue reading "Duopoly shumopoly" »
At Telephony Online, Rich Karpinski notes,
In today's carrier networks, IP may not always be hyped or even seen, but it is indeed everywhere -- and in 2010, it's only going deeper and making an even bigger impact.
I think this protocol proliferation in the name of IP is the death rattle of the old network. IP is a data protocol so of course it dominated the enterprise market and it is prevalent on the Internet so of course Internet players such as Google want it to be upgraded for so-called Multimedia.
But the message of all the brave talk about "ultimate outcomes that have yet to take hold today" is that once again it is becoming reasonable to predict that cable will win. CableTV is already frankly devoted to the transmission of the high definition interactive video that will comprise 99 percent of network traffic. This is the black hole into which all the plans for sophisticated Rich Communications Suites, guaranteed QoS, Internet Multimedia Services, and all the abortive plan for Long Term Evolution (LTE) will fall.
The companies for the new era will be the hardware enablers of broadband interactive video: graphics and network processors, optical transponders, wavelength division muxing gear, and optical circuit switches for the new TDM circuits that will be crucial for the robust streaming video that will be at the heart of the market.
That's the Henry Gau Telecosm and I'm sticking to it. Upgrading the old networks for video and multimedia, one service at a time, is a non-starter. It will be swept away by truly broadband wavelength circuits optimized for interactive video streams. Within these circuits all other
traffic can flow without significant additional expense.
Security, routing, session management, and switching all will be done on the customer edge and the datacenter, which will comprise the bulk of the server edge.
Unless the telco's grasp that their old circuit model is relevant again, they are going to give way to cable TV players who already get the picture in high definition and are moving ever closer to video teleconferencing.
Verizon Wireless and Google plan to
co-develop several devices based on the Android system that will be preloaded with their own applications -- plus others from third parties, a possible contender to Apple's huge iPhone application store. They will market and distribute products and services, with Verizon also contributing its nationwide distribution channels.
If the network neutrality mandates in the Markey-Eshoo bill
were to become law, I don't see how VZW and GOOG could preload applications, if the applications favor certain content on the Internet when they are used. That would seem to violate the "duty" of Internet access service providers to
not block, interfere with, discriminate against, impair, or degrade the ability of any person to use an Internet access service to access, use, send, post, receive, or offer any lawful content, application, or service through the Internet.
I also wonder how VZW and GOOG could effectively market products and services utilizing VZW's wireless Internet access service without prioritization or favoritism?
Perhaps someone has thought of a clever legal argument already why they could do these things, but I'm reminded of a recent editorialwhich correctly observes that "[o]nce net neutrality is unleashed, it's hard to see how anything connected with the Internet will be safe from regulation."
VZW and GOOG's competitors won't like whatever they do. The competitors will have a captive audience at the FCC. The burden of proof will be on VZW and GOOG to justify every move.
A must-read from Bret Swanson:
Despite the brutal economic downturn, Internet-sector growth has been solid. From the Amazon Kindle and 85,000 iPhone "apps" to Hulu video and broadband health care, Web innovation flourishes. Mr. Genachowski heartily acknowledges these happy industry facts but then pivots to assert the Web is at a "crossroads" and only the FCC can choose the right path.
The events of the last half-decade prove otherwise. Since 2004, bandwidth per capita in the U.S. grew to three megabits per second from just 262 kilobits per second, and monthly Internet traffic increased to two billion gigabytes from 170 million gigabytes--both tenfold leaps.* * * *
At a time of continued national economic peril, the last thing we need is a new heavy hand weighing down our most promising high-growth sector. Better to maintain the existing open-Web principles and let the Internet evolve.
The FCC staff estimtates it would cost $350 billion to achieve universal access to the fastest broadband speeds, or $700 billion to build ubiquitous competing networks.
One way to raise this kind of money -- without requiring a vote of Congress to raise taxes -- is to impose a user fee on broadband subscribers.
Assuming you are a politician and you don't want to be blamed for raising taxes or for increasing broadband rates in an election year, this plan would have to be paid for by Chinese and other foreign investors buying Treasury bonds which would increase our national debt.
But what if a massive investment in the fastest broadband speeds of today turns out to be an investment in the wrong technology?
Today fiber delivers the fastest broadband speeds.
But what if wireless becomes the dominant form of broadband? Wireless is cheaper than fiber to deploy, especially in rural areas. The Economist reports,
Within India, even the most remote areas are now judged to be on the verge of commercial viability, judging by the results of two auctions held in 2007. In each case bidders had to say how much government subsidy they would require to expand into rural areas, with the contract going to the lowest bidder.
In the first auction, for the right to build shared towers in 8,000 rural locations, the average subsidy requested was 35%, much less than expected. In the second auction, for the right to offer mobile services, many operators submitted zero bids or even negative ones--in effect offering to pay for the right to set up in rural areas. "The subsidies required are not as big as everyone thought, because the companies believe there's a business case in being present in rural areas first," says Mr Bajaj. In part this reflects the cut-throat competition in the Indian market. But it also shows that mandated tower-sharing can make the economics far more attractive for operators in rural areas, which could be a valuable lesson for other countries. A second round of rural expansion, with another 12,000 shared towers, has been announced.
I suspect the Economist
has got it wrong about mandated tower sharing. The "newspaper" notes
that voluntary, market-led tower sharing is already common in India, while it is mandated in China.
If producers can make money wholesaling, they will do it. If they will lose money -- as a result of regulated prices or terms -- they won't. It's only if they won't make money that it is necessary to mandate it. But if they won't make money, it doesn't make economic sense-- even if an Act of Congress requires it.
Why should government mandate something that doesn't make economic sense?
If government does embrace a particular technology, it could be embarrassed if that technology becomes obsolete earlier than expected. France invested in the Minitel; China in the TD-SCDMA wireless technology.
Both gambles became jokes when overtaken by technology before they generated a sufficient return on significant political investment.
OTOY founder Jules Urbach is interviewed about the possibilities of cloud computing. Urbach:
You're going to be hard-pressed to have a Playstation 4 or an Xbox 720 that has better quality than the cloud.
* * * *It's not just [gaming] consoles that will be threatened by this -- it's your PC. It's your Blu-ray system.
It's going to be a very thin, cheap device that can connect to the cloud. Or maybe you'll see a hybrid solution in the meantime.
Graphics processors (GPUs) -- the most robust and commercially successful and thus most rapidly advancing parallel architecture -- create an image ultimately expressed in a light pattern that is intrinsically parallel since all the pixels have to been seen at once. Processors from AMD/ATI and Nvidia already contain as many as a thousand cores and Urbach has contrived ways to program clusters of thousands of GPUs with his OTOY language and related technology. Below the horizons of most laboratory science, this technology is already advancing at three times Moore's Law chiefly under the pressure of high end gaming and may enable the world's fastest computer, a petaflop in a forty square foot container with five racks, by the end of the year.
Cloud computing depends on fast broadband, as Urbach confirms:
The problem is U.S. bandwidth. The typical U.S. user has 1.5-megabit to a 6-megabit connection. It's enough to do 720p games, equivalent to the Xbox output resolution. But you'll need higher end connection, and Verizon FiOS and other services are coming around.
Reacting to Apple's decision to not allow Google Voice for the iPhone, Wall Street Journal guest columnist Andy Kessler complains,
It wouldn't be so bad if we were just overpaying for our mobile plans. Americans are used to that--see mail, milk and medicine. But it's inexcusable that new, feature-rich and productive applications like Google Voice are being held back, just to prop up AT&T while we wait for it to transition away from its legacy of voice communications. How many productive apps beyond Google Voice are waiting in the wings?
So Kessler proposes a "national data plan."
Before we get to that, Kessler complains that margins in AT&T's cellphone unit are an "embarrassingly" high 25%. He doesn't point out that AT&T's combined profit margin -- taking into account all products and services -- is only 9.66%.
AT&T is actually earning less now than it was legally entitled to earn when fully regulated -- 9.66% versus 11.75%.
Don't fall for the myth that AT&T killed Google Voice.
The truth is regulators are quietly expropriating wireless profits to hold prices for regulated services like plain old telephone service artificially low.
This has always been how the game is played. Regulation has kept prices for basic phone service at or near the bare cost providers incur to offer the service, forcing providers to chase profits elsewhere.
In a normal business, an unprofitable product or service would disappear. But telecom providers are still required by law to provide plain old telephone service to anyone who requests it. It's called the "carrier of last resort" obligation. Believe it or not, providers are still required to provide copper-based, circuit switched phone service in many places, even though they could cut costs by deploying fixed wireless and VoIP to deliver basic phone service.
This service obligation imposes a tax on those of us who have cancelled our landline service in favor of our cellphones in the form of artificially high prices for wireless service.
Kessler offers one solution, but before we get to that, I've got a simpler one.
The solution is to give providers full freedom to set prices and choose their own technology. Yes, I mean freedom to raise prices for basic phone service so cellphones don't have to subsidize it, because cellphone providers who are affiliated with landline units could afford to lower their prices.
Don't lose me here: Cellphone providers would lower their prices, because every time prices fall subscribers consume more minutes of use.
Kessler favors a more convoluted plan, which I will admit is more practical politically than my own:
- End phone exclusivity. Any device should work on any network. Data flows freely.
This is stupid. There may be instances where exclusivity promotes innovation, and others where it might not.
For example, a wireless provider might be willing to negotiate its customary profit margin, compromise the level of control it normally exercises over product design, promise to make special efforts to promote the product and provide technical support, and even make fresh investments in its network or back office systems to fully exploit the product's innovative features.
A bright line rule would kill both good and bad exclusivity.
- Transition away from "owning" airwaves. As we've seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other.
As Kessler notes, Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s. The fact is, our rulers in Washington, D.C., fifty state capitals and thousands of city halls view wireless as a giant taxing opportunity.
Wireless providers are recovering the $70-plus billion they deposited into the U.S. Treasury right now from each and every one of us in the form of artificially high prices for cellphone service.
Let unlicensed devices operate in the "white spaces," then refund the $70-plus billion so new and existing carriers can compete on quality of service rather than on artificial cost disparities.
- End municipal exclusivity deals for cable companies ... A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don't like one service blocking apps, use another), thus one less set of artificial rules to be gamed.
Congress invalidated exclusive cable franchises in 1984, and most states have recently streamlined the video franchising process so new entrants can obtain statewide franchises instead of negotiating individually with thousands of local franchising authorities.
Kessler's certainly accurate that competition between telephone and cable providers brings de facto network neutrality and open access. We have that competition already. In 2008, competition has pushed down the rates for bundles of Internet, phone and TV service by up to 20 percent, to as low as $80 per month, according to Consumer Reports.
- Encourage faster and faster data connections to our homes and phones. It should more than double every two years.
One way to encourage it is to make it clear up front that investors will be allowed to earn a profit -- that's unclear now due to the possibility of extensive new regulation which would lead to bureaucratic control of broadband networks and bandwidth rationing.
The other way to encourage it is to subsidize it to make up for the harmful effects of taxes and regulation.
If we accept the idea there are too many vested interests to permit meaningful reform of legacy telephone regulation, then we are forced to look for ways to treat the various symptoms.
But the advent of wireless and VoIP technology mean that legacy phone service is unsustainable and will die unless politicians are going to treat it like GM because it provides employment for thousands of unionized workers.
There is still time for the politicians to simply let go of it and let it adapt.
The FCC received reply comments last week concerning the national broadband plan it is required -- pursuant to the stimulus legislation -- to deliver to Congress by Feb. 17, 2010.
In the attached reply comments of my own, I conclude:
- The broadband market is delivering better services at lower prices. There is no evidence of a market failure which would justify additional regulation.
I pointed out that just as the Sherman Act does not "give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition," according to the Supreme Court, the Commission would be wise not to insist that broadband providers alter their way of doing business just because it hopes some other approach might yield more consumer benefits. The pursuit of the "perfect" may prove elusive. Meanwhile, the "good" -- which presently exists in the form of a fast-charging, innovative market -- could be destroyed.
- The Commssion should focus on non-regulatory strategies which have proven effective in promoting the adoption of broadband services.
For example, a lot of Americans don't subscribe to broadband because they don't see the need for it or because they are concerned about the price. According to the Pew Research Center, 50 percent of dial-up and non-online users fall into the former category and 19 percent fall into the latter category.
A public-private partnership in Kentucky discovered that the lack of a computer at home ranked even higher than the monthly service fee as a barrier to the adoption of household broadband. In Kentucky, the number of people actually using broadband jumped from 22% to 44% as a result of the partnership's efforts.
- Common carrier regulation could interfere with innovation and legitimate network management.
If government mandates that sellers have to charge everyone the same price, that potentially limits returns on investment (because some consumers are willing to pay more than others). If government says sellers can't serve some customers unless they can serve all customers, that potentially limits investment opportunities. Net neutrality regulation would potentially lead to these and perhaps other consequences.
One such consequence might be to prevent network operators from proactively managing the network to reduce congestion and malicious traffic which lead to identity theft and cyber attacks.
- There is no compelling evidence of excessive profits which would justify reregulation of the special access market.
Purchasers of these high capacity services allege profiteering, but a more reasonable analysis has found that instead of earning a 138% return on special access investment, AT&T is more likely earning 30%. Qwest is probably earning 38%, not 175%. And Verizon, 15% instead of 62%.
If AT&T, Qwest and Verizon are earning excess profits, cable and fixed wireless competitors will be able to undercut their prices and capture market share. The higher the profits, the faster the entry.
If regulation pushed special access prices lower, that would reduce the revenue investors could expect to earn from new competitive facilities. If investment won't be profitable, it won't be made.
It is unacceptable that the country which invented the Internet ranks 15th in the world in broadband adoption, according to President Obama -- a fact which he and some others believe justifies government spending and regulation to "renew our information superhighway."
A new paper by Scott Wallsten at the Technology Policy Institute contributes useful perspective concerning the U.S. ranking (which actually is in relation not to the world as a whole, only to the 30 nations which comprise the Organization for Economic Co-operation and Development (OECD).)
Because average household sizes differ across countries, when every household in every country is connected to broadband the U.S. will rank 18th among OECD countries and much lower when compared to all countries in the world. Consider, for example, country rankings of the number of landline telephone subscribers per capita. In 2006 (before consumers started cutting their landlines in significant numbers), the U.S. ranked 45th in the world by this metric, despite 95 percent of all U.S. households having a telephone. (emphasis added.)
Besides the billions of dollars in the stimulus package for broadband subsidies, the FCC is on an urgent mission to devise a national broadband strategy. But the the light regulation and private investment we have now will drive adoption to the saturation point within 2-3 years.
If current trends continue, the U.S. and nearly all wealthy OECD countries will reach a saturation point within the next few years.
* * * *
[B]roadband penetration will eventually reach a saturation point that will be difficult to exceed. Korea, for example, has probably reached that point at about 80 percent of households onnected. At current trends the U.S. will be in a similar position sometime in 2011.
another complaint is that U.S. consumers pay more for broadband than consumers in other nations. For example, a recent paper
by S. Derek Turner at Free Press claims:
The monthly cost of broadband in America is higher than all but seven of the 30 OECD nations, only slightly less expensive than the offerings in countries like Hungary and Poland ...
But Wallsten points out that the
U.S. appears to have among the least expensive low-end broadband plans among OECD countries, but among the more expensive high-end plans.
Wallsten also notes that the U.S. leads all OECD countries in investment in information and communications technology as a share of gross fixed capital.
"Understanding International Broadband Comparisons -- 2009 Update," by Scott Wallsten, Technology Policy Institute (Jun. 2009) can be found here.
Bret Swanson at Entropy Economics makes some fascinating findings in a new paper:
We estimate that by the end of 2008, U.S. consumer bandwidth totaled almost 717 petabits per second. On a per capita basis, U.S. consumers now enjoy almost 2.4 megabits per second of communications power, compared to just over 28 kilobits per second in 2000. The ability of Americans to communicate and capitalize on all of the Internet's proliferating applications and services is thus, on average, about 100 times greater than it was in 2000.
It sort of makes you wonder why we need a National Broadband Plan
from the government, particularly when you consider the possibility that the government's well-intentioned efforts may backfire. Consider Swanson's observation as to the last time the government tried to improve the telecommunications market:
The millennial technology and telecom crash was, in part, a result of this broadband dearth. Thousands of Silicon Valley dot-com business plans had been conceived on the assumption that real broadband would be rapidly deployed and adopted across the nation. More than half a dozen communications companies took advantage of the newly deregulated long-haul transmission market and built nationwide fiber optic networks, boosting intercity bandwidth by several orders of magnitude. But local telecom markets werenÊ¼t similarly deregulated. They were re-regulated. At the FCC and in 51 state utility commissions, in fact, complex rules and price controls grew for DSL and threatened to engulf cable modems as well. Investment ground to a halt. The resulting bandwidth gap, with the crucial last mile falling well short of the market's expectations, helped produce the crash, which lasted through 2002.
A new coalition, NoChokePoints, has been formed to lobby Congress and the Federal Communications Commission to further regulate the prices that incumbent telephone companies (Regional Bell Operating Companies or Incumbent Local Exchange Carriers) can charge for special access services purchased by businesses and institutions. Special access circuits are dedicated, private lines. For example, Sprint purchases special access circuits to connect its cell towers to its backbone.
According to a coalition spokeswoman,
Huge companies like Verizon and AT&T control the broadband lines of almost every business in the United States. The virtually unchallenged, exclusive control of these lines costs businesses and consumers more than $10 billion annually and generates a profit margin of more than 100 percent for the controlling phone companies, according to their own data provided to the FCC. This hidden broadband tax results in enormous losses for consumers and the economy, and this country cannot afford it; especially now.
prepared by Peter Bluhm with Dr. Robert Loube under contract with the National Association of Regulatory Commissioners (NARUC) disputes this conclusion.
NARUC represents both state utility commissioners who are pro-business as well as state utility commissioners who are hostile toward regulated utilities. NARUC is not supporting the incumbent network providers on the issue of special access regulation. According to Bluhm and Loube,
Buyers have criticized the FCC's current regulatory regime because it has apparently allowed excessive earnings. For their part, the RBOCs contend that the ARMIS figures are virtually meaningless. We agree with the RBOCs ....
Before 2000, special access investment was categorized by what is called "direct assignment." The purpose was to assign 100% of investment for interstate special access to the interstate jurisdiction and 100% of investment for intrastate special access to the state jurisdiction. In practice, direct assignment required carriers to perform studies on how their networks were used ....
In 2001, the FCC "froze" separations categories and factors for large companies. At that point, large carriers stopped performing direct assignment studies ....
During [the ensuing] period, carriers greatly increased their sales of interstate special access, and all of that revenue was assigned to interstate. As a result, interstate special access revenues increase every year, but not interstate special access costs. This imbalance has inflated ARMIS special access earnings reports and made them unreliable. (emphasis added.)
Likewise, a paper by Harold Ware, Christian Dippon and William Taylor at NERA Economic Consulting concludes
accounting profits generated from [ARMIS] data bear no relationship with economic profits and cannot serve any useful purpose in determining whether pricing flexibility has generated excessive rates of return.
In an effort to get to the bottom of this, Bluhm and Loube estimated
the current actual cost and found that the carriers are probably earning substantially less than ARMIS indicates. Instead of earning a 138% return on special access investment, AT&T is more likely earning 30%. Qwest is probably earning 38%, not 175%. And Verizon, 15% instead of 62%.
The revised percentages are still more than a regulated utility would be allowed to earn. However, there are at least two points to consider.
First, absent cost studies there is no way to know how much the network providers are earning. According to Ware, Dippon and Taylor,
allocations and adjustments can produce wildly different results depending on what factors are used. This is why economists and regulators have long rejected use of cost allocations such as those in the ARMIS data. It is also why [Bluhm and Loube's] conclusions regarding profits for special access should be summarily rejected.
Incidentally, Ware, Dippon and Taylor predict that the potential benefits of additional special access regulation are not worth the "potentially large costs."
They point out that if different adjustments are chosen, the return on investment could be even lower.
For another, competitors are entering the market and they are capturing market share. Bluhm and Loube concede that
Cable television and fixed wireless have low entry and exit costs where their networks are currently established, and each can provide substitutable dedicated services to many customers. Overall, these competitors are still acting on the fringes of special access markets, but they have larger roles in some locations and their market shares appear to be growing. Fixed wireless may hold a large market share in five years, particularly if WiMAX proves reliable and if these carriers can attract sufficient capital to expand. These newer technologies may be poised to become major competitors and are increasingly constraining ILEC behavior, but they have not yet grown beyond fringe competitors in most markets.
Maybe these competitors are still "acting on the fringes" because profit margins afforded by the market aren't fat enough.
If AT&T, Qwest and Verizon are earning excess profits, cable and fixed wireless competitors will be able to undercut their prices and capture market share. The higher the profits, the faster the entry.
What would happen if Congress or the FCC decided to intervene? If regulation pushed special access prices lower, that would reduce the revenue investors could expect to earn from new competitive facilities. If investment won't be profitable, it won't be made.
NoChokePoints includes telecommunications providers Sprint, BT (British Telecom) and tw telecom among its members.
These competitors would not be pushing to cap the special access prices charged by incumbent network providers if they wanted to profitably invest in competing facilities. They would want incumbent providers to charge high prices so they could charge lower prices and still make a profit.
The logical conclusion is that competitors don't want to invest in new facilities. They simply want to cut costs. (Sprint, which has partnered with Clearwire and is exploring a combination with Level 3, is hedging its bets.)
A desire to cut costs rather than assume investment risks is not surprising.
But the coalition claims that additional special access regulation will create jobs.
Policymakers need to consider whether they want to help companies who don't want to invest save jobs at the expense of their suppliers, or whether it would be better to maintain incentives for investment. Investment will create sustainable jobs.
Cost cutting will simply lead to more layoffs, here or there.
The message for Congress is: (1) the "controlling phone companies" are not earning margins in excess of 100%, according to any credible observer; (2) determining what the exact margin really is would require cost studies which are expensive, time consuming and would probably lead to litigation and (3) if prices do exceed reasonable costs it will be profitable for competitors to invest in new facilities which will create needed jobs.
For more information, a recent column I wrote about proposals to expand special access regulation can be found here.
The Japanese government filed comments in response to a Notice of Inquiry the Federal Communications Commission issued as part of its effort to design a grand strategy for broadband (see this and this).
Japan has been working on opening essential facilities for broadband services to encourage broadband development in a fair competition environment. In 1999, local loop unbundling was ensured (for dry copper and line-sharing), and in 2000, collocation rules were established and optical fiber network unbundling were ensured. These policies accelerated the spread of DSL services and led to the rapid start up of FTTH services. In 2009, we also introduced rules to ensure Next Generation Network (NGN) unbundling. We have enforced the promotion of competition to realize the diversity of interconnection by other operators. The Government of Japan has introduced enforcing policies for interconnection tariffs at proper charges, which has ensured that costs for using infrastructure of broadband have been low, while incentives for facility investment have not been diminished (See Appendix 3.).
I don't know why the Japanese government would have prepared comments for an FCC proceeding unless it was asked. Someone who favors an expanded role for government in the broadband marketplace must have requested it.
Giving competitors access to legacy telephone facilities may have made some sense in Japan, notes Robert W. Crandall of the Brookings Institute and Debra J. Aron of LECG and Northwestern University, because Japan doesn't have ubiquitous cable connections. In many countries where there is little or no intermodal competition -- as between telephone and cable companies -- unbundling and collocation may be the best prescription available to policymakers.
In the U.S., deregulation has been an investment magnet. The cable industry invested $130 billion in network upgrades after the 1996 Telecommunications Act deregulated cable rates. A competitive spiral has ensued. When the FCC adopted a deregulatory strategy in 2004, phone companies began investing in video services. Cable companies responded by investing in voice-over-Internet services. The competitive struggle continues as both sides race to provide faster broadband.
Some believe Japan proves that unbundling and collocation will drive broadband providers to invest in new facilities, so we don't need regulatory reform.
But notice how when Japan imposed local loop unbundling at low wholesale prices and collocation to stimulate competition for Digital Subscriber Line (DSL) services in 2000, incumbent NTT invested in fiber-to-the-home -- which was free of similar requirements. This is the same strategy Verizon is following here.
NTT is now required to unbundle fiber loops -- years after NTT made a strategic investment commitment -- but according to a report by Robert D. Atkinson, Daniel K. Correa and Julie A Hedlund of the Information Technology and Innovation Foundation,
the price that competitors pay is quite high, enabling NTT to obtain an adequate rate of return on its fi ber investment. As a result, NTT has invested more than $200 billion in optical fi ber installations.
Crandall and Aron make a similar observation. They add,
As a result of the limited use of leased unbundled facilities, competition in FTTH services is largely facilities-based among NTT, the electric power companies, and USEN, the largest Japanese cable company. Unbundling obligations have not led to significant competition in providing fiber-based broadband services in Japan.
Atkinson, Correa and Hedlund observe that
A number of European Union (EU) nations with similar unbundling regimes as France--for example, Italy and Spain--rank below the United States in terms of broadband adoption. Furthermore, most EU nations adopted unbundling regulations because they had almost no intermodal broadband competition--in part because their cable regulations signifi cantly limited investment in cable modem service.
For countries like our own which do have intermodal competition, unbundling and collocation are not only unnecessary but they are counterproductive since they encourage private investment to flow somewhere else. Why would our government want to allocate scarce tax dollars to broadband deployment when there are so many other urgent priorities?
The lesson from Japan is unbundling and collocation wouldn't make sense in the U.S.
The FCC has big plans for a national broadband strategy, according to Acting FCC Chairman Michael J. Copps
It is my intention that at our next full Commission meeting, on April 8, we will kick-off an open, participatory, public process with a far-reaching Notice of Inquiry to marshal the data and expertise we need to make sure we meet our legislatively-mandated date of one year for presenting Congress and the American people a national broadband strategy worthy of the name.
* * * *
And we will endeavor to ignore no sector of our national life. Stop to think about it for a moment. What doesn't broadband impact as we look to the future of America? Not just the basic ways we communicate with one another. But health care information technology and the need to computerize medical records. Better utilization of scarce energy resources through the use of smart grids. Higher education and the needs of schools, libraries and students as they gear up for the Twenty-first century. More efficient agriculture. Better housing. Public safety and cybersecurity. Education. The environment. Each of these presents its own questions and new opportunities which need to be examined as part of a national broadband plan.
Meanwhile, the New York Times reports
that some banks want to return government bailout funds because the conditions are proving too onerous
Financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must slash dividends, cancel employee training and morale-building exercises, and withdraw job offers to foreign citizens.
Government cannot easily resist populist and special interest pressures like these, and there is nothing preventing government from altering a deal it has struck anytime it wants when it's politically expedient.
The bankers' experience is a cautionary tale for broadband providers who are interested in receiving government grants. Accepting the money is like entering into a partnership agreement with politicians and bureaucrats and becoming the junior partner. Unlike a banker or an investor, the government's primary interest isn't whether the venture is profitable.
[A] growing chorus of industry experts are warning that asking weak banks to carry out the government's economic and social policies could increase the drain on the public purse. These experts say that the financial assistance, while helpful in the short run, could force weak banks to engage in lending practices that will lose even more money, and that the government inevitably will become more heavily involved in dictating how banks do business.
Wall Street Journal columnist Gordon Crovitz writes that
In Japan, wireless technology works so well that teenagers draft novels on their cellphones. People in Hong Kong take it for granted that they can check their BlackBerrys from underground in the city's subway cars. Even in France, consumers have more choices for broadband service than in the U.S.â€¨â€¨
The Internet may have been developed in the U.S., but the country now ranks 15th in the world for broadband penetration. For those who do have access to broadband, the average speed is a crawl, moving bits at a speed roughly one-tenth that of top-ranked Japan. This means a movie that can be downloaded in a couple of seconds in Japan takes half an hour in the U.S. The BMW 7 series comes equipped with Internet access in Germany, but not in the U.S.
Then he adds that the economic stimulus package before Congress will not fix the real reason the U.S. now ranks 15th in the world for broadband penetration because
nothing in the legislation would address the key reason that the U.S. lags so far behind other countries. This is that there is an effective broadband duopoly in the U.S., with most communities able to choose only between one cable company and one telecom carrier. It's this lack of competition, blessed by national, state and local politicians, that keeps prices up and services down.
â€¨â€¨A couple of observations come to mind.
One is that the U.S. has the most successful wireless market in the world. Cellphone calls are significantly less expensive on a per minute basis in the U.S. (6 cents per minute) than in France (17 cents) or Japan (26 cents), according to the FCC's latest analysis of wireless competition (Table 16). U.S. mobile subscribers continue to lead the world in average voice usage by a wide margin..
The explanation for why fourth generation wireless technology is further along in Japan than it is here would have to include the fact that the Japanese government years ago decided to make leadership in 4G wireless technology a national priority and invested heavily with taxpayer money (see, e.g., this).
This is a form of industrial policy, which involves picking winners and losers, and it is how the Japanese do things. Back in the late 1980s or early 1990s the Japanese government decided Japan needed to be the world-leader in high-definition television, which prompted some in our own government to argue we couldn't afford to let that happen, so we needed a public-private partnership and a national high-definition television transition plan (which some now want to postpone).â€¨â€¨
The good news is that AT&T, Clearwire and Verizon Wireless have all successfully acquired spectrum for the rollout of their own 4G services over the next couple years without government subsidies and oversight.â€¨â€¨
Meanwhile, 3G wireless services -- which are also capable of being used for broadband Internet access, albeit at slower speeds -- are now provided in zip codes covering more than 96 percent of the U.S. population, and over 92 percent of the U.S. population has access to 3G service at their primary place of residence, according to studies commissioned by CTIA.â€¨â€¨
An estimated 13 percent of U.S. mobile telephone subscribers accessed news and â€¨information via a mobile Web browser in January 2008, and rates were much â€¨higher among "smartphone" users (58 percent) and iPhone users (nearly 85â€¨percent), according to the FCC's analysis of wireless competition.
â€¨As a definitional matter, since most Americans can choose between at least three broadband providers and since a significant number of consumers use the third option and the third option is constantly improving, broadband is not a duopoly.â€¨â€¨
The fact that the U.S. is a few years behind Japan in 4G deployment is not the reason we slipped to 15th place in the international broadband rankings. The reason for that was a predictable yet unintended consequence of the Telecommunications Act of 1996.
When the 1996 law passed, there were several cable operators who planned to offer competitive phone services in a venture that included Sprint Corp. These plans were shelved, according to then-Sprint CEO William T. Esrey, as a result of the FCC's "pro-competition" policies: "If we provided telephony service over cable, we recognized that they would have to make it available to competitors." That plus the fact it was unclear whether telephone company investment in high-speed connections capable of delivering video would also have to be shared with competitors, chilled investment on both sides and prevented a spiral of competition. Thus, the local competition rules which were intended to speed effective competition actually delayed it.
Once the FCC finally scaled back its pro-competition rules in 2004, Verizon began to deploy state-of-the-art broadband to be able to enter the video market dominated by cable operators, who in turn accelerated both their own entry into the voice market dominated by incumbent phone companies and their investment in higher-bandwidth broadband service. In the past year, competition has pushed down the rates for bundles of Internet, phone and TV service by up to 20 percent, to as low as $80 per month, according to Consumer Reports.
We slipped to 15th place because of a government failure in the regulation of wireline networks. That problem has been fixed, and the last thing we need now is government intervention in the wireless market. Wireless services were completely deregulated early in the Clinton administration, and aside from the new technologies, improved service quality and choice among wireless providers, the average cost per minute of cell phone use has fallen 87 percent, from 47 cents in 1994 to 6 cents in 2007, according to the FCC's most recent analysis of wireless competition.
The Senate version of the stimulus package (H.R. 1) winding its way through Congress would provide $9 billion in direct public subsidy for broadband network deployment subject to a "non-discrimination" requirement which, like the "open access" requirement in the House bill, could turn into onerous "network neutrality" regulation (see previous post).
Meanwhile, Britain has outlined its digital transition plans in "Digital Britain - Interim Report."
It is interesting to compare the substantially more free-market direction Britain is taking with the silly approach our own Congress is considering. For one thing, Britain is going to let private investors finance network upgrades.
The Government is not persuaded that there is a case now for widespread UK-wide public subsidy for Next Generation Network deployment, since such widespread subsidy could simply duplicate existing private sector investment plans or indeed chill such plans.
Another reason direct public subsidies should be avoided is they distort competition. Over at the Progress & Freedom Foundation blog, Ken Ferree cites
a recent U.S. government audit report (analyzing significant problems with the current broadband grant and loan programs of the USDA Rural Utilities Service) which asked the evident question: "What is the government's responsibility if, due to subsidized competition, a preexisting, unsubsidized broadband provider goes out of business?"
Next, the British report touches on the third rail of broadband policy, by noting that if Internet service providers offer guaranteed service levels to content providers in exchange for increased fees, it could lead to "differentiation of offers and promote investment in higher-speed access networks. Net neutrality regulation might prevent this sort of innovation." The report adds that
the Government has yet to see a case for legislation in favour of net neutrality. In consequence, unless Ofcom [Britain's FCC-equivalent] find network operators or ISPs to have Significant Market Power and justify intervention on competition grounds, traffic management will not be prevented.
So the British digital transition is based on some sound free market insights, and keep in mind that Britain has a Labour government! Here in this country we are heading in the other direction due to some muddled thinking, and not just on the Left. A prominent Republican writes
that "conservatives should cheer" over the fact the stimulus package will include billions to promote broadband deployment and adoption.
Although a case can be made for broadband subsidies in areas which cannot be served by a phone, cable, wireless or satellite provider except at prohibitive cost, the number of households in these areas is extremely small. Connect Kentucky proved that subsidies were unnecessary to make broadband available to approximately 95 percent of the state's households.
The stimulus package is not narrowly targeted to remote areas which it is economically impossible for broadband providers to serve with current technology.
(Yes, a primary objective of the stimulus package is to create jobs, but there is an argument that spending on other infrastructure will create more jobs now, when we need them. See, e.g., "Not so fast," in the Economist.)
What is the "conservative case" for the direct public subsidies for broadband in current versions of the stimulus package? The Republican writer claims, first, that a national strategy is needed to address previous policy interventions, often regulatory relics from earlier eras. But this is an argument in support of deregulation, not subsidization.
When Reagan said "Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it," he was referring to the view which prevailed before he became president. Reagan's comment wasn't an endorsement. Reagan opposed big government.
The second argument is that rational economic participants might under-invest in network upgrade and expansion because broadband deployment offers fewer positive network externalities for individual actors than for society as a whole. In fact there is only one reason why rational economic participants might under-invest in broadband, and that is if public policy has the potential to deprive investors of a competitive return on their investment. Broadband isn't like basic research, to cite one of the writer's better examples; from an investment perspective, basic research is like a crap shoot at best. Broadband, on the other hand, is a proven money-maker. That is, unless profit is expropriated through regulation, excessive or discriminatory taxes or government-subsidized competition.
Third, the writer claims more robust broadband deployment and adoption will promote conservative ends, such as freedom from teacher unions, more independence from Mideast oil, less work for trial lawyers, more headaches for mainstream media, etc. But is it ever ethical or conservative to argue that ends justify means? Our friends on the Left are constantly justifying their horrible policies on the basis of their wonderful intentions.
In conclusion, there is no conservative case to be made for expansive broadband subsidies, only some conservatives who hold unorthodox views.
Maybe it is premature to conclude that the government is the only entity who can facilitate broadband deployment at this juncture.
Seeking to raise $500 million in debt to meet coming maturities, Cablevision Systems Corp. ended up with $750 million as investors with a renewed appetite for more lucrative but riskier debt flocked to the offering, according to a person familiar with the situation.
Here is the full
The proposed "American Recovery and Reinvestment Act of 2009" unveiled yesterday by House Appropriations Chair Dave Obey (D-WI) includes $1.825 billion for Broadband Deployment Grants, another $1 billion for Wireless Deployment Grants (25% to provide voice service in unserved areas and 75% to provide "advanced wireless broadband service" in underserved areas.
The bill also appropriates $2.825 billion for broadband loans, loan guarantees and grants in predominantly rural areas by the Rural Utilities Service of the Department of Agriculture.
An explanatory report accompanying the bill notes that the Communications Workers of America estimate (using a Department of Commerce model) that each $5 billion investment in broadband would result in 100,000 new jobs.
On the positive side, the loans, loan guarantees and grants would be for non-recurring costs of deploying broadband networks in rural, suburban, and urban areas. When in the past policymakers wanted to promote the deployment of legacy telephone service, they subsidized operating costs (the direct federal payments alone were in excess of $40 billion over the last 20 years).
On the negative side, the bill creates a lot of opportunities for politicians and bureaucrats to pick winners and losers, micromanage and second-guess, i.e.,
- States wishing to participate must submit a report identifying the geographic areas of greatest need.
- NTIA must adopt rules to ensure, among other things, that grant recipients operate broadband networks on an open access basis and adhere to the principles contained in FCC's broadband policy statement adopted August 5, 2005.
- Applicants must submit a cost-study, engineering plan, proposed build-out schedule and comply with "any other requirements the NTIA deems necessary."
- Applications will be evaluated according to whether they will increase service affordability or subscribership; enhance service for health care delivery, education, or children; contain concrete plans for enhancing computer ownership or computer literacy in the area; and whether the applicant is a recipient of at least 20 percent matching grants from state, local or private entities.
Whenever the government manages anything, there are many individual needs to look after. Government is a captive of special interests.
Even worse, the bill enshrines into the law definitions of broadband even though technology continues to evolve rapidly. The broadband infrastructure eligible for federal assistance consist of:
- "Advanced broadband service" = at least 45 megabits per second downstream/at least 15 mbps upstream.
- "Advanced wireless broadband service" = at least 3 mbps downstream/at least 1 mbps upstream over an end-to-end internet protocol wireless network.
- "Basic broadband service" = at a speed of at least 5 mbps downstream/at least 1 mbps upstream.
There are two categories of people who lobby politicians to define so as to exclude: corporations who want to deny their commercial rivals access to the money, and equipment vendors who want to make everything they have already sold obsolete.
The Independent Telephone and Telecommunications Alliance, which represents mid-sized phone companies, is advocating for stimulus aid to build networks in rural areas offering download speeds of 1.5 megabits per second. This does not sound very fast, but ITTA may know better than anyone what its target customers are willing to pay for. The Communications Workers of America, incidentally, proposes 3 mbps.
The services which qualify as "Advanced broadband services" are Comcast's DOCSIS 3.0 upgrade and Verizon's FiOS deployment. These services, which are being built on top of each other, are not yet practical in most of the country. It was reported in October that Comcast would initially roll out the service in Boston, Philadelphia, New Hampshire and New Jersey, where Verizon was already deploying FiOS. Comcast stated in a press release that it intended to reach more than 10 major markets and pass nearly 10 million homes and businesses within several months. This is how the market works, but is it how we want to spend our tax dollars?
There is clearly a possibility that people who don't even have access to slow broadband won't get even that.
The bill also mandates that the FCC define the terms "underserved area" and "unserved area." Why not?
Most troubling is that the FCC would get unlimited discretion to define "wireless open access" and "open access" within 45 days. The bill doesn't even direct the FCC to find a reasonable and appropriate balance between some of the more obvious competing public policy objectives (one being the protection of investors who are financing the upgrade), thus there is no basis for a court to review the FCC's final decision and throw it out if it is irrational. This is a serious mistake.
Applying an open access mandate could amount to a serious escalation in regulation. But if we want more of something, the best thing we can do is deregulate it. This is not just Republican dogma; this is bipartisan. President Clinton's first FCC chief boasted in his memoirs that in the Omnibus Budget Reconciliation Act of 1993, passed by Al Gore's tie-breaking Senate vote, the Democratic Congress gave the FCC authority to promote growth in the wireless industry by auctioning new licenses with "no rules attached and preempting all state regulation[;] we had totally deregulated the wireless industry." And the average cost of a minute of cellphone use has declined from 47 to 7 cents per minute. The Clintonites knew what they were doing.
Hawaiian Telcom has entered Chapter 11 bankruptcy (see this and this), FairPoint Communication's CFO is under siege as the company looks for a new CEO and Qwest Communications is cutting another 1,200 jobs as it tells investors not to worry about massive debt repayment deadlines.
Times are tough for a lot of people, of course.
However, phone companies have a special problem: Basic phone service is not profitable. Regulators have matched prices with costs; and they have defined costs narrowly, so as to shift some costs, for accounting purposes, to services which are profitable.
As a result, basic phone service has to be subsidized by overpriced calling features such as voice mail, Caller ID, etc.; Internet access; video or wireless offerings.
That doesn't work anymore. People can cut the cord and make do with a wireless phone or VoIP service from their cable provider. In the case of Hawaiian Telcom, which was recently purchased from Verizon by a private equity firm,
Customers initially had complained about poor service. They have steadily abandoned their traditional land lines for other alternatives, like wireless phones and digital phone service offered by the cable company, a trend that is being experienced nationwide.
Hawaiian Telcom, which employs about 1,400 workers, served about 524,000 residential and business phone lines at the end of September, down about 21 percent from the 660,000 lines when Carlyle purchased the company in 2005.
Hawaiian Telcom, FairPoint and Qwest have all been trying to make it as land-line companies while expanding their Internet access and video offerings as fast as they can with borrowed money.
AT&T and Verizon, on the other hand, benefit from considerable wireless revenues which make those companies profitable -- to a point -- despite declining land-line revenues.
If we want phone companies to invest in broadband, we have to understand that current regulation will require them to use their broadband profits to subsidize basic phone service. That may give their investors and their lenders pause. The lenders and investors could, for example, instead fund cable network upgrades with no diversion of profits.
Or if we want to decrease wireless phone prices -- such as eliminating Early Termination Fees -- we have to understand that wireless subsidizes basic land-line service.
We could just let the taxpayers subsidize broadband so it can subsidize basic phone service. Or we could free the phone companies to configure and price their basic phone service more efficiently, let them build broadband networks which can compete with the cable companies or anyone else and free taxpayers to rescue someone else.
Observers predict stepped-up regulatory battles in telecom, according to the Wall Street Journal,
New congressional leaders as well as policy makers in the Obama administration are expected to press for fresh limits on media consolidation and require phone and cable firms to open their networks to Internet competitors, lobbyists and industry officials say.
The article overlooks the fact that broadcast ownership limits and forced access policies are restraints on the free speech rights of broadcasters and network providers, and that the constitutionality of new regulation could ultimately be decided by the courts.
Misguided regulatory policy is "among the most important inhibitors of capital investment in telecommunications," conclude Debra J. Aron and Robert W. Crandall in a recent paper.
The authors observe that
Business firms do not make investments for altruistic reasons but rather make investments in order to earn a return on the invested capital. For any company to make any investment, it must determine, and convince the capital market, that the investment is reasonably likely to produce a positive return in net present value (NPV) terms sufficient to compensate for the risk incurred. When companies seek funding to execute a project, they compete for those funds with all other potential projects in the economy, not just with other investment opportunities available to the company itself and not just with investment opportunities in the same industry or geographic area.
Regulators cannot set optmal prices -- as a practical matter -- only prices which either are too high or too low. Prices which are too low discourage investment.
The risk that regulatory prices would not be compensatory is magnified by the fact that any investment in new fixed-wire networks is largely sunk. That is, the company making the investment cannot remove the assets and deploy them in alternative pursuits if they prove to be non-remunerative in the telecom sector. Thus, a decision to invest today in a given technology is irrevocable and potentially very costly. In contrast, if a competitor were to be granted access to these assets, once they are in place, at regulated rates, the competitor's decision would not be irrevocable. If it is allowed to lease these facilities on a short-term basis, it could simply walk away if a new technology were to appear. For this reason, economists refer to the competitor as having a "real option" which should be priced into the regulated rate. Alternatively, the competitor could be required to share the incumbent's investment risk by leasing the asset for its entire life. In this way, if the competitor remained solvent, it would be faced with its proportionate share of the risk of early obsolescence. (footnotes omitted.)
But that is not what regulators do. Regulators require incumbents to share the rewards of successful investments, not the losses arising from investment failures. The competitor gets to walk away while the incumbent is forced to write off huge amounts of fixed investment.
Next, the authors confirm that Wall Street is skeptical of Verizon's and AT&T's massive broadband investments.
A recent report by Bernstein Research, for example, concludes that "Even with aggressive assumptions about incremental adoption and retention, we believe the FiOS [Verizon's fiber-to-the-home initiative] project, in aggregate, falls well short of earning its cost of capital." An earlier report by industry analysts Pike & Fisher was also pessimistic, stating that its "report suggests Verizon is spending so much on FiOS that it could take a decade or more for the company to pay back its investment should it fall considerably short of its market-penetration goals." In contrast, Stifel Nicolaus analysts Christopher King and Billie Warrick were fairly optimistic about Verizon's FiOS product, predicting that "Verizon will still be able to offer a superior product to cable (and AT&T) due to its FTTH [fiber-to-the-home] architecture, and will still be able to generate a positive ROI [return on investment], given its superior product offering to its cable competitors, in our view." (footnotes omitted.)
The authors caution that regulation harms some consumers more than others.
The effects of the depressed investment incentives would be most immediately and directly felt in areas where the economics of investment are at the edge of profitability even without unbundling burdens. This is likely to be in already disadvantaged geographic areas. Hence, consumers in the least attractive areas for investment in advanced broadband networks would be the ones who would likely be disproportionately deprived of the new investment.
The authors point out that
The vigor and speed with which ILECs make investments in
broadband infrastructure will affect the vigor and speed with which cable and wireless broadband companies will continue to invest in response, and the ferocity of intermodal competition.
Finally, we are reminded that that the Federal Communication's Commission policy of deregulating broadband investment by incumbent telephone companies has in fact unleashed a virtuous cycle of multi-billion dollar investment by the phone companies and their competitors in the cable industry.
In this deregulatory environment, broadband subscriptions in the U.S. have soared, more than trebling in the three years ended June 2007. Clearly, the FCC's forbearance policy has borne substantial fruit for U.S. citizens.
Verizon and AT&T are not alone among communications companies in the U.S. in substantially increasing their investments since the TRO decision. Consistent with the mutually-reinforcing dynamic of responsive competitive investments we discussed earlier, cable companies have made massive investments in their broadband infrastructures as well. While the combined annual capital expenditures of AT&T and Verizon have increased from $17.1 to $24.6 billion since 2004, the aggregate annual capital expenditures of the three largest publicly held cable providers, Comcast, Cablevision, and Time Warner Cable, have nearly doubled, from $5.6 billion to $10.1 billion. (footnotes omitted.)
The paper is entitled "Investment in Next Generation Networks and Wholesale Telecommunications Regulation
The conventional Beltway wisdom would be that net neutrality legislation should have a real chance now with the election of President-Elect Obama and strengthened Democratic majorities in the Senate and House.
But there are two recent developments which make the case for net neutrality regulation less compelling.
The Federal Communications Commission approved the use of unlicensed wireless devices to operate in broadcast television spectrum on a secondary basis at locations where that spectrum is open, i.e., the television "white spaces."
In other words, a vast amount of spectrum will soon be available to provide broadband data and other services, and the spectrum will be free.
George Mason University Professor Thomas W. Hazlett notes that
[S]ome 250 million mobile subscribers in the US paid about $140 billion to make 2 trillion minutes' worth of phone calls in 2007, accessing just 190MHz of radio spectrum. The digital TV band, in contrast, is allocated some 294MHz--and it's more productive bandwidth. Tapping into this mother lode would unleash powerful waves of rivalry and innovation.
Most of the television spectrum is either unused or isn't used efficiently. FCC Chairman Kevin Martin expects
that devices using the spectrum could be on the market within a year to 18 months.
Hazlett laments that since 90 percent of consumers subscribe to cable service the broadcasters really don't need their assigned frequencies, and suggests that if digital TV frequencies were auctioned off taxpayers could be compensated to the tune of $120 billion. This is a good point. But, as an alternative, the government could also come back later and tax the unlicensed uses of the spectrum. Either way, the money would be collected from the same consumers who are also the taxpayers.
The value of auctions lies in preventing politicians and bureaucrats from awarding spectrum to their friends and relatives or from picking winners and losers, not in sucking money from the private sector. Here, the spectrum is being awarded not to profit-making entities who hired the most gifted lobbyists, but to the public at large.
The real significance of the FCC's decision is consumers who are dissatisfied with the broadband services provided by telephone, cable and cell phone companies or satellite providers will soon have even more options. This fact undermines the case for net neutrality regulation, which is premised on the false notion that most consumers of broadband services are captives of a single phone company and/or a single cable provider. Absent the validity of this false rationale, regulation which tells broadband providers who can use their networks and at what prices is an unjustified restraint on the free speech rights of broadband providers.
Harvard Law Professor Laurence H. Tribe, a First Amendment scholar, addressed the question: "Can broadband providers be forced to act as common carriers"? at a 2007 conference sponsored by the Progress & Freedom Foundation. He concluded that the Supreme Court decision in Hurley v. Irish-American Gay, Lesbian & Bisexual Group of Boston, 515 U.S. 557 (1995) is the decision which "would probably apply here."
In that case, the the Supreme Court upheld the decision of the event's organizers to exclude GLBG from marching in the parade. The Court ruled that a parade is not merely a conduit for the speech of participants.
Alternatively, another Supreme Court precedent which might be applicable is Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994), which obligated cable operators to retransmit the signals of local broadcasters. But I agree with Tribe that this is less likely because cable franchises at the time conferred what the Supreme Court believed were a "monopolistic opportunity [for the cable operators] to shut out some speakers." This is no longer true. Although the opportunity to exclude certain speakers still exists, cable operators are not monopoly providers. Telephone, cell phone and satellite providers -- and unimagined services utilizing unlicensed white spaces -- offer similar services. Disappointed speakers can seek other platforms.
Therefore, the FCC decision permitting unlicensed uses of television white spaces significantly improves the possibility that net neutrality legislation would be struck down by the courts as unconstitutional.
Verizon Wireless + Google vs. Microsoft
Another recent development are the talks Verizon Wireless is having with Google and Microsoft (see this and this), who are competing for the privilege of having their search bar featured as the default search feature on Verizon Wireless handsets. If Verizon Wireless features a default search bar, subscribers who want to use a competitive search service would have to navigate to the competitor's web site. A lot of times consumers don't bother to do that. Google has claimed in the past that when default search bars are available, they are the starting point for 30 to 50 percent of a user's searches.
Only one search provider gets to be Verizon Wireless's search partner. One search provider gets to sit at the end of a fast lane; the others don't.
"Fast lane" may not be a perfect metaphor, because traffic may not actually be prioritized across the network; but from a consumer perspective there are fewer clicks and the search may seem faster overall. Fast lane is the favorite metaphor of net neutrality proponents, and I suspect it provides a clue as to why Google became such an enthusiastic supporter.
Google is making a massive investment in data centers to deliver faster results, including one in the home state of Sen. Ron Wyden (D-OR), and wanted to make sure its competitors couldn't easily and cheaply duplicate that investment with the help of broadband providers. According to this source,
Google has found that for search engines, every millisecond longer it takes to give users their results leads to lower satisfaction. So the speed of light ends up being a constraint, and the company wants to put significant processing power close to all of its users.
A former Google executive is quoted as saying "Google wants to raise the barriers to entry by competitors by making the baseline service very expensive."
The purpose of net neutrality regulation is to ensure "equal treatment" for all consumers and businesses. Sen. Wyden, sponsor of one of the earliest net neutrality proposals, reportedly explained he "didn't oppose companies offering different speeds of service at different prices, a practice already undertaken by several major Internet providers, provided that content is treated equally within each level of service."
If Wyden's bill had become law, Verizon Wireless wouldn't be able to provide Microsoft or Yahoo faster access than it offers Google -- even if they need it and are willing to pay for it but Google doesn't and isn't.
Perhaps net neutrality regulation could be drafted more fairly -- like allowing broadband providers to build a fast lane, but guaranteeing that anyone could pay an identical fee for the same fast access. This would mean that broadband providers couldn't build fast lanes unless they could build them big enough to accommodate anyone who might seek to use them. The likely outcome is the fast lanes wouldn't get built at all.
There may be yet other ways a net neutrality regulation could be structured, but they would all create uncertainty, complexity and pitfalls for broadband providers.
Google has been a major proponent and -- one suspects -- has provided significant support for the enactment of net neutrality regulation. That the company is now bidding against Microsoft for the right to share some portion of its colossal advertising revenue with Verizon Wireless may indicate that Google thinks it has found a more acceptable way to limit the ability of its competitors to easily and cheaply duplicate its investment in data centers, that it is no longer banking on net neutrality becoming law, or both.
If Google is the successful bidder, it may have less of an incentive to provide support for net neutrality regulation. Even if Google isn't the successful bidder, the negotiations prove that there are mutually-beneficial and pro-competitive partnerships which are nevertheless discriminatory and could be outlawed by net neutrality regulation.
But these partnerships can be beneficial for consumers -- if Verizon Wireless can obtain advertising revenue it may be able to reduce wireless subscription fees. Google CEO Eric Schmidt has even suggested that your mobile phone could be free, subsidized by targeted ads.
Permitting the unlicensed use of white spaces and participating in negotiations with Verizon Wireless to feature a default search bar both had Google's full support.
These two events reduce the likelihood that net neutrality will become the permanent law of the land.
The Federal Communications Commission began a broad inquiry of intercarrier compensation in 2001 and now it may finally be getting around to acting on it on Nov. 4 while everyone's thoughts are on something else.
This is about 12 years overdue. Congress in 1996 foresaw that implicit phone subsidies were unsustainable and ordered the FCC to replace them with a competitively-neutral subsidy mechanism. Due to political pressure, regulators have failed to complete the job.
Intercarrier compensation refers to "access charges" for long-distance calls and "reciprocal compensation" for local calls. A long-distance carrier may be forced to pay a local carrier more than 30 cents per minute to deliver a long-distance call, but local carriers receive as little as .0007 cents per minute to deliver calls they receive from other local carriers.
Once upon a time, before fiber optics, there were significant distance related costs. Now distance isn't a major factor.
The high access charges remain only because the recipients, typically small and mid-size phone companies serving sparsely populated areas, have successfully lobbied regulators and legislators to keep them.
Thanks to outdated regulatory classifications, wireless and VoIP services pay far less when the connect to the legacy phone network.
This is the reason a small phone company named Madison River Communications attempted to block its customers from accessing VoIP services, however the FCC intervened. As a result of that episode, Moveon.org and others have argued for imposing common carrier regulation on broadband providers under the guise of net neutrality. Regulation truly tends to beget more regulation.
Reducing the hidden subsidies for local phone service would put incumbent phone companies in a better position to attract private investment to expand their broadband offerings and ought to be a key item in any agenda for promoting broadband deployment.
Otherwise, investors face a choice between investing in one category of broadband providers whose broadband profits may be forced to subsidize plain old phone services, and another category who get to reinvest 100% of their broadband profits or distribute them as dividends.
Reducing access charges would also remove a perverse disincentive which may be inhibiting some providers of legacy phone service in rural areas from updating their networks. If they offer wireless or Internet phone service, they are deprived of the generous compensation they currently receive for handling long-distance calls.
It may no longer be politically correct to criticize regulation, but intercarrier compensation is an example of harmful regulation which distorts competition. It needs to be eliminated and replaced with something which does not harm competition.
The FCC ought to just allow the carriers to negotiate these rates. The small and mid-size carriers would be afraid of that, and even the big carriers might prefer a reasonable FCC-set rate to endless bickering with 1,400 other carriers.
Either approach would be a huge improvement and is long overdue.
A divided FCC recently issued an order concluding that Comcast acted discriminatorily and arbitrarily to squelch the dynamic benefits of an open and accessible Internet, and that its failure to disclose it's practices to its customers has compounded the harm. The FCC required Comcast to end its network management practices and submit a compliance plan.
Richard Bennett reviews the Comcast "protocol agnostic" network management plan requested by the FCC:
[T]he new system will not look at any headers, and will simply be triggered by the volume of traffic each user puts on the network and the overall congestion state of the network segment. If the segment goes over 70% utilization in the upload direction for a fifteen-minute sample period, congestion management will take effect.
In the management state, traffic volume measurement will determine which users are causing the near-congestion, and only those using high amounts of bandwidth will be managed. The way they're going to be managed is going to raise some eyebrows, but it's perfectly consistent with the FCC's order. High-traffic users - those who've used over 70% of their account's limit for the last fifteen minutes - will have all of their traffic de-prioritized for the next fifteen minutes. While de-prioritized, they still have access to the network, but only after the conforming users have transmitted their packets. So instead of bidding on the first 70% of network bandwidth, they'll essentially bid on the 30% that remains. This will be a bummer for people who are banging out files as fast as they can only to have a Skype call come in. Even if they stop BitTorrent, the first fifteen minutes of Skyping are going to be rough.
Aside from filing a compliance plan, Comcast is also filing suit. For one thing, Commissioner Robert McDowell claims that "the FCC does not know what Comcast did or did not do. The evidence in the record is thin and conflicting." Ouch.
Yes, there could be years of litigation.
Stepping back and looking at the big picture, there are potentially at least four major issues here:
- Does the FCC have authority to govern this? Over at the Progress & Freedom Foundation, Barbara Esbin concludes that it does not. Personally, I am not so sure the courts wouldn't ultimately uphold the FCC if the commission's jurisdiction is debatable -- which it may be -- and the commission's action seems eminently "reasonable." It has happened before. But I hasten to add Comcast delaying BitTorrent uploads does not seem like an ideal set of facts for such an outcome.
- May the FCC require light users to subsidize heavy users?
- May the FCC prohibit or allow broadband providers to discriminate to the extent necessary to receive advertising revenues (not penny-ad revenue from classified ads, but major revenue from exclusive partnerships), which they could use to reduce the monthly fees consumers pay for broadband access to the Web?â€¨
And, hold on to your seat...
- Should broadband providers be required to assist copyright holders police their copyrights?
This is going to be the first test case.
What we have here is a small number of users using a huge amount of network capacity to exchange an enormous amount of pirated work.
Should Comcast ignore copyright violations? Or if technology allows Comcast to police copyrights, does the company become an accomplice if it looks the other way? Good question.
Verizon Wireless and Google are reportedly in talks right now aimed at featuring the Google search bar on VZW phones in exchange for VZW and Google splitting the ad revenues. A new revenue stream might allow VZW to reduce the price of its wireless service, which would be good for consumers. Would a nondiscrimination principle prohibit agreements such as this? Does the law -- or should the FCC be allowed -- to require that?
FCC Chairman Kevin Martin apparently worries that if broadband providers are allowed to manage their networks they may block the next Google from distributing an unimagined software application which could change the world.â€¨â€¨
But popular applications don't threaten broadband providers; they make broadband services more appealing to consumers. â€¨â€¨Apple and AT&T allow independent developers to create new applications for the iPhone because they have more to gain if consumers can access new applications they didn't invent than if the iPhone can only be used for a limited number of standard purposes. Now Yahoo! is allowing users to customize their home pages with content from other providers.
In a free market there really is an incentive for suppliers to work to please consumers.â€¨â€¨
The problem with regulation is that it can be circumvented or exploited for anticompetitive purposes, and that it usually leads to unintended consequences like inhibiting inventive ideas, discouraging investment and preserving the status quo.â€¨â€¨
If the courts conclude the FCC does not have jurisdiction, Congress will be forced to act. My prediction is Congress would give the FCC ample authority but ambiguous direction (politicians are unbelievably cautious), leaving the commissioners free to exercise their "expert" discretion. That could be the worst of all possible outcomes. Commissioners are unelected politicians and they come and go. So commission policy lurches in one direction and then another. Ask any telephone company (incumbent or new entrant); they have all been on both ends -- teacher's pet and class dunce.
While all this is happening, investors may look for a safer bet, and broadband providers like Comcast will have less to invest in broadband -- which would be a tragedy.â€¨
There are many interesting questions here. Thanks to the FCC, the courts will provide answers -- in the fullness of time.
Maybe the FCC ought to have taken a more modest approach and allowed the mere threat of regulation to constrain broadband providers.
I expected to see more reaction to the Wall Street Journal's recent observation of a surprising shakeup in the broadband industry. Vishesh Kumar reported that
Verizon Communications Inc., which last quarter became the first company ever to see a drop in DSL subscribers -- some of whom went to its faster FiOS service -- is now offering customers six months of DSL service free if they sign up for the company's phone and Internet package. That makes the bundled package $45 a month, vs. $65 prior to the offer. AT&T Inc., meanwhile, is now guaranteeing its current prices, ranging from $20 to $55 a month, for two years.
I cite this because I always claim that less regulation of a highly-regulated industry promotes competition, consumer choice and ultimately lower prices. Occasionally someone claims that prices do not appear to be falling. And depending on the point in time they may be right. Of course, if you don't have to lower prices to attract and retain customers you won't. But good times never last forever.
Until the second quarter of this year, the cable and telephone industries were adding roughly equal numbers of broadband accounts. Then something changed, and the cable companies are now signing up three-quarters of new customers. Maybe the marketing efforts of some of the companies are better than others, or maybe the phone companies' main broadband product, DSL, can no longer compete on speed, quality and/or features.
In any event, when all else fails, you have to slash your prices.
From an interview by Peter Day, of BBC Radio 4's "In Business," who notes that "nearly everything that George Gilder has been predicting about communications is now in the process of coming true," with George Gilder:
George Gilder: ... you have video conferencing widely used and suddenly you move from petabytes to zettabytes ... two human eyes do more image processing than all the supercomputers in the world put together.
Peter Day: What? Now? Today?
Gilder: Now. Today.
Day: No wonder it's so difficult to get to a video conferencing that's convincing.
Gilder: That is true. ... .Anya Hurlbert Ridley ... says that vision is not a sense, it's an intelligence. And so, in understanding vision, it's not enough to reproduce the biology and biochemistry of the retina -- or even the circuitry of the retina -- it's the whole enigma of consciousness that is engaged in understanding vision, and so the move of the network to a global vision system does entail some sort of deeper and richer intelligence than is comprehended by many people who try to mechanically reproduce various vision technologies.
Day: So we need an exaflood, or more than an exaflood...
Gilder: We've got an exaflood -- we got that now --
Day: So we need to build for...
Gilder: Zettaflood, I guess.
Day: George Gilder predicting an intensitity of Internet use we can only marvel at at the moment.
You should have been there! Telecosm was thrilling. I will list the ways, in chronological order in two or three posts over the next few days. (Below is Part 1.)
1) Lawrence Solomon, author of The Deniers, demonstrated, beyond cavil,
that nearly all the relevant scientists, outside of the government
echo-chambers, completely repudiate the climate panic. He concluded by
pointing to evidence for a cooling trend ahead.
2) After I presented the statistics showing that most of the global
economy is driven by innovation in the Telecosm--teleputers, datacenters,
optical fiber, fiberspeed electronics--Steve Forbes gave a magisterial
tour of the world economy. Relevant to the debates on the Gilder Telecosm
Forum subscriber message board was his assertion that the Fed had been too
loose in the face of a collapse in the demand for dollars caused by the
muddled cheap dollar leadership from the administration. Later in the
conference, in an incandescent speech mostly about the amazing expansion
of freedom and supply side economics in China, John Rutledge maintained
that the Fed had been too tight, measured by the flat monetary base. But
then, as far as I could grasp, Rutledge contradicted himself by showing a
dramatic surge of bank lending to small and midsized businesses. If it was
caused by the collapse of other lending sources, he did not give any
3) Nicholas Carr gave a suave and lucid presentation of the themes of his
The Big Switch book, comparing the emergence of cloud computing to the
rise of the centralized power grid. Raising an issue that recurred
throughout the conference, our regnant expert on the power grid, Carver
Mead, dismissed the analogy as simplistic, since one-way power delivery
and two-way information transfer are radically different processes. Bill
Tucker, author of the forthcoming Terrestrial Energy, pointed out in a
compelling speech that Moore's Law is about miniaturization of bits while
the energy industry is better described by a Law of More--more power and
more efficiency. He explained that all the energy in the atom is in the
nucleus and pointed to the immense heat caused by nuclear fission and
fusion within the earth. Then he impugned the venture capitalists'
compulsion to waste arable land and space twiddling with electrons and
photons and presented much evidence that solar energy in all its forms
would never provide adequate power for an ever growing economy. Physicist
Howard Hayden of Energy Advocate enthusiastically confirmed this view.
4) Andy Kessler followed with an uproarious investigation of Who Killed
Bear Stearns?. His answer pointed not to the usual culprits (though he did
politely finger front row auditors me and Bob Metcalfe) but to Bear
Stearns' itself. After preparing a feculent feast of sub-prime pork ("they
knew better than anyone else what was in it"), then packaging it all into
putatively succulent AAA delicacies, they totally lost it and ate their
5) The Exaflood Panel presented Andrew Odlyzko's dour but learned analysis
of Internet traffic, which concluded that the real danger is not too much
traffic but not enough to sustain all the businesses in the sector. Joe
Weinman, a brilliant strategist from ATT, however, confirmed the Exaflood
thesis, and Johna Till Johnson of Nemertes offered compelling evidence
that the best way to examine the issue is from the supply side. If you
don't build it, they definitely will not come. Traffic in the core is
dependent on access from the edge, which still lags in the US, as even
Odlyzko showed rates of usage in Korea and Hong Kong six times US usage
rates. Lane Patterson of Equinix confirmed aggressive estimates of traffic
growth and still more ambitious growth of Equinix datacenters, but said
that patterns of traffic confirm that the core is being starved by
inadequate access on the edge.
George Gilder is getting some well-deserved recognition in Technology Review in an article by Mark Williams entitled "The State of the Global Telecosm - The most notorious promoter of the 1990s telecom boom has been proved right."
"I'm a fan of George Gilder, the bubble bursting notwithstanding," Ethernet coÂinventor Bob Metcalfe (a member of Technology Review's board of directors) told me after his San Diego keynote speech, "Toward Terabit Ethernet." Metcalfe had told his audience not only that optical networks would soon deliver 40- and 100-gigabit-per-second Ethernet--standards bodies are now hammering out the technical specifications--but also that 1,000-gigabyte-per-second Ethernet, which Metcalfe dubbed "terabit Ethernet," would emerge around 2015. Why, I asked, did Metcalfe believe this? "Last night, Gilder spoke to 300 of us at an executive forum about his 'Exaflood' paper, in which he predicts a zettabyte of U.S. Internet traffic by the year 2015," Metcalfe said. "Since I admire Gilder, I extrapolated from his prediction."
An exabyte is 1018 bytes of data; a zettabyte is 1021 bytes. Metcalfe pointed to video, new mobile, and embedded systems as the factors driving this rising data flood: "Video is becoming the Internet's dominant traffic, and that's before high definition comes fully online. Mobile Internet just passed a billion new cell phones per year. Then totally new sources of traffic exist, like the 10 billion embedded microcontrollers now shipped annually."
Metcalfe also addresses the interesting question of whether there is sufficient capacity in the Internet backbone to accommodate the surging traffic:
Did Metcalfe believe that the existing infrastructure--built in the boom years, when great excesses of fiber-optic cable were laid down--could support terabit Ethernet? "That dark fiber laid down then is being lit up, and some routes are now full," he said. "That's the principal pressure to go to 40 and 100 gigabits per second. It seems we can reach those speeds with basically the same fibers, lasers, photodetectors, and 1,500-nanometer wavelengths we have, mostly by means of modulation improvement. But it's doubtful we'll wring another factor of 10 beyond that." Thus, the backbone networks would need to be overhauled and new technologies implemented.
John Dvorak, PCMag.com:
In today's world, bandwidth demand is similar to what processing demand was 20 years ago. You just can't get enough speed, no matter how hard you try. Even when you have enough speed on your own end, some other bottleneck is killing you.
This comes to mind as, over the past few months, I've noticed how many YouTube videos essentially come to a grinding halt halfway through playback and display that little spinning timer. Why don't they just put the word "buffering" on the screen?
All too often, it's not the speed of my connection that's at issue--it's the speed of the connection at the other end. It may not even be the connection speed itself; it may simply be the site's ability to deliver content at full speed under heavy demand.
This concerns me, since I'm an advocate of IPTV and other technologies that need lots of speed to work. We seldom consider the fact that if something becomes hyper-popular (like YouTube), user demand on the system is enormous and can easily break the system from the demand side....
Interesting article that misses the chief recent development on the net: the huge advances in the efficiencies of the datacenters that dispense these web pages. The "cloud" computing paradigm, pioneered by Google, is now going mainstream as Nicholas Carr, Telecosm speaker this year (www.TelecosmConference.com), documents in his intriguing book. For example, Jules Urbach--our movie and virtual world renderman and Telecosm star with his Lightstage corporation--can send images from thousands of different "viewports" per second from his graphic processor based OTOY servers, which can scale to millions of users. A company called Azul has developed cheap scalable datacenter technology that delivers terabits per second from its OS neutral Java-based clusters of servers.
The bottleneck is rapidly moving back to where it has long resided: at the last mile, where passive optical networks, such as VZ's FiOS, are increasingly necessary. For IPTV, content delivery networks (CDN) from Akamai and its increasing throng of video rivals using a variety of ingenious delivery algorithms will eclipse the cumbersome BitTorrent mesh model, which shuffles video files through underused personal computers across the network.
Normally when you quote someone extensively but selectively and you're making a different (arguably opposite) point, you acknowledge that.
Stanford Law Professor Lawrence Lessig, who got a chance to lecture a captive Federal Communications Commission during a special public hearing on broadband network management this week, began the lesson quoting from remarks Gerald R. Faulhaber, Professor Emeritus of Business and Public Policy at Wharton, made at Stanford on Dec. 1, 2000 when he was chief economist at the FCC.
I think Prof. Lessig is a gifted and well-intentioned scholar and educator. And Prof. Faulhaber framed the issues well, so it's understandable why Lessig quoted him.
But Faulhaber wasn't on Lessig's page.
A transcript of Faulhaber's full remarks, available on the Stanford Web site, indicates that Faulhaber was merely summarizing arguments made by others and was actually quite skeptical of the "open access" proposal (an ancestor of net neutrality) that was being discussed.
Lessig Thursday credited Faulhaber with observing in 2000 that the "end-to-end" principle (e2e) equals perfect competition:
where does the e2e argument figure into this?
if I translate this into planet economics, that e2e in engineering is the equivalent of the perfect competitive market that economists know and love.
But the full quote makes it clear Faulhaber was summarizing the argument of others:
Now, where does the e2e argument figure into this? Well, the e2e advocates are essentially arguing, if I translate this into planet economics, that e2e in engineering is the equivalent of the perfect competitive market that economists know and love.
Faulhaber made it clear he didn't agree, a fact which Lessig failed to mention:
But in fact that's not the way the real world works. It's neither the economist nirvana of perfect competition nor is it the engineers' nirvana of e2e. It doesn't work that way.
First, we notice that customers actually don't behave as we would wish them to. They keep insisting on things like "I'd rather buy a bundle. I'd rather buy it from one person. I'd rather not have to worry about solving complexity; I'd rather somebody else solve complexity for me," all of which present enormous profit opportunities for businesses and opportunities to change the technology. And at one level this is what consumers want and this is how it's going to evolve.
I'll give you an example, I'll give you two examples. The first is, and the most obvious, is you should read Dave Clark's and Marjorie Blumenthal's paper, which was supposed to be required reading, which will show you that the principles of e2e tend to get violated essentially when, at least in some of the cases that he mentions, customer demand is pushing them to be there. The couple of issues he raised, one is operating in an untrustworthy world, more demanding aps, less sophisticated users.
One of these we seen and we all sort of pooh-poohed, us, you know, cool Internet guys, is the rise of AOL; right? As they put it, somewhat understating the case, "We're for the people" -- "We're the ISP for the people who go to Jiffy Lube, not the ISP for the people that change their own oil." And we all pooh-pooh this and we call them "newbies," and their market share is huge. There's a market demand for all those nasty things they're doing. And consumers like it. If we think they're newbies, tough. So e2e may very well be violated for reasons which are really lower cost or higher value to customers.
Lessig advocates that broadband service provider should obtain permission from regulators before they make any changes in network architecture:
Before we allow it to change the burden should be on those who would change its architecture ... show me that innovation won't be harmed from this change. Show me investment won't be choked. Show me competition will continue. And until you show me that don't allow [network architecture] to change.
This isn't as reasonable as it sounds. Following the divestiture of AT&T in the early 1980s, this is exactly what we had, and it was a nightmare.
According to Huber, Kellogg and Thorne (Federal Telecommunications Law , 823-830),
[The] initial division of the Bell System turned out to be the easy part. It immediately was clear that the Decree's restrictions on the divested local companies were impractical, unnecessarily broad, or simply exceptionally onerous, and a steady stream of requests for relief ensued .... Waivers were filed faster than they were processed, leading to growing backlogs before the Department of Justice and Judge Greene: by 1994, the average age of waivers pending before the DOJ and Judge Greene was two and a half years. This breakdown of Judge Greene's oversight of the telecommunications industry was of serious concern to legislators when they drafted the 1996 Act.
Is this what we want in a fast-moving sector of the economy characterized by rapid technological change? Two and a half years? That's an eternity in this industry.
One of the reasons Faulhaber cited for his opposition to open access is the problem of government failure, which Lessig also skipped:
Let me address one thing at the last. Now, we've heard something about regulation and that regulators need to step in and fix this problem of open access, and e2e is the touchstone for this. Now, I refer -- the notion here is regulators will come in and fix it. And I would refer to this as the high school civics view of regulation. And since engineers really -- oh, yeah, right -- since engineers usually don't actually get to see how regulation is done, more or less like Bismark sausages, you can be excused for not understanding what this means. But lawyers who actually often take the same view really should -- they see how it's made -- understand what's going to happen.
So we all sort of think what's going to happen is a sensible rule gets made, and everybody says "Oh, yeah, that's very sensible." It's never the way it works. It's not like it -- mostly it doesn't work this way. It never works that way; okay? It's what you got to understand.
First of all, of course, if you put a regulation in, the reason you put a regulation in is 'cause you're making somebody do something they otherwise wouldn't want to do. So they're going to object to that. So the first thing that happens is, you know, fifty lobbyists appear in my office, and they're all over the FCC like a cheap suit. So what you actually started is, you put into place, you know, you've put into training this long process of regulatory judicial and legislative hearings, filings, NOIs, MPRMs, years of essentially the FCC or somebody else sitting in the middle of commercial disputes.
The solution here isn't to regulate broadband service providers but to free up more spectrum for broadband competition.
In 1993 Congress substituted auctions for the deplorable practice of giving away valuable spectrum to well-connected commercial entities.
Lawmakers who think spectrum is a valuable public resource for which the taxpayers should be compensated need to wake up for a minute. FCC rulemaking could render the remaining assets worthless, distort wireless competition and contribute to the unfortunate perception of the FCC as a candy store.
Google has made it clear that it plans to weigh in at the FCC as it determines how to re-auction the D-block from the recent 700 MHz auction, and that it wants to open the white spaces between channels 2 and 51 on the TV dial for unlicensed broadband services.
Anna-Maria Kovacs, a regulatory analyst, reported that in the recent 700 MHz auction AT&T Mobility paid an average price of $3.15 per POP in the B-block while Verizon Wireless paid 77 cents per POP in the C-block which was subject to special rules advocated by Google.
Now comes an admission that Google's main goal was not to win C-block licenses in the auction but to jack up the price just enough so the reserve could be met, according to the New York Times.
"Our primary goal was to trigger the openness conditions," said Richard Whitt, Google's Washington telecommunications and media counsel.
This certainly isn't consistent with the way Google presented the open access proposal to the Federal Communications Commission last summer. Google stressed
that open access was for the purpose of leading to the introduction of new facilities-based providers of broadband services.
Chairman Martin has articulated the critical issues at stake in this proceeding:
The most important step we can take to provide affordable broadband to all Americans is to facilitate the deployment of a third "pipe" into the home. We need a real third broadband competitor....The upcoming auction presents the single most important opportunity for us to achieve this goal. Depending on how we structure the upcoming auction, we will either enable the emergence of a third broadband pipe -- one that would be available to rural as well as urban American -- or we will miss our biggest opportunity. Such a status quo outcome certainly would not sit well with consumer groups that have been strongly urging us to adopt rules that facilitate the ability of a "third pipe" to develop. Further, Chairman Martin has observed that Google and other members of the Coalition for 4G in America are "the only parties that have promised to try to provide a national, wireless broadband alternative."
As Chairman Martin recognizes, the actual method of providing a broadband alternative is through a "real third broadband competitor." This means that the would-be new entrants should not be aligned with either an incumbent wireline carrier or incumbent wireless carrier. Those carriers, quite rationally, seek to extend and protect their legacy business models, and in particular not take any actions that would jeopardize existing and future revenue streams. For this reason, the appropriate public policy stance is not simply to facilitate an additional spectrum-based broadband platform, but rather to facilitate independent broadband platforms.
Obviously, the idea that an open access requirement would facilitate a third "pipe" was naÃ¯ve on the part of pliant regulators.
We now have a block of spectrum owned by an incumbent with an open access requirement which aligns nicely with Google's business model. Yet it's fairly obvious that the open access requirement contributed to a substantial loss for the Treasury.
The admission by Google's counsel that winning the spectrum wasn't the company's goal and that Google submitted bids for the purpose of spiking the auction price casts doubt on the company's motivation and veracity in view of Google's previous representations to the FCC.
It may be that "everyone" attempts to "influence" the regulatory process when they can get away with it, but that doesn't make it right.
Comcast and BitTorrent are working together to improve the delivery of video files on Comcast's broadband network.
Rather than slow traffic by certain types of applications -- such as file-sharing software or companies like BitTorrent -- Comcast will slow traffic for those users who consume the most bandwidth, said Comcast's [Chief Technology Officer, Tony] Warner. Comcast hopes to be able to switch to a new policy based on this model as soon as the end of the year, he added. The company's push to add additional data capacity to its network also will play a role, he said. Comcast will start with lab tests to determine if the model is feasible.
Over at Public Knowledge, Jef Pearlman argues
that the pioneering joint effort by Comcast and BitTorrent "changes nothing about the issues raised in petitions" before the FCC advocating more regulation, because Comcast and BitTorrent are "commercial entities whose goals are, in the end, to make sure that their networks and technology are as profitale as possible."
Setting aside whether the pursuit of profit is a good thing or not, what this episode actually proves is that the Federal Communications Commission has done its job, the threat of regulation is a credible deterrent to prevent unreasonable discrimination by broadband service providers and we don't need a new regulatory framework with the unintended consequences which regulation always entails.
If we want innovation, more choices and ultimately lower prices we have to be prepared to allow broadband service providers to experiment and to succeed or fail in the market. Regulator always discourages all three.
We also need an enforcement backstop, of course. But it doesn't have to be formalistic and inflexible.
Aside from FCC authority under the Communications Act of 1934 as amended, the professional staff of the Federal Trade Commission has concluded that antitrust law is "well-equipped to analyze potential conduct and business arrangements involving broadband Internet access."
Here at the Tech Policy Summit in Hollywood, one panelist claimed during a breakout session that antitrust enforecement in this area is impaired as a result of the Supreme Court's decision in Verizon v. Trinko (2004). But it isn't so.
In that case, the plaintiff was trying to convert an alleged breach of the Communications Act into an antitrust claim under Â§2 of the Sherman Act. In other words, the plaintiff was trying to expand the application of antitrust jurisprudence. The Court ruled that the Telecommunications Act of 1996 neither expanded nor limited the antitrust laws.
The 1996 Act has no effect upon the application of traditional antitrust principles. Its saving clause--which provides that "nothing in this Act ... shall be construed to modify, impair, or supersede the applicability of any of the antitrust laws," 47 U. S. C. Â§152--preserves claims that satisfy established antitrust standards, but does not create new claims that go beyond those standards.
The Court went on to conclude that the activity of Verizon which Trinko complained of did not violate pre-existing antitrust standards.
The bottom line is that we have three federal agencies, which include the Antitrust Division of the Department of Justice in addition to the two previously mentioned, who have the jurisdiction, expertise and some actual experience to intervene if broadband providers unreasonably discriminate.
Groups like Public Knowledge have done a great job and can declare victory now.
John Conyers, Jr.
If broadband providers turn the Internet into a "world where those who pay can play, but those who don't are simply out of luck," current antitrust law can solve the problem says House Judiciary Chairman John Conyers, Jr. (D-MI).
I believe that antitrust law is the most appropriate way to deal with this problem -- and antitrust law is not regulation. It exists to correct distortions of the free market, where monopolies or cartels have cornered the market, and competition is not being allowed to work. The antitrust laws can help maintain a free and open Internet.
The comment came at a Congressional hearing
yesterday. Of course the broadband market isn't characterized by monopoly or cartel, so I would dispute whether antitrust could be used to prevent broadband providers from experimenting with innovative pricing and network management (and it wouldn't matter -- antitrust law wouldn't be needed because consumers could take their business elsewhere). But if one believes the market is or soon will become a cartel, Conyer's assessment should be reassuring.
The Federal Trade Commission staff have expressed the same opinion as Conyers:
The competitive issues raised in the debate over network neutrality regulation are not new to antitrust law, which is well-equipped to analyze potential conduct and business arrangements involving broadband Internet access.
Aside from antitrust law, the Congressional Research Service, among others, concludes
that the Federal Communications Commission already has the authority to regulate broadband providers.
[N]either telephone companies nor cable companies, when providing broadband services, are required to adhere to the more stringent regulatory regime for telecommunications services found under Title II (common carrier) of the 1934 Act. However, classification as an information service does not free the service from regulation. The FCC continues to have regulatory authority over information services under its Title I, ancillary jurisdiction. (footnotes omitted)
Conyers acknowledged at the hearing that the Internet has become the "dominant venue for the expression of ideas and public discourse," as I believe everyone can agree.
But if there's a risk broadband providers could do something bad does that mean Congress should prohibit everything? Not according to Conyers.
[W]hen it comes to the Internet, we should always proceed cautiously. Unless we have clearly documented the existence of a significant problem that needs regulating, I do not believe Congress should regulate. And even in those instances, we should tread lightly.
An inconvenient fact (for opponents of network management):
A survey by the Japan Internet Providers Association shows 40% of Japanese ISPs perform network management, according to Yomiuri Shimbun, and the trend is growing.
Of the 276 respondents, 69 companies said they restricted information flow through their lines. A total of 106 companies, including those that rent lines from infrastructure owners, impose such restrictions. Twenty-nine companies said they were planning to take similar measures.
This is somewhat ironic because advocates for a centrally-planned national broadband strategy led by bureaucrats cite Japan as one of the successful examples the U.S. should follow. See, e.g.
, "Down to the Wire
," by Thomas Bleha in Foreign Affairs
Hat tip: Ken Robinson
Referring to Bret Swanson's and George Gilder's prediction U.S. IP traffic will reach an annual total of 1,000 exabytes, or one million million billion bytes by 2015, Ethernet inventor Robert Metcalfe foresees a terabit-per-second Ethernet, according to Telephony. Although not sure eaxctly when, Metcalfe predicts --
New modulation schemes will be needed for the coming network, he said, as well as "new fiber, new lasers, new everything."
The need to replace existing technologies will create "chaos," Metcalfe said, but also opportunity for equipment vendors.
The Federal Communications Commission conducted a public hearing this week on network management before a group of law students -- as opposed to, say, engineering students who are the ones who study network management -- where lead witness Rep. Ed Markey (D-MA) declared
[T]he Internet is as much mine and yours as it is Verizon's, AT&T's or Comcast's. Please keep front and center in your examination the needs and wishes of the community of users rather than a small coterie of carriers.
As a matter of law, Markey would have flunked if that were an exam question. But of course the government has a right to try to control whatever it wishes one way or another.
The interesting and relevant question is whether and to what degree it's possible to proscribe network management practices which most reasonable people would consider inappropriate without unintentionally preventing network providers from trying to improve their services while earning a competitive return on their investment.
"[C]learly, complicated network architectures, Internet viruses, and capacity limitations raise real-world, complex and valid questions, conceded FCC Commissioner Michael J. Copps. "Our job is to figure out when and where you draw the line between discrimination and reasonable network management."
Copps wants to impose a common carrier obligation on broadband providers so they'll treat everyone's communications equally, which is mostly what they do now on a voluntary basis.
Copps says he would also empower the FCC sit back and conduct a "systematic, expeditious, case-by-case approach for adjudicating claims of discrimination."
That way, over time, we would develop a body of case law that would provide clear rules of the road for those who operate on the edge of the network, namely consumers and entrepreneurs, and those who operate the networks. It's an approach that echoes easily off the walls of the nation's oldest law school--because it's in the ancient tradition of the English common law, the tree that grows from the roots up.
This is essentially what the FCC already does, although Copps may have in mind clarifying and/or augmenting the existing procedures.
Copps seems to either question whether the FCC's current policy statement on broadband Internet access is enforceable without question or doubt, whether it's too vague, or both.
He appears to want a system where the nondiscrimination rule is so broad that broadband providers would have to secure the votes of 3 of 5 FCC Commissioners in advance to create specific exceptions on a case-by-case basis allowing them to experiment with a particular innovation. It's a variation on the guilty-until-proven-innocent concept. And anytime a broadband provider thinks of a way to "build a better mousetrap," it would have to file a petition with the FCC providing notice not only to the public but also it's competitors. Then the broadband provider would have to wait for the bureaucrats to figure out what to propose to the politicians and how to cover their ass.
This sort of arrangement isn't necessary to protect consumers, only the aspirations of "me too" competitors. The competitors would be asked by the FCC staff what they think (and what is the price for their acquiescence)? They would respond that in order to capture a "reasonable" (read: handsome) profit from the broadband provider's innovation, the competitors would need the right to buy it at an arbitrary discount and resell it at a price that undercuts the broadband provider's cost plus a reasonable profit.
The problem with this approach would be years of heightened uncertainty (if not the likelihood of outright confiscation) just when the U.S. needs broadband providers to invest at least another $100 billion in additional capacity.
But Commissioner Jonathan Adelstein and others fret that the broadband market presently resembles a duopoly which justifies regulation even though he seems to understand this situation is unlikely to persist:
We all have high hopes for the development of alternative technologies like wireless to promote greater competition in the broadband access market. Right now, though, we see a broadband market in which, according to FCC statistics, telephone and cable operators control over 93 percent of the residential market. For many consumers, there is no meaningful choice of providers.
Setting aside the fact that the unmistakable emergence of a viable and compelling category of competitors (wireless) completely demolishes the duopoly theory, in the broadband market as it is there are none of the dangers commonly associated with a duopolistic market (rising prices, deteriorating service, etc.).
It isn't like Coke and Pepsi, who compete primarily on the basis of their marketing efforts. Broadband providers are investing billions of dollars to improve their services, something they wouldn't have to do in a noncompetitive market. The most recent evidence is Comcast's announcement that it will deploy a new technology to boost speed and bandwidth:
Stung by the success of phone companies in selling packages of TV and high-speed Internet services, the cable industry is getting close to launching a counteroffensive -- an inexpensive new technology that dramatically boosts Internet connection speeds.
Called Docsis 3.0, the technology will allow the cable industry to compete on a more even footing with telecom giant Verizon Communications Inc., which is aggressively marketing a high-performance fiber-optic network called FiOS that offers much faster Internet connection speeds than cable modems can currently deliver. Whether the cable industry can roll out the new technology fast enough to minimize the damage from FiOS remains to be seen.
There are many markets dominated by two competitors
. And the rivalrous broadband market demonstrates how they can be good for consumers.
Bret Swanson and George Gilder have a column in today's Wall Street Journal in which they argue that more Internet capacity will be necessary to keep up with movie downloads, gaming, virtual worlds and other fast-growing applications.
They explain that Internet capacity will have to increase 50 times in the next couple years in their recent report "Estimating the Exaflood: The Impact of Video and Rich Media on the Internet -- A 'zettabyte' by 2015?," which I discuss here.
In their column, Gilder and Swanson warn this won't happen if politicians re-regulate network providers:
The petitions under consideration at the FCC and in the Markey net neutrality bill would set an entirely new course for U.S. broadband policy, marking every network bit and byte for inspection, regulation and possible litigation. Every price, partnership, advertisement and experimental business plan on the Net would have to look to Washington for permission. Many would be banned. Wall Street will not deploy the needed $100 billion in risk capital if Mr. Markey, digital traffic cop, insists on policing every intersection of the Internet.
I included a similar warning in comments
to the Federal Communications Commission last week.
Check out Taylor Frigon's blog post, "A paradigm's shift in the way you get information," which links to a story in the Wall Street Journal by Esther Dyson entitled: "The Coming Ad Revolution." Dyson's column discusses major changes in advertising that have been on their way for years but which few people today even see coming. Frigon writes:
The article outlines an impending paradigm shift in the way people find information, which will have a tremendous impact on the advertising business and those that support it.
But this revolution in the way that people find information will impact more than just the ad industry. We wrote about some of the potential implications in the world of search two months ago in a post entitled, "What is the future of search?" And there are thousands of other ways in which the kinds of changes that Dyson is discussing in this article will impact business and life beyond business.
George Gilder predicted these very same revolutionary forces in his 2000 book Telecosm: How Infinite Bandwidth Will Revolutionize our World. In chapter 18, "The Lifespan Limit," he wrote:
"The supreme time waster, though, is television. Many people still have trouble understanding how egregious a time consumer, how obsolete a business model, how atavistic a technology, and how debauched a cultural force it is. [. . .] For as much as seven hours a day, on average, consuming perhaps two thirds of your disposable time, year after year, all in order to grab your eyeballs for a few minutes of artfully crafted advertising images that you don't want to see, of products that you will never buy.
"[. . .] In the future, no one will be able to tease or trick you into watching an ad. Your time is too precious and you are too powerful. Advertisements will truly add value rather than subtract it (247 - 252)."
The value of your trusted circle of friends, family, colleagues, and various networks to which you belong or with which you associate may become much easier to tap into to help you with decisions than ever before, diminishing the power of old-fashioned advertising as Gilder foresaw years ago and as Dyson describes in today's article.
You may well make purchasing decisions based on these existing networks, as well as based on new networks which arise to provide you with access to what products other consumers like you find valuable.
Based on this outlook, the tremendous valuations for companies like Google, whose revenues are based upon a very primitive version of tying advertisements to what you are looking for, may be something of a house of cards. If the paradigm is truly shifting in the ways that are foreseen by Dyson and Gilder, there are new opportunities few see now, and the companies most dominant today may become examples for future discussions of the topple rate.
Markey: "The bill contains no requirements for regulations on the Internet whatsoever."
The long-awaited network neutrality bill of Rep. Ed Markey (D-MA) was unveiled this week. H.R. 5353 establishes a new broadband policy and requires the Federal Communications Commission to conduct an Internet Freedom Assessment, with public summits and a report to Congress.
According to the bill, it would be the policy of the U.S. to:
- maintain the freedom to use for lawful purposes broadband telecommunications networks, including the Internet ...
- ensure that the Internet remains a vital force in the United States economy ...
- preserve and promote the open and interconnected nature of broadband networks ...
- safeguard the open marketplace of ideas on the Internet by adopting and enforcing baseline protections to guard against unreasonable discriminatory favoritism for, or degradation of, content by network operators ...
These policies would become part of the Communications Act, but as all lawyers know, Congressional declarations aren't enforceable (although sometimes they may be useful in resolving ambiguous or doubtful provisions of law).
Markey concedes this point:
"There are some who may wish to assert that this bill regulates the Internet. It does no such thing. The bill contains no requirements for regulations on the Internet whatsoever. It does, however, suggest that the principles which have guided the Internet's development and expansion are highly worthy of retention, and it seeks to enshrine such principles in the law as guide stars for U.S. broadband policy."
When Congress wants to make something happen, it passes a law. It's safe to assume Markey would be proposing a law if he thought he had the votes to pass it.
Internet Freedom Assessment
Markey's bill also directs the FCC to open a proceeding on broadband services and consumer rights, assess whether broadband providers are in compliance with the above policies, conduct at least 8 public broadband summits around the country and submit a report to Congress. But another agency has already done something similar.
Last summer the Federal Trade Commission completed a study, "Broadband Connectivity Competition Policy: A Federal Trade Commission Staff Report," covering the same subject.
The advantages of the Markey net neutrality bill for net neutrality proponents are: (1) the policy statements would have symbolic value which proponents could try to exploit in court rooms, hearing rooms and editorial boards, and (2) another year or two of wasteful and duplicative process at the FCC would keep the net neutrality issue front and center for a while longer.
Last week Commerce Secretary Carlos M. Gutierrez noted that the total number of broadband lines in the U.S. has grown by more than 1,100 percent from almost 6.8 million lines in December 2000, to 82.5 million in December 2006, according to the most recent FCC data which is cited in a report issued by the National Telecommunications and Information Administration. The NTIA report is entitled "Networked Nation: Broadband in America, 2007," and is available here.
The report also contains the following graph which illustrates the dramatic increase in broadband investment -- from $15.2 billion in 2003, to $24.4
billion in 2007 and projected to double in 2010:
This investment boom isn't the result of a public works project which, according to Ludwig von Mises, would be counter-productive because:
The necessary resources for such projects must be withdrawn by taxes or loans from the application they would otherwise have found. Unemployment in one industry can, in this way, be mitigated only to the extent that it is increased in another.
We can thank the Bush administration for a deregulatory
broadband policy which includes the following elements:
- Improving the spectrum efficiency of Federal radio systems and operations.
- Increasing the amount of spectrum available for advanced wireless services.
- Facilitating unlicensed uses in bands with Federal operations.
- Promoting the development of Broadband over Power Line (BPL) technology, a potential "third broadband wire into the home."
- Relieving telephone companies of the obligation to make their next generation broadband facilities (e.g., residential fiber-to- the-home (FTTH) and fiber-to-the-curb net- works, and FTTH networks serving residential multiunit buildings) available to competitors at discounted rates, terms, and conditions.
- Ending the economic regulation of broadband services.*
- Not imposing traditional economic regulation (such as rate regulation, tariffing, and entry and exit regulation) on "voice over Internet protocol" (VoIP) services.
- Reforming video franchising to promote competition in the multi-channel video programming market.
- Estending the moratorium on Internet taxation (President Bush has signed extensions of this ban into law three times (2001, 2004, and 2007) and has consistently urged that the moratorium be made permanent).)
- Allowing companies to accelerate depreciation for capital expenditures (including those associated with broadband deployment) and permitting the depreciation of
as much as 30 percent of the basis in certain property in the first year.
* Aside from the deregulation of fiber networks, the most important initiative by the Bush administration was to: (1) declare that cable modem services are "information services" and therefore are neither subject to regulation under Title II of the Communications Act nor to regulation by the states and (2) bring the regulation of DSL services into parity with that of cable modem service by removing legacy regulations from DSL providers that had required them to share their networks with competing Internet service providers (ISPs), tariff their DSL services, and comply with other traditional telephone regulations.
The issue is whether we need a broadband agenda based on new taxes and more regulation or whether the Bush administration has proved that we can have more investment in broadband by reducing taxes and regulation. The NTIA report provides the answer.
In preparation for the "Exaflood" paper, I read the November 2007 paper by Nemertes Research -- "The Internet Singularity Delayed: Why Limits in Internet Capacity Will Stifle Innovation on the Web." It is an exemplary supply-side work (low utilization rates signify inadequate bandwidth rather than lack of demand). Failure to invest in infrastructure will produce not a breakdown of the Internet but a breakdown of the innovation culture of the net that brought us YouTube et al.
I recommend the paper to all as a guide to the prospects of our network processor and hollow router paradigms. It contains a number of obvious errors (dates reversed on charts (p.22), confusions between zettabits per second and petabits), and a "What me worry?" approach to huge conflicts between Nemertes and Odlyzko estimates of global capacity in 2000 (Odlyzko 85 pettabytes per month; Nemertes 61 exabytes!). Today global access capacity is around a zettabyte (10 to the 21) per month (2 plus petabits per second), with the U.S. commanding only one seventh of it (300 Tbps) or 14% while our GDP was close to 20% and our market cap 40% (adjusting for dollar doldrums).
Meanwhile, U.S. investment in infrastructure (capex only) was roughly $5B out of a global total of $20B and U.S. investment in access equipment (again capex only) was under $1B or about a fifth of global access investment in capex ($5B plus). But the U.S. out-invests the rest of the world in edge router/switch connectivity for the metro and high-end enterprise. Enterprise IP traffic is estimated to be about 1.5 times Internet IP traffic, but convergence continues.
On page 29, the report contains a breakdown of core and edge router/switch unit growth that is relevant to our network processor paradigm. On the order of 10 to 15 thousand core routers are sold annually, compared to between 30 and 60 thousand edge and metro routers and literally billions of access nodes of all kinds. The NPA is a key product for volume production of NPUs for scale and learning curves.
The other insight is that IPV6 meets the need for addresses but does not respond to the expansion of router tables that will slow the net in coming years if it is not remediated. The conclusion is a large need for CAMs, Knowledge Processors, and other memory and lookup table accelerators.
Nemertes declares that the U.S. confronts a coming bandwidth crunch in 2010, when access constraints will begin seriously to limit investment in Internet service innovation. The argument is that Moore's law increases in capacity will yield rising utilization rate and that traffic is supremely sensitive to utilization rates. In other words, as bandwidth increases we use it more and innovate more. I believe this. Others don't.
"If we build it, they will come," is the underlying assumption of Nemertes and me. People laugh but it is true over any run longer than a year or so.
Bret Swanson and George Gilder predict that the U.S. Internet of 2015 will be at least 50 times larger than it was in 2006. Their report, "Estimating the Exaflood: The Impact of Video and Rich Media on the Internet -- A 'zettabyte' by 2015?," estimates that annual totals for various categories of U.S. IP traffic in the year 2015. It projects:
- Movie downloads and P2P file sharing of 100 exabytes
- Internet video, gaming and virtual worlds of 200 exabytes
- Non-internet IPTV of 100 exabytes, and possibly much more
- Business IP Traffic of 100 exabytes
Gilder notes that an exabyte is equal to one billion gigabytes, or approximately 50,000 times the contents of the U.S. Library of Congress.
This report expands on Swanson's article "The Coming Exaflood," which was published in the Wall Street Journal on January 20, 2007.
Let Technology Revive the Economy
Swanson and Gilder point out that the network isn't currently designed to handle this increase.
Internet growth at these levels will require a dramatic expansion of bandwidth, storage, and traffic management capabilities in core, edge, metro, and access networks. A recent Nemertes Research study estimates that these changes will entail a total new investment of some $137 billion in the worldwide Internet infrastructure by 2010. In the U.S., currently lagging Asia, the total new network investments will exceed $100 billion by 2012.
Wow, this is roughly comparable to the projected cost of the economic stimulus bill now winding its way through Congress ($146 billion). But I'll bet no one's thought of empowering the telephone and cable companies to revive the economy. That would mean scrapping welfare for Silicon Valley (aka
network neutrality legislation) and eliminating discriminatory taxation of communications services. Nah, not as long as they can contribute boatloads of cash for politicians through their political action committees. Swanson and Gilder correctly point to a fact that's lost on the political class:
Technology remains the key engine of U.S. economic growth and its competitive edge. Policies that encourage investment and innovation in our digital and communications sectors should be among America's highest national priorities.
The FCC has settled on an inappropriate definition of what constitutes a competitive market. A memorandum explaining why the FCC denied the Verizon's forbearance petition seeking deregulation in Boston, New York, Philadelphia, Pittsburgh, Providence and Virginia Beach suggested it's because Verizon's market share has to be less than 50% AND Verizon's competitors must have ubiquitous overlapping networks with significant excess capacity.
While there is some evidence in the record here regarding cable operators' competitive facilities deployment used in the provision of mass market telephone service in the 6 MSAs at issue, we find that it does not approach the extensive evidence of competitive networks with significant excess capacity relied upon in the AT&T Nondominance Orders ... where the Commission has found an incumbent carrier to be nondominant in the provision of access services, it had a retail market share of less than 50 percent and faced significant facilities-based competition. (footnote omitted)
A market share in excess of 50% would justify regulation in the EU, but not in the U.S. pursuant to settled antitrust principles.
J. Bruce McDonaldâ€¨, formerly Deputy Assistant Attorney Generalâ€¨ with the Antitrust Divisionâ€¨, explains:
EU law seeks to control the conduct of firms that are dominant, while U.S. law addresses monopolies, the creation or maintenance of monopoly power. Take this practical comparison of market share thresholds. The dominance standard Â the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers allows a presumption of dominance where a single undertaking holds 50% or more of the market, and less may be enough. The U.S. standard - the ability to raise price and exclude competition - would rarely be proved where market share is less than 70%. Of course, neither jurisdiction relies solely on market share evidence. (footnote omitted)
The FCC memorandum doesn't disclose Verizon's market shares. However, I suspect it is less than 50% in one or more places or the memorandum wouldn't make it so clear that even a market share below 50% won't justify deregulation unless competitors have ubiquitous overlapping networks with significant excess capacity like MCI and Sprint did in the long-distance market of the mid-1990s.
The U.S. doesn't regulate dominant companies like the EU and the FCC because it doesn't make any sense. If there is rising demand, other providers will enter the market. They will be successful if they offer better service or a superior product, or competitive pricing. If competitors can't figure out how to differentiate themselves in the market, they tend to hire former FCC staffers to importune their former colleagues to bestow regulatory advantages on the hapless competitors. That's called "competitor welfare," and it leads to higher prices for consumers and diminished innovation.
If Verizon has a market share below 50% or even in the 50% range, the FCC would do well to recall what Alan Greenspan says:
It takes extraordinary skill to hold more than fifty percent of a large industry's market in a free economy. It requires unusual productive ability, unfailing business judgment, unrelenting effort at the continuous improvement of one's product and technique. The rare company which is able to retain its share of the market year after year and decade after decade does so by means of productive efficiency -- and deserves praise, not condemnation.
In other words, even if the FCC didn't exist, it would be nearly impossible for Verizon or anyone else to sustain a market share above 50%. Greenspan continues:
The Sherman Act may be understandable when viewed as a projection of the nineteenth century's fear and economic ignorance. But it is utter nonsense in the context of today's economic knowledge. The seventy additional years of observing industrial development should have taught us something. If the attempts to justify our antitrust statutes on historical grounds are erroneous and rest on a misinterpretation of history, the attempts to justify them on theoretical grounds come from a still more fundamental misconception.
The FCC isn't ignorant. It's just trying to help its friends, who it hopes will one day return the favor. It's an incestuous little world.
Two commentators tried to argue that FCC Chairman Kevin J. Martin has held true to conservative principles nowithstanding recent attempts to re-regulate the cable industry. Cesar V. Conda and Lawrence J. Spiwak posited that a "pro-entry/pro-consumer-welfare mandate" is the very "hallmark of economic conservatism." This is a bizarre statement.
"Pro-entry" is a euphemism for competitor welfare, the antithesis of consumer welfare. Competitor welfare used to be the guiding principle of antitrust law -- a legacy of the populist movement. The idea was that more competitors equaled stronger competition. It's intuitively appealing, but it confuses quantity with quality and is wrong if the competitors are inefficient. Protection of inefficient competitors is a form of subsidy.
For example, the Clinton FCC tried to jumpstart competition in telecom with a "pro-entry" policy which allowed startups to lease facilities and services below cost from incumbent providers like AT&T and Verizon. You might think that's no big deal, AT&T and Verizon can probably afford it. But the truth is they don't absorb such losses, they pass them on to their remaining customers.
Okay, you might say, maybe it's a negative in the short term, but won't all consumers be better off in the long run when pro-entry regulation leads to more competition -- which should push prices down for everyone?
The answer depends on whether the competitors are viable -- whether they can thrive in a free market without price controls or similar regulation.
The few remaining telecom startups who managed to avoid bankruptcy clearly cannot, but the FCC doesn't seem to have read the memo.
The trade association representing the startups, COMPTEL, has written to the FCC that its members "do not have the scale and scope to compete with the Bells for the major purchasers of special access," and reasons that regulation is in the public interest because this particular segment of competitors "have to offer extremely steep discounts off the Bells [sic] tariff price in order to win any modest portion of the customer's business."
Wall Street is of the same view. The viability of the startups, referred to as CLECs, is regarded as so bleak that Covad sold in late October for $1.02 a share, for example.
Since the fundamentals suck for the CLECs, they would be fools not to try to hire better lobbyists to convince the FCC to improve their regulatory advantage over the incumbents. This can become and endless game. And it has.
Yesterday the FCC refused to deregulate Verizon's local phone services in six cities including New York, Boston and Philadelphia, even though Verizon pointed out that in New York, for example, cable operators offer competitive voice services to the vast majority of homes and intend to provide voice services throughout virtually all of their franchise areas in the near future; and each of the nation's major wireless carriers offers service that is competitive with Verizon's wireline service and is available throughout (or virtually throughout) the New York area.
This afternoon, Covad was trading at 82 cents a share. Obviously, investors aren't optimistic that continued regulation of Verizon will revive Covad.
The FCC issued the following explanation:
The Commission found that the current evidence of competition does not satisfy the section 10 forbearance standard with respect to any of the forbearance Verizon requests. Accordingly, the Commission denied the requested relief in all six MSAs.
The forbearance standard, for all the criticism it has received lately, really gives the FCC wide latitude to do whatever it chooses. For example, it must make a finding that continued enforcement of a regulation is "not necessary for the protection of consumers." It also must find that forbearance is "consistent with the public interest." I just wish I were in the private practice of law right now so I could charge $500 an hour to argue what those terms mean.
The FCC ought to be asking itself why it is attempting to protect start-ups who, by their own admission, cannot cut it in a free market when cable operators and cellphone companies are offering competing voice services that consumers really want. But apparently irrational criticism from a few Congressional Democrats is becoming too much, and we are witnessing a classic case of Stockholm syndrome.
One of the very few positive things in the Telecommunication Act of 1996 is Section 401 (codified as Sec. 10 of the Communications Act of 1934, as amended), which requires the Federal Communications Commission to forbear from applying unnecessary regulation to telecommunications carriers or services.
Congress tucked the provision into the 1996 act to improve the chances that pro-competition regulation would be eliminated once fully implemented and no longer necessary to ensure competition.
On Friday the FCC issued a notice of proposed rulemaking requesting public comment on whether the forbearance procedure needs more procedure. Commissioner Michael J. Copps issued a statement indicating dissatisfaction with the whole forbearance concept:
Too often forbearance has resulted in industry driving the FCC's agenda rather than the reverse being true. Decisions are based upon records lacking in data and the Commission faces a statutory deadline that requires a decision with or without such data. Perhaps most egregious is the fact that if the Commission fails to act, forbearance petitions may go into effect based upon the industry's reasoning rather than the Commission's own determination. All of this is to say that I do not believe that forbearance is being used today in the manner intended by Congress.
I admire Commissioner Copps' confidence that he knows what Congress intended, but I actually sat on the Senate floor when the Telecommunications Act of 1996 was debated and the forbearance provision (which originated in the Senate) wasn't debated at all. It was included in the committee mark, which was supported by Commissioner Copps' old boss, the committee's ranking member and former chairman, Senator Ernest Hollings (D-SC).
Hollings could have kept the forbearance provision out of the Telecom Act if he had chosen. He had won the ideological battle over immediate deregulation versus eventual deregulation. And the committee chairman, Larry Pressler (R-SD), was up for reelection and desperate to pass a major piece of legislation.
Hollings didn't keep it out. And although his reasons aren't a matter of public record, I can think of a couple reasons why he let it become law.
One, there was great concern at the time that the Telecom Act wasn't sufficiently deregulatory to reflect well upon a Republican-controlled Senate. Senator McCain and a few others were highly critical. Majority Leader Bob Dole didn't like it, either. The bill's chief sponsors, Pressler and Hollings (and also various cosponsors such as Trent Lott), were anxious to title the bill "Telecommunications Competition and Deregulation Act"; and the forbearance provision was one of the few things in the entire bill which could be described as deregulatory.
The justification for the pro-competition sections of the act -- which were undeniably regulatory in nature -- was that they would lead to competition and that competition would make it possible to deregulate, thus they were a temporary evil. Everyone agreed that regulation should go away when the local telephone market was competitive. For example, Reed E. Hundt, who was FCC chairman at the time, claims: "On competition, I had two sub-themes: clear, enforceable rules opening monopolized markets to entrepreneurs, and the elimination of regulation where competition existed."
I've always suspected that the regulate-now-so-we-can-deregulate-later argument ignores the slippery slope and therefore is or should be regarded as a completely disingenuous fiction, but since Hollings used it, that undoubtedly placed him in a difficult position to object to the forbearance provision.
Also, it was Hollings' staff, I believe, who limited the reach of the forbearance provision. The only concern I can recall being raised against the provision (it was during the premarkup phase) was, what if the FCC forbears from applying a provision of the '96 act immediately? A limitation was added prior to markup prohibiting the FCC from forbearing to apply the pro-competition portions of the Telecom Act until it determined that they were fully complied with.
Origin of the "Deemed Granted" Clause
The "deemed granted" clause was very intentional.
The forbearance provision allows a carrier to request forbearance, and provides that the request shall be "deemed granted" in one year (with the option of a 90 day extension) if the FCC doesn't deny the request.
In the absence of something like Sec. 10, the FCC could simply ignore a forbearance petition, allowing it to languish for eternity. That's because inaction can't be appealed. If the FCC accepts or rejects a petition, there is "final agency action" which can be appealed. But if it ignores a petition, there is nothing to appeal. Sec. 10 forces the FCC to take final action -- and if it doesn't, turns inaction into final agency action which can be appealed.
In 1995, when I was legislative assistant to the chairman of the Senate Communications Subcommittee and the former chairman of the full Commerce Committee and when we were deliberating the Telecom Act of 1996, we were mindful that the FCC had attempted to forbear from tariffing long-distance and the Court of Appeals for the DC Circuit said it didn't have the authority. We were mindful that it took the FCC decades to license cellular telephony and almost a decade to repeal the Fairness Doctrine. We knew that the long-distance carriers -- AT&T, MCI and Sprint -- would do anything to block deregulation of the Regional Bell Operating Companies. We knew that the FCC frequently ignored -- or failed to meet -- deadlines set by Congress.
Sec. 10 was intended to shift the paradigm from regulation, unless Congress specifically repealed it; to deregulation, unless the experts at the FCC could demonstrate that it is still needed.
The "deemed granted" clause recently became controversial because the deadline for action on a Verizon petition occurred while Commissioner Robert M. McDowell was awaiting Senate confirmation. With two Republicans and two Democrats, the FCC deadlocked on the Verizon petition. The petition was deemed granted by operation of law because of the tie vote.
The outcome was, and is, a disappointment for struggling competitive local exchange carriers who are trying to compete on price rather than innovation. These entrants invested in sales and marketing rather than their own facilities. They are mere retailers who can only offer the incumbents' services under a different name. Now that cable companies offer VoIP and wireless pricing is comparable with wireline rates, there is no non-political reason for the CLECs to exist.
The problem with emasculating the forbearance provision is that it takes the FCC years to accomplish anything novel or controversial.
Will the forbearance provision lead to chaos, e.g., will the FCC allow large carriers to refuse interconnection with small carriers(?) as Rep. Ed Markey, chairman of the House telecommunications subcommittee suggests:
Take the issue of forbearance. Some incumbent phone companies have asked the FCC to eliminate their essential network sharing arrangements under Section 10 of the Act. One of today's witnesses -- Cavalier Telephone -- leases copper phone lines for the last mile and provides residential consumers with the "triple play" bundle of voice, 150 channels of cable TV, and high speed broadband for approximately $80 a month. But if the forbearance petitions are granted, Cavalier, Time Warner Telecom, and other broadband competitors will lose access to the critical, bottleneck facilities they need.
Of course I can't, and would never, say no one would disagree to interconnect with, Cavalier, Time Warner Telecom, and other broadband competitors. But considering there are approximately 1,000 local telephone companies in the U.S., I am confident at least one or two would interconnect if Cavalier, Time Warner Telecom, and other broadband competitors are willing to pay their freight. And, of course, one or two interconnections would gain Cavalier, Time Warner Telecom, and other broadband competitors access to every consumer in the country.
Kevin J. Martin, politically-savvy and a highly effective chairman of the Federal Communications Commission, has a strong free-market orientation. So why would the New York Times report that the FCC may be on the verge of enacting new regulation which would:
- Force the largest cable networks to be offered to the rivals of the big cable companies on an individual, rather than packaged, basis;
- Make it easier for independent programmers, which are often small operations, to lease access to cable channels; and
- Set a cap on the size of the nation's largest cable companies so that no company could control more than 30 percent of the market?
Martin believes "[i]t is important that we continue to do all we can to make sure that consumers have more opportunities in terms of their programming and that people who have access to the platform assure there are diverse voices," according to the New York Times article. In other words, regulators (i.e., philosopher kings) should intervene to improve on the free market.
There are already plenty of opportunities for independent programmers to lease access to spare cable channels. The independent programmers aren't excluded from cable networks. Making it "easier" for independent programmers to lease access to cable channels, according to one report, is code for a government-mandated rate reduction of 75 percent.
The FCC and state public utility commissions embarked on a similar crusade some 10 years ago when they tried to introduce competition in telecommunications. It was a complete failure.
In his recent book, Competition and Chaos: U.S. Telecommunications Since the 1996 Telecom Act (2005), Brookings Institution Senior Fellow Robert W. Crandall points out that efforts by the FCC and the states to promote competition in telecom was "not only wasteful but unnecessary." Wasteful, because the policies "simply transferred billions of dollars from incumbent telephone companies to fund marketing campaigns required to sell the same services under a different name."
Unnecessary, because most of the competitive local exchange carriers declared bankruptcy due to the fact they couldn't offer a compelling product while "competition has developed in ways totally unanticipated by regulators, namely through unregulated wireless providers and cable platforms" -- sectors which regulators ignored.
Fortunately, federal and state regulators were denied the right to regulate wireless rates and services, and cable television regulation was scaled back considerably in 1996. As a result, the wireless sector began to launch an unregulated competitive rate war and to offer national calling plans as soon as it could consolidate into six national players after new frequencies were auctioned in 1995-96. At about the same time, cable operators began to expand their capabilities to meet satellite competition and were thus poised to be early movers in the broadband race .... [W]hen unregulated voice over Internet protocol (VoIP) services began to appear, cable operators were forced to offer voice services rather than allow third-party carriers to siphon revenues from their cable modem customers. None of this new competition required the guiding hand or patient nurturing of regulators.
In a current FCC proceeding about whether to continue some of these failed policies, a trade association representing the new entrants claimed that its members "have to offer extremely steep discounts" relative to the prices charged by incumbent telephone companies to remain competitive. And obviously, they also need to be able to demonstrate profitability to raise capital. The only way regulators can guarantee that new entrants can profitably offer steep discounts is to ignore actual costs incurred by the incumbents. If the incumbents have to sell at a loss, why would they commit to risky investments in network infrastructure when they could safely invest in government bonds?
There have been several failed attempts to micromanage the cable industry in the past 20 years or so. In 1984, Congress had to pass legislation to prevent local franchise authorities from regulating and taxing cable companies into oblivion. Cable companies thereupon made massive investments in new channels and compelling content. In 1992, Congress responded to popular pressure to control cable rates and the resulting price controls nearly bankrupted the cable industry. (The FCC chairman at the time, Reed E. Hundt recounts in his book how the Wall Street Journal "ran an editorial awarding me their supreme insult: 'French bureaucrat.' In their cartoon I looked lobotomized." Aside from drafting the cable retail pricing regulations of the early 90's, Hundt made the same effort to lower wholesale access prices in telecom that Martin is now making in cable.) In 1996, Congress scrapped the regulation and ushered in a decade in which cable companies invested $110 billion upgrading their networks. Now, Verizon and AT&T -- whose broadband offerings were recently deregulated -- are spending billions of dollars to deliver video, and the cable companies are being forced to invest more money to keep up.
Even when well-intentioned, regulation of competitive markets -- whether perfectly competitive, like a commodity market; or imperfectly competitive, like all the rest -- should be avoided because it usually leads to bad things. As Crandall describes in the same book:
Students of regulation are generally wary of regulated competition. Airline, trucking, railroad and petroleum regulation in earlier decades became a form of cartel management, keeping prices artificially high and entry low in order to protect competitors.
Alfred E. Kahn, who served in the Carter administration, counsels that "even very imperfect competition is preferable to regulation" in The Economics of Regulation: Principles and Institutions
The solution, again according to Crandall (who is hardly a lone voice), is for regulators to get out of the way:
The economic lesson from the history of regulation is that regulation and competition are a bad emulsion. Once the conditions for competition exist, it is best for regulators to abandon the field altogether. This is particularly true in a sector that is undergoing rapid technological change and therefore requires new entry and new capital. The politics of regulation favor maintaining the status quo, not triggering creative destruction.
I want to comment on Adam Thierer's recent paper, "Unplugging Plug-and-Play Regulation," which makes several excellent points. Adam briefly summarized his thesis (i.e., there is no need for government "assist" in private standard-setting) here a couple days ago and generated a couple comments.
The cable industry and consumer electronics manufacturers are touting competing standards initiatives. The pros and cons of each approach, from a technology perspective, are somewhat bewildering to a non-engineer like myself. But there appears to be one clear difference that matters a lot. Adam points out that under the initiative sponsored by the consumer electronics industry,
the FCC would be empowered to play a more active role in establishing interoperability standards for cable platforms in the future. [It's] a detailed regulatory blueprint that specifies the technical requirements, testing procedures, and licensing policies for next-generation digital cable devices and applications.
Why would ongoing assistance be required from the FCC, which mainly consists of lawyers? It's that same old argument we hear over and over: Cable companies are big, therefore they must be regulated, right? Back before the emergence of DISH Network, DIRECTV, FiOS, U-verse, the iPod and who knows what else may be coming over the Internet, that argument was hard to refute. The world has changed, as can clearly be seen
in how Wall Street is valuing the cable companies versus phone companies who offer comparable programming .
Already Wall Street has gone negative on cable stocks because of concern over FiOS as well as the slowing growth of the high speed Internet business and the rollout of more high definition TV stations by satellite companies. Comcast is now trading in the $23 range, down from its 52-week high of over $30 a share in January. Verizon's stock, on the other hand, is trading in the $45 range, its highest level since early 2002, with some on Wall Street partially crediting FiOS. Shares of Verizon rose 48 cents, or 1.1%, to $44.81 in 4 p.m. in New York Stock Exchange composite trading yesterday.
Cable companies need to be able to respond to the competition -- they need to be able to raise capital, which requires that investors earn a return which meets or exceeds the return available somewhere else -- yet the FCC is on the path of regulating the navigation devices used by cable companies but no one else.
Is this a big deal? Yes. The motion picture association points out that the CE manufacturers' favored approach "fails to adequately address content creators' reasonable concerns regarding content protection, presentation and interactivity." I'm not going to get into a discussion about the level of content protection the motion picture industry is seeking, only comment on the inappropriateness of placing cable operators in the middle of that dispute without a paddle.
MPAA's ominous warning, that "high value programming will be made available for bidirectional navigation devices only if content is adequately protected from unauthorized copying and redistribution," has enormous implications for broadband competition.
The FCC ought to take a step back and completely reassess what it is doing here. In my view, mature consideration leads to the conclusion that government has no business in this space at this time.
This week the Federal Communications Commission failed to muster 3 votes to deregulate the broadband access services of Qwest Communications, as it has already done for Verizon in early 2006. The nature of the relief we're talking about is analogous to the commission's reclassification of DSL as an "information" service rather than a "telecommunications" service in 2005. In both cases, the effect is to free broadband providers from onerous common carrier regulation, allow them to tailor their offerings to customer needs and not be forced to offer their services to competitors at regulated, cost-based rates for resale.
To be fair, the relief Verizon got didn't garner 3 of 5 votes. Verizon's petition was filed pursuant to Sec. 10 of the Communications Act, which provides that a forbearance petition (a petition which asks the FCC to forbear from applying a regulation) will be granted automatically unless the commission denies it for good reason within one year plus a 90-day extension. That didn't happen, so Verizon's petition was granted automatically. This procedure may not sound like an ideal way to conduct public business, but Congress enacted Sec. 10 because of a long history of FCC foot-dragging. The commission is a political animal, and many former staffers are employed by the companies the FCC regulates.
Word is that Chairman Kevin J. Martin and Commissioner Deborah Taylor Tate were both prepared to vote "yes" on the Qwest petition. Republican Commissioner Robert M. McDowell, meanwhile, claims that the commission as a whole was prepared to grant at least some of the relief sought by Qwest, and that he is disappointed an "appropriate accommodation" could not be found. Qwest chose to withdraw its petition before it could be denied.
Maybe Qwest was unwilling to settle for half a loaf, but maybe the commission wasn't prepared to offer anything of value. The commission's recent ruling allowing Qwest and other telecom providers to integrate their long-distance and local services provided some of the regulatory relief Qwest sought in the petition it withdrew this week. Thus it may be Qwest was merely offered the portion of its petition which matched the relief it won a couple weeks ago.
It's ironic: The broadband services offered to consumers and used by most small businesses have been deregulated.Â One would assume the primary concern of government would be to "protect" consumers and small businesses -- those who can least afford to hire expensive lawyers, consultants and lobbyists. But now that the question is whether to finish the job -- to deregulate the broadband services offered by AT&T, Embarq, Qwest and Verizon to large businesses and competing carriers, the FCC is receiving pushback.Â Big business and competitive carriers oppose deregulation, hoping to pay less -- even if that means residential and small business users who rely on DSL have to shoulder a greater share of carrier revenues.Â There is no free lunch.Â
The outcome of the Qwest petition coupled with the commission's recent decision in the matter of ACS of Anchorage, Inc., suggests that the commission has set a new bar which could slow, or possibly even reverse, the commission's successful policy of promoting investment and competition in broadband through deregulation. In voting to grant a recent petition for regulatory forbearance submitted by an Anchorage telephone company which is subject to unusually intense competition, Republican Commissioner Robert M. McDowell -- the commission's swing vote --adhered to a competitive analysis focusing not on the existence of the requisite conditions for competition nor even the actual presence of competition, but on the competitors' market share.
I support the relief from regulation that is granted in this forbearance petition filed by ACS of Anchorage, Inc. (ACS). The Anchorage, Alaska study area is a unique market, where the incumbent local exchange carrier, ACS, faces significant facilities-based competition from other carriers, primarily General Communication Inc. (GCI). For instance, GCI purportedly has over one-half of the exchange access market and 60 percent of the high-speed Internet market in Alaska. In addition, the geographic location of Anchorage contributes to the special characteristics of that market that are not duplicated in any other market in the country. With regard to ACS's enterprise broadband services, forbearance from regulating those services is appropriate based on the level of competition it faces in the Anchorage market, not only from GCI but also from AT&T and other providers. I believe that a local market analysis, rather than a national market analysis, is the correct basis for determining whether this type of relief is warranted. (emphasis added.)
Although the commission reached the correct result, ACS's petition was granted, the vote was 3-2 and McDowell's analysis combined with the pro-regulatory sentiments of the commission's two Democrats raises the possibility that the commission is in the midst of retreating from its preexisting policy of deregulating incumbents based on the presence of competitive facilities -- which is comparatively easy to verify -- in favor of an analysis of relative market shares, which could lead to endless quarrels over methodology, data and the appropriateness of desired thresholds.Â McDowell also said that he thinks localized market analysis is the correct basis for determining whether deregulation is warranted.Â Since there are hundreds if not thousands of localities, this would only magnify the problem.Â Â Â Â
The commission is considering other proposals for deregulation and re-regulation. Rep. Ed Markey (D-MA), who chairs the House subcommittee responsible for FCC oversight, recently asked the commission to complete any review of special access issues (as I have discussed here) necessary to revise the current rules no later than Sept. 15th.Â Though somewhat cleverly couched, Markey's letter is a clear signal to the FCC to re-regulate the services that telecom providers offer large businesses and competitive carriers.
But to do so would completely ignore what's happening in the marketplace.Â There is abundant evidence that competition is increasing, actual prices are declining and that additional regulation is not only unlikely to promote competition but is actually more likely to reduce it, as I recently noted in comments to the FCC on this matter.
Cable operators and fixed wireless providers are currently investing in new facilities that will compete with the special access services provided by incumbent LECs. For example, Sprint Nextel is partnering with Clearwire to build a nationwide WiMAX network partly in order to reduce the backhaul costs it pays to route calls from cell towers to switching centers (Sprint claims in this proceeding that special access constitutes, on average, approximately 33 percent of the monthly cost of operating a cell site). Sprint has also inked a deal with FiberTower to provide backhaul for its 4G/WiMAX service in several markets. [AT&T has submitted an affidavit which claims] that Sprint told AT&T negotiators it has "many other options" to meet its backhaul needs.
Cablevision and Time Warner are making "major pushes" to offer packages of phone, TV and high-speed Internet service to small and midsize businesses, according to the Wall Street Journal, and Comcast has said that offering services to small and midsize businesses will be its top new priority of 2007 and 2008. (citations omitted.) ....
If the Commission arbitrarily reduces what incumbent LECs can charge for special access, that would also reduce the revenue investors could expect to earn from these new facilities which, in turn, may affect their willingness to follow through with these investments. The risk that Sprint Nextel, for example, might cancel its plans to build a WiMAX network if the Commission reduces its backhaul costs via regulation of incumbent LECs is a risk the Commission should avoid.
As another example, Google CEO Eric Schmidt has commented
that "One of the neat things about the bubble is that people built all of this fiber that is now essentially free."
The dilemma facing the commission is, small new entrants are struggling in the marketplace (yes, they employ several well-regarded former FCC staffers).Â As I pointed out in my comments, it may not be possible to save these carriers without indefinite regulation.
The rates incumbent LECs charge for special access aren't the primaryÂ headache facing CLECs, just the easiest for lobbyists to fix.Â As COMPTEL acknowledges, CLECs "do not have the scale and scope to compete with the Bells for the major purchasers of special access."Â AdHoc makes a similar point when it observes that the "rummage sale prices" at which the divestiture assets from the AT&T/BellSouth merger were sold may indicate that the assets conferred little competitive benefit to the CLECs.Â Since the CLECs can offer high-revenue customers only limited facilities and a limited array of services, COMPTEL confirms that its members "have to offer extremely steep discounts" relative to the prices charged by incumbent LECs. (footnotes omitted.)
The point is this: Indefinite regulation isn't necessary to protect robust competition from cable and wireless. In fact, regulation will diminish their enthusiasm for new investment.Â
We can't haveÂ it both ways.Â Either we ensure that investments can profitably be made in new facilities by letting the market set prices, or we can attempt through regulation to keep prices low which will encourage competitors to share existing facilities and beseech regulators to impose ever-lower prices.Â In that case, their offerings will simply mirror the incumbents' and the incumbents will search for investment opportunities that don't require profit-sharing.Â This is not a recipe for innovation.Â Â Â
Paul Krugman's got it all backwards. He says the deregulatory policies of the Bush FCC have plunged the U.S. downward on the international broadband rankings. In fact, we are just starting to catch up after the long hangover from the Clinton-Gore-Hundt policies of the late-90s. The U.S. began with a lead in Internet access because we invented the Net. But the Hundt FCC quickly gave away our lead with a flurry of anti-investment price-controls and complicated mandates. The result was the telecom crash of 2000 and several more years of heavy fall-out that depressed Silicon Valley and global technology. After regrouping, the U.S. is now on the verge of a massive rebound in broadband technology and access, thanks in large part to the elimination or relaxation of Hundt's onerous rules. Verizon and AT&T are now building the world's most advanced fiber-optic networks to homes, businesses, and neighborhoods, and the cable TV companies will be forced, through competition, to follow suit and yet again upgrade their already capacious hybrid-fiber-coax nets. These are projects that cost many tens of billions of dollars and take years to complete. But after 10 long years, after an essentially wasted decade, just as we are finally crawling out from the rubble of the Clinton-Gore broadband cataclysm, as we are about to scale the gigabit hills and climb the international broadband comparisons, Krugman swoops in, hoping to snatch defeat from the jaws of victory. Just hope your house gets connected before Krugman gets his hyper-regulatory wish.
The Senate Commerce Committee's hearing Wednesday on the Internet tax moratorium demonstrates the necessity of making the ban on state and local taxation of Internet access services permanent. Another temporary extension simply guarantees opponents another chance to overturn it down the road, and creates the possibility they can win new concessions in the meantime.
The hearing showed than opponents are still determined to gut the moratorium. Harley Duncan, the Washington representative of state and local tax administrators, rehashed the old argument that the moratorium is unnecessary, because "the economic evidence is that state taxation of Internet access charges has little or nothing to do with the adoption of Internet services by consumers or the deployment of services by industry." And he cites a new Government Accountability Office conclusion that taxing Internet access is "not a statistically significant factor influencing the adoption of broadband service at the 5 percent level. It was statistically significant at the 10 percent level." Even assuming this conclusion is valid, it still doesn't mean anything. Because once states and localities are allowed to impose taxes on Internet access, they won't hold the line at 5 percent.
To get an idea what states and localities might do with Internet access, just consider what they do with telecommunications. Right now, for instance, Jeff Dircksen of the National Taxpayer Union & Foundation notes that the are pushing the combined tax burden on cellphone services above 20 percent.
Local and state governments believe wireless taxes, fees, and surcharges are a "cash cow" for the 21st Century. Yet, they fail to consider that the total wireless tax and fee burden can exceed 20 percent in some areas -- a higher effective tax rate than the typical middle-class consumer pays on a 1040 federal income tax return.
Annabelle Canning with Verizon Communications points to a 1999 study by the Committee on State Taxation which found that consumers of telecommunications services paid effective state and local tax rates that were "more than twice those imposed on taxable goods sold by general business (13.74% vs. 6%)." She also cited a Heartland Institute conclusion that consumers of cable TV, wireless and wireline phone service paid an average of 13.5% in taxes, more than two times the 6.6% average sales tax rate.
The taxes on telecom, cable and wireless include franchise taxes, utility taxes, line access and right-of-way charges, 911 fees, relay charges, and maintenance surcharges, according to Dircksen. He notes that there are approximately 11,000 state and local governmental entities that could levy taxes or fees on telecommunication activities, according to the National Conference of State Legislatures. Canning mentioned that the typical communications service provider was required to file "seven to eight times as many tax returns compared to those filed by typical businesses (63,879 vs. 8,951 annually)."
This is how we can expect state and local government to handle the taxation of Internet access services if given the chance.
"Bundled" and "Acquired" Services
If Duncan can't eliminate the moratorium, he'd like to gut it. In his Senate testimony, he suggested changing the definition of "Internet access" to make it clear that an Internet service provider cannot "bundle" other types of Internet services, content and information (some of which may be currently taxable) into a package of "Internet access" and claim that the state would be preempted from taxing any part of that package.
There is also a controversy over so-called "acquired" services. Basically, opponents want to apply the moratorium only to retail services while allowing wholesale services to be taxed. The effect is to allow taxation of the Internet backbone. Unfortunately, GAO has bought-off on this interpretation. Their testimony, which includes the following diagram, claims that the Internet tax moratorium did not apply to Internet backbone services (described as "acquired" services).
The bottom line is that the Internet tax moratorium helps keep the price consumers pay for broadband as low as possible, and affordability is usually a key factor when consumers make a purchasing decision. If we didn't have the moratorium, we might be forced to consider subsidizing broadband to make it ubiquitous. Duncan's testimony makes it clear that's exactly what the tax administrators recommend.
Online Sales Taxes
States and localities are prohibited from taxing "remote sales" by virtue of a Supreme Court ruling, not the Internet Tax Moratorium. Duncan requested enactment of Federal legislation to authorize states to require remote sellers to collect sales and use taxes on goods and services sold into the state. The Supreme Court's Bellas Hess rule has been around since 1967. State and local officials have been trying, without success, to overturn it ever since. If they were to ever succeed, they would surely discover that the Internet provides a lot of opportunities for tax avoidance and evasion. That would only lead to more regulation which would stifle innovation.
Policymakers have more serious things to talk about than debate these same issues every few years; that's why Congress needs to make the Internet Tax Moratorium permanent.
Kyle McSlarrow, president and CEO of the National Cable and Telecommunications Association, cited the following numbers in a recent speech to the Media Institute (available here).
- Cable's broadband service is already available to 94% of all American households, and more than 30 million households subscribe to the high speed service provided by their local cable operator.
- Using our broadband network, the cable industry now markets telephone service to more than 90 million homes and serves 10 million residential customers.
- [M]ore than 33 million customers -- more than half of all cable subscribers -- currently purchase "digital tiers" of video, which include hundreds of additional channels of video programming and CD-quality music.
- [T]here are already 30 cable networks transmitting in HD, with many more to come.
McSlarrow talked about the need to finish the job of deregulating telecommunications, instead of deregulating some but not others. He's absolutely right.
In the past, deregulation has been a bipartisan objective -- a point that McSlarrow highlights nicely:
It is important to think of this as a systemic reform, without reference to parties or personalities. In the case of the cable industry, it is hard to overstate how important it was to have former Chairman Bill Kennard hold the line against non-facilities-based Internet Service Providers (ISPs) demanding government-mandated access to the broadband pipe, or to have former Chairman Michael Powell lead the way to ensure cable's broadband service was left largely unregulated, a decision Chairman Martin extended to other broadband providers. Those decisions to resist the impulse to regulate helped unleash enormous investment.
Lompoc, California financed the construction of a Wi-Fi network that has attracted so few users it won't be able to start repaying the loan -- and a lot of other cities are facing the same predicament, according to the Associated Press.
A $3 million plan to blanket Lompoc, Calif., with a wireless Internet system promised a quantum leap for economic development: The remote community hit hard by cutbacks at nearby Vandenberg Air Force Base would join the 21st century with cheap and plentiful high-speed access. Instead, nearly a year after its launch, Lompoc Net is limping along. The central California city of 42,000, surrounded by rolling hills, wineries and flower fields more than 17 miles from the nearest major highway, has only a few hundred subscribers.
That's far fewer than the 4,000 needed to start repaying loans from the city's utility coffers, potentially leaving smaller reserves to guard against electric rate increases.
And Lompoc isn't alone. Across the United States, many cities are finding their Wi-Fi projects costing more and drawing less interest than expected, leading to worries that a number will fail, resulting in millions of dollars in wasted tax dollars or grants when there had been roads to build and crime to fight.
The article notes that Wi-Fi vendors remain confident that demand will grow as Wi-Fi-enabled phones become more ubiquitous and cities use the networks to reduce the cost of other city services (e.g., reading electric meters remotely).
There is not a problem here specific to Wi-Fi, which -- like all technologies -- has its strengths and weaknesses. The mistake is awarding preferential terms to a single provider. That induces the provider's competitors to look elsewhere for business opportunities, and allows the provider to relax and take the day off.
The Washington Post has an item about the Southernwalk Neighborhood Association in Loudon County, Virginia which signed an exclusive deal a few years ago with a small company to lay fiber throughout the neighborhood and provide Internet, cable and phone service. Many residents now wish it hadn't.
Just a few years ago, developers lured homebuyers to the outer suburbs with the promise of lightning-fast Internet access and high-definition television to go along with Olympic-size swimming pools, tennis courts and other amenities.
Residents bragged about not just keeping up with their inner-suburb neighbors but leapfrogging them altogether -- only to watch their technological advantage give way to newer offerings.
What was once state of the art is now par for the course, a frustration familiar to any early adopter who has bought the latest and greatest only to find something better, or cheaper, soon after. For Southernwalk, the price of chasing Internet Nirvana turned out to be a contract that could run 75 years.
About 40 fuming residents recently attended a neighborhood meeting to blast OpenBand for services they call, among other things, unreliable and overpriced. They also directed their ire at Van Metre. When they moved in, residents agreed to pay a fee, now $149, for the services as part of their monthly homeowners association fees.
"It was the only way to get Internet out here back then, so the concept seemed like a good idea," said Hodell-Cotti, who moved into the neighborhood with her husband four years ago. She recently bought a satellite dish for better reception, but she still pays the mandatory fee for OpenBand services. "Now there are more options out there, but we're stuck in a monopoly."
In both cases, someone picked winners and losers rather than looking for ways to remove barriers to investment for all broadband vendors.
See: "Cities struggle with wireless Internet," by Anick Jesdanun, Associated Press, May 22, 2007.
See: "In Suburbs, Locked Into a High-Tech Lure: Fiber-Optic Service Disappoints Many, but Contracts Span Decades," by Kim Hart, Washington Post, May 21, 2007.
In a recent speech in Fort Wayne, Verizon Senior Vice President Thomas J. Tauke provided this update on the company's FiOS rollout:
In Fort Wayne alone, we've connected some 130,000 homes, multi-family households and small businesses to our fiber-to-the-home broadband service, called FiOS. Verizon is aggressively deploying FiOS across the country; we've already passed more than seven million homes, and we're on schedule to pass 18 million premises by the end of 2010. This is a network, because of the fiber to the doorstep infrastructure, which has 100 mbps of capacity.
Tauke also pointed out that the network will soon be capable of delivering much faster speeds:
[O]ver the next five years broadband will be transforming itself, using new network technology called gigabit passive optical network, or G-PON. This will allow our fiber networks to go from the 100 megabit speeds we have today, to speeds up to 100-times faster -- 10 gigabits.
Fort Wayne, according to Mayor Graham Richard, wants to be the "most wired and inspired" city of its size in the country and has been on a broadband crusade since 2001 (described by Richard here
Looking back, Richard says he is pleased that Fort Wayne encouraged private sector investment, rather than partnering with hand-picked entities:
[W]hat I like about our situation is, we have not used substantial public dollars into private investments, private companies that are now vying to woo the public with high-quality services. We have already seen the run-rates and the costs be very competitive, the costs are coming down, run-rates are going up. You have two very, very substantial competitors, one using coaxial cable with fiber to the node. The other then using fiber all the way to the home.
Richards also believes broadband is an important tool for recruiting new businesses:
[W]e just did a study of existing businesses in Fort Wayne and of site selection specials, eight years ago no one said that a key reason for having a business located in Fort Wayne, Indiana was the availability of broadband. Today the number one issue is trained, skilled workforce available for the companies and number two is availability of high-speed broadband.
Japan has 7.2 million all-fiber broadband subscribers who pay $34 per month and incumbent providers NTT East and NTT West have only a 66% market share. According to Takashi Ebihara, a Senior Director in the Corporate Strategy Department at Japan's NTT East Corp. and currently a Visiting Fellow at the Center for Strategic and International Studies here in Washington, Japan has the "fastest and least expensive" broadband in the world and non-incumbent CLECs have a "reasonable" market share. Ebihara was speaking at the Information Technology and Innovation Foundation, and his presentation can be found here. Ebihara said government strategy played a significant role. Local loop unbundling and line sharing led to fierce competition in DSL, which forced the incumbents to move to fiber-to-the premises.
Others have taken a slightly different view. Nobuo Ikeda, formerly a Senior Fellow with Japan's Research Institute of Economy, Trade and Industry, says that the "success of Japan's broadband has been brought about by such accidental combination of a Softbank's risky investment and NTT's strategic mistakes." Ebihara acknowledges that the results of the unbundling regulation have been "mixed" in terms of competitors investing in their own local switching and last-mile facilities, as the U.S. discovered for itself.
The whole point of Ebihara's lecture was that the U.S. doesn't have what he and others consider a national broadband strategy. Never mind that Verizon already plans to spend $23 billion to construct an all-fiber broadband network, which will pass up to 18 million homes by 2010, according to USATODAY. And AT&T is spending $4.6 billion to deploy VDSL to 19 million homes by 2008.
Viewed in hindsight, and not because the Bush Administration has done a particularly good job touting its own success, a clear strategy emerges. It consists mainly of relief from unbundling regulation for fiber deployments; flexibility to offer broadband services a common-carrier basis, a non-common carrier basis, or some combination of both; and national guidance for local franchising authorities.
When, on Feb. 20, 2003, the FCC set new rules for telephone network unbundling which freed fiber-to-the-home loops, hybrid fiber-copper loops and line-sharing from the unbundling obligations of incumbent carriers, then-SBC Communications (now AT&T) and Verizon quickly responded. Verizon announced it would begin installing fiber to the premises (FTTP) in Keller, Tex. and that it planned to pass "about 1 million homes in parts of nine states with this new technology by the end of the year." SBC outlined its own plans to deploy fiber to nodes (FTTN) within 5,000 feet of existing customers in order to deliver 20 to 25 Mbps DSL downstream to every home (amd that it would construct fiber to the premises for all new builds. SBC projected that FTTN deployment can be completed in one-fourth the time required for an FTTP overbuild and with about one-fifth the capital investment. Verizon subsequently announced it would hire between 3,000 and 5,000 new employees by the end of 2005 to help build the new network, on which it planned to spend $800 million that year. And that it planned to pass two million additional homes in 2006.
It may look like these major investment decisions didn't depend on subsequent deregulatory actions -- such as the Jun. 27, 2005 decision of the Supreme Court in NCTA v. Brand X Internet Services -- clearing the way for the FCC, on Aug. 5, 2005, to eliminate the requirement for telephone companies to share their DSL services with competitors. The FCC decision finally put DSL on an equal regulatory footing with cable modem services. However, it began to emerge as early as 1998 -- in an FCC Report to Congress -- that asymmetric regulation between the broadband offerings of the telephone companies versus their competitors would be impossible to sustain as a matter of logic. A decision by the U.S. Court of Appeals for the Ninth Circuit in 2000 all but confirmed this. Thus, it was possible to foresee that either cable would have to be regulated or the phone companies would have to be deregulated. When cable modem service achieved a higher market penetration than DSL, and given the Bush administration's preference for less regulation, it became possible to anticipate that DSL would ultimately be deregulated.
The FCC didn't enact national guidelines for local franchise authorities until Dec. 20, 2006, however there was a long history of abuses by local franchise authorities. In a report to Congress in 1990 the FCC said that "in order '[t]o encourage more robust competition in the local video marketplace, the Congress should ... forbid local franchising authorities from unreasonably denying a franchise to potential competitors who are ready and able to provide service.'" Despite howls of protest from local officials, Congress imposed limits on the franchise authorities in the Cable Act of 1992. Similar abuses began showing up when the telephone companies looked serious about upgrading their broadband services. After months of discussion, the FCC began the proceeding which resulted in the current guidelines in Nov. 2005.
There's more to be done. Spectrum policy, in particular, remains mired in special-interest broadcaster and public safety politics and must be fully sorted out. But it's not clear the U.S. should follow the costly Japanese model, with its heavy reliance on tax breaks, debt guarantees and subsidies (see, e.g., this). And don't forget that Japan had zero interest rates. Industrial policy leads to higher costs, because taxpayers are footing the bill. It also relies on policymakers, who usually understand the least about technology. Consider this poignant example, as noted by Philip J. Weiser:
It was the threat of Japan's rise in the 1980s that spurred the course toward digital television that the United States still follows today. Washington committed wide swaths of spectrum to digital television, leaving U.S. mobile-phone providers with less bandwidth than they needed and only about half the amount of their European counterparts. The entire effort assumed that Americans would continue to watch television shows broadcast over the air. Yet over the past two decades, more U.S. consumers have begun to watch cable and satellite television, undermining the rationale for this expensive policy, which has also delayed innovation and imposed unjustifiable costs on the nation.
Patients, adept at using the internet to schedule travel, conduct business, and access information with the click of a mouse, are now driving changes in the way state and federal policymakers address health care reform.
"Health IT" is the new buzzword for health care, and information technology proposals for healthcare reform are sprouting like daffodils in April!
Tennessee Gov. Phil Bredesen
So far this year, the National Governor's Association has announced the creation of the State Alliance for E-Health, co-chaired by Tennessee Gov. Phil Bredesen and Vermont Gov. Jim Douglas. Their purpose is to bring together office holders and policy experts to, "address state-level health information technology (HIT) issues and challenges to enabling appropriate, interoperable, electronic health information exchange (HIE)".
As quoted in the National Journal's coverage of the event, Gov. Bredesen explained, "...the states can move much more quickly....I don't trust the federal government to actually do anything on my watch."
Continue reading "Health IT Creating a Buzz" »
Life is about "repeating the same mistakes" in different contexts, says Larry Lessig. In the current issue of Wired, the Stanford law professor compares the prevailing wisdom in the 1990s that Microsoft's operating system would chill competitive innovation in the software industry with the current popular wisdom that we need net neutrality regulation to prevent broadband providers from blocking any use of the Internet which threatens their bottom line. Regulatory enthusiasts didn't in the 1990s foresee the success of Linux, according to Lessig, and they may not appreciate the significance of municipal networks.
According to MuniWireless.com, there were 312 cities and counties in the U.S. with networks up and running, or in the deployment or planning phase at the end of 2006. The number of cities and counties issuing RFPs and deploying networks has tripled since July, 2005.
Lessig is skeptical municipal networks will check the power of broadband providers, but concedes they must have potential or else broadband providers wouldn't oppose them. To be fair, most broadband providers oppose the possibility that local officials will subsidize municipal networks directly or indirectly. The proliferation of municipal networks demonstrates there's a thriving broadband alternative which consumers could use to bypass any telephone, cable or wireless company which discriminates against particular Internet applications or services. Yeah, Wi-Fi may not be available everywhere. But that's the wrong yardstick to measure whether the broadband market is so concentrated as to require net neutrality regulation. Analysts at the big broadband providers and in the investment community look both at where municipal broadband already exists today and where there could be sufficient demand for it to exist tomorrow. If broadband providers turn their networks into walled gardens, there will be lots of demand everywhere. Broadband providers won't do that. They won't give municipal Wi-Fi an enormous competitive advantage.
Jonathan S. Adelstein
AT&T's opponents may not get everything they thought they had from the FCC's review of the AT&T/BellSouth merger. The process was a disgrace, as I discussed here and elsewhere leading up to the final decision. No federal or state regulator identified any competitive or public interest harms, yet Commissioner Jonathan S. Adelstein and Commissioner Michael J. Copps leveraged the process to deliver cash to state and local officials, unwarranted discounts to AT&T's competitors and 3,000 previously outsourced positions to the labor unions.
AT&T also volunteered to maintain "a neutral network and neutral routing in its wireline broadband Internet access service," subject to certain limitations. I argue that a nondiscrimination principle applied to the Internet would outlaw the partnership, bundling and pricing strategies that are the basis for all advertising efforts (see, e.g., this and this).
Continue reading "Status of merger conditions unclear" »
The Internet is bringing fundamental change to small-town Texas, according to Roy Bragg, a writer-at-large with the San Antonio Express-News.
Highways leading into town are lined with vacant commercial and industrial buildings. Many open businesses bear the markings of life on the economic edge. They're shoehorned into decrepit buildings that have seen a litany of failed ventures and show it -- peeling paint; old, broken, painted-over signs; orphaned gas pump islands; drive-through lanes to nowhere; and the general sense that an office is a bad fit in a converted muffler shop.
But there still is life in small-town Texas, and much of it is happening in the broadband pipes that deliver high-speed Internet to homes and businesses ...
The article notes that in remote Snyder, Tex. (pop. 10,000), former schoolteacher Deanie Mills "has seen 11 of her suspense and true crime books published by New York houses .... Research used to take months. Now, with the Web, she can research from her country home outside Snyder."
Also mentioned is Jerry Baird, a caterer who sells seasonings over the Internet. "His factory is near Fort Worth. His distribution center is here. And he has customers on three continents."
The article compares broadband connections to the Internet to paved roads in terms of significance for rural America, and notes that the Internet is compensating for the harm that interstate highways had on the small towns they bypassed.
HB 6456 -- the bill which would streamline video franchising in Michigan -- was signed into law by Gov. Jennifer Granholm, who noted that she expects it to create 2,000 jobs.
Michigan becomes the 11th state to reform video franchising.
The FCC finally approved a long-overdue reform of anticompetitive video franchise rules by a vote of 3-2 after nearly a year of study. An Order will be issued sometime within six months. Grasping local officials won't be able to drag out negotiations over franchise agreements with video service providers until the exhausted applicants capitulate to legal blackmail, a process which sometimes takes a year or two. Now, the negotiations will have to be completed within 90 days.
The deregulatory milestone is a victory for consumers, who will benefit from more rapid investment in competitive video offerings by AT&T and Verizon. It will also further reduce the possibility that broader telecom reform legislation will move through the next Congress, meaning fewer options to enact net neutrality regulation or pump up the current unsustainable universal service regime (which could lead to taxation of Internet traffic).
Continue reading "FCC fixes video franchising" »
The Wall Street Journal reports that cable rate increases are going to be the "most moderate in years." The main reason: Verizon and AT&T are getting into video despite the opposition of politicians who want to raise taxes or fees and impose new layers of regulation.
... cable companies that are facing the early waves of phone-company competition are showing the most restraint in raising prices. Cablevision, for example, which is facing threats from Verizon in much of its turf, has some of the lowest price increases in the business.
Cablevision believes that its strategy of low price increases is responsible for a "surge" in revenue. This isn't very surprising. As the price of anything falls, demand rises. However, there are many regulatory enthusiasts who are under the impression that broadband is what economists call "inelastic," meaning that consumers don't care what it costs -- they'll buy it anyway. The Cablevision experience shows that isn't so. The implication is that anything which raises the cost of broadband -- such as taxes or fees and regulation -- will reduce consumption of broadband.
Verizon recently issued details on its massive investment in broadband. As great as it sounds, it's still a far cry from Japan. The American company expects to invest $18 billion between 2004 and 2010 in a network that will bring fiber to the home or business (FiOS). The investment generates "profitable growth" within 4 years. By the end of 2006, Verizon expects to offer fiber Internet connections to 6 million premises. So far, about 15% subscribe to the service. The company therefore has a target of 725,000 fiber Internet customers by the end of 2006. By year-end 2010, Verizon expects to offer the service to 18 million premises and it predicts that it will have 7 million customers.
Fred Leonberger of EOvation Technologies, among others, have noted that NTT of Japan expects to have more than 6 million fiber subscribers by early next year. By 2010, NTT expects to have 30 million subscribers. Leonberger pointed this out during a panel discussion at Telecosm last week in Lake Tahoe on the subject of optical networks.
This is another bit of evidence that we are doing something wrong in the U.S. Specifically, we are over-regulating and over-taxing communications services while we needlessly alarm investors that more is on the way.
Continue reading "U.S. far behind Japan in fiber to the premises" »
Critics claimed broadband access is a duopoly (a market in which there are only two providers) but this is technically inaccurate in much of the country so now the complaint is that 98 per cent of broadband customers receive their service from either the telephone company or the cable company. Even this criticism is irrelevant. Consumer harm occurs where prices are excessive or quality is deficient. In the case of broadband, competition is leading to lower prices and higher bandwidth.
Most economists agree it's misleading to read too much into market shares, although I could point out that regional bell operating companies -- the main targets of net neutrality regulation -- report only 39.3% of total high-speed connections and that this is far less than a dominant position (other providers who are not telephone companies are lumped together in the FCC's broadband status report). More important is whether consumers could vote with their feet if an incumbent provider abuses its customer relationships. They could if there are alternate providers or new providers could enter the market. According to the FCC, satellite providers have at least some presence in 88% of the nation's zip codes, ADSL in 82% and cable modem in 57%. These numbers suggest a lot of consumers have more competitive choices than the critics like to point to. Other technologies, such as fixed and mobile wireless (cellular, PCS and WiMAX) and power line, are growing fast and have enormous potential. They prove that new providers can enter the market.
Broadband is spreading rapidly, according to the FCC. High-speed lines increased by 18% during the second half of 2005 compared to a 12% increase during the first half of 2005. This wouldn't be happening if broadband providers were gouging their customers or restricting their choices. In order to recoup their multi-billion dollar investments, the providers need to attract all the traffic they can.
The report also says that 99% of the nation's zip codes have at least one provider who serves at least one customer, and that 99% of the nation's population lives in those zip codes. Most would agree if only one household or business or a privileged handful have a choice of competitors, that's a problem. The numbers are actually more positive and the methodology used to gather them more useful than it seems. Cable and telephone networks are never built to serve small groups of people. Networks are capital intensive with high fixed costs, so the cost of bringing on an additional user is always lower than it was for the most recent user. If you have a network you want to build it out as fast as you can, because every additional customer will generate a higher profit margin than the one before. Satellite and wireless providers are capable of serving small groups or even only one customer in an entire zip code, but the fact is they market their services widely and have no incentive to market in such a way as to manipulate the statistics that the FCC gathers in this report.
Duopoly is one of those frightening terms that can either be meaningful or meaningless. In the context of broadband access services, it is meaningless.
See: "High-Speed Services for Internet Access: Status as of December 31, 2005," Report of the FCC's Industry Analysis and Technology Division, Wireline Competition Bureau, July 2006
A small rural community in Western Oregon has a communications network that is far more advanced than most American cities, with IPTV available to every resident. So reports Bobby White, who profiled Monroe Telephone Company and its president, John Dillard, in today's Wall Street Journal. Dillard participated in a conference on universal service reform sponsored by the Discovery Institute earlier this year, where he shared ideas for making universal service more efficient and sustainable -- ideas that do not exactly place Dillard in the small company maninstream.
Dillard's investment in IPTV is part of a small company trend. White cites an industry analyst who estimates there are 313,000 IPTV subscribers in the U.S., 95% of whom subscribe through a "rural telephone company" -- including Monroe Telephone Co.
Why does this happen? Sure, as the article notes, an RTC like Monroe Telephone Co. can access guaranteed loans through the USDA Rural Utilities Service. These loans are not available to large or mid-size carriers, but those companies have other available sources of capital.
The big reason is outdated regulation. There are 33,000 cable franchise authorities in the U.S., and RTCs usually only have to contend with one. It might have helped that Dillard is a leading citizen and former mayor of Monroe. But in this case, Monroe Telephone Co., which was already providing cable tv service before it retrofitted its network to provide IPTV, had a franchise to begin with. Larger carriers have to negotiate with hundreds or thousands of cable franchise authorities -- a process which is both expensive and time-consuming. Each negotiation can take a year or more and typically resquires concessions that have nothing to do with communications services. There is bipartisan support for proposals before Congress which would fix this problem, but they are languishing.
See: "Tech's Cutting Edge? Try a Tiny Town," Wall Street Journal, July 27, 2006; Page B1
The member of the European Commission in charge of telecom, Viviane Reding, admits that these are "times of convergence where we can access music, emails and media content using different terminals and networks and where also the borders between fixed-line and wireless are disappearing." She has therefore initiated a review of the EU telecom rules -- with a focus on opening up more spectrum, regulating less in markets "where competition is
already effective" and achieving "competition and investment."
On the positive side, Reding advocates phasing out ex-ante sector-specific regulation -- leaving control with competition law and authorities -- and reducing the variety of regulatory approaches in recognition that "neither technology nor economic interest nor consumer behavior know national borders anymore."
According to Reding, many telecom industry officials are urging her to follow the U.S. model. She believes they are referring to the breakup of Ma Bell in 1984. Some people see divestiture as the sine qua non of competition in telecom. In fact, competition pre-dates divestiture, which was mainly an effort to identify and prevent hypothetical anticompetitive machinations. This is not an insignificant distinction. Competition arose when new technology -- microwave transmission -- slashed the cost of transport, not as a result of regulators' clairvoyance.
Still, Reding is right in observing that consumers in the U.S. have "true choice" in broadband access. But we wouldn't be where we are today if we had adopted structural separation -- i.e., ripping apart the wholesale and retail functions of a telecom carrier into separate entities so new entrants can free ride on the carrier's network investments -- or if we hadn't allowed cable operators to invest $100 billion in broadband networks free of regulation and then deregulated DSL.
We debated these schemes for years, and most observers concluded that they tend to diminish the incentives of incumbents and new entrants alike to invest in new services, and -- in the words of Justice Stephen Breyer -- create "not competition but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms."
Reding, unfortunately, is hoping that the EU will impose structural separation and she is critical of Germany for not mandating "bit-stream access" -- Euro-jargon for net neutrality.
In the U.S., nearly every time Congress or the FCC have attempted to update telecom law or regulation, they have created more new regulation than they have eliminated. The best example is the 1996 Act, which former FCC Chairman Reed Hundt admitted earlier this year that some believe demonstrates that lawmakers and regulators cannot predict the results of their actions, "and so should do nothing." I expected Hundt to argue that this would lead to the end of civilization. But what he said was, "By this reasoning, few of us would get out of bed in the morning."
To see the full set of remarks, go to: Review 2006 of EU Telecom rules: Strengthening Competition and Completing the Internal Market
The telecom reform proposal under consideration in the Senate Commerce Committee would create a $500 million account as part of the Universal Service Fund to subsidize broadband deployment in rural areas. The anecdotal evidence for some time has been that rural areas actually are not far behind urban areas as it is. Part of the reason that there is not much of a lag is small rural telcos have been able to finance broadband upgrades with USF.
In a paper released Friday, the Congressional Budget Office sheds some much-needed light on the rumors. CBO claims that broadband is in fact permeating rural areas at a "rapid pace," and cites a finding from the Pew Internet and American Life Project that "rural areas are only about two years behind urban areas in their broadband subscription rates." (See "Factors That May Increase Future Spending from the Universal Service Fund," Jun. 2006.)
CBO confirms that USF is in fact already subsidizing broadband deployment, since current telephone equipment eligible for the subsidies is capable of providing voice and data services.
The proposal in the Senate to expand USF may be bad for innovation, since new technology could be forced to subsidize obsolete technology. The CBO study provides evidence that the popular notion of a rural broadband divide is actually a myth, and not a justification for expanding USF.
How is it that in a technical discussion former White House press secretary Mike McCurry can get the best of Craigslist founder Craig "Hey, I'm an engineer" Newmark? Silicon Valley's self-destructive hatred of the telecom companies continues to astound. See the Newmark-McCurry debate over "net neutrality" and also my reply at The Wall Street Journal.
From: Guest 5:18 pm
To: WSJ.com Editors (27 of 29)
3897.27 in reply to 3897.1
The "net neutrality" debate has become so confused that even the Journal's brief introduction to the McCurry-Newmark debate got it wrong. Congress is *not* "mull[ing] legislation that would allow Internet service providers to charge Web sites for preferred delivery of digital content." Network operators have always charged different prices for different amounts and qualities of bandwidth. Just like any other product. Nothing new there. Congress *is* mulling legislation that would regulate bandwidth prices and network functionality, with potentially disastrous effects on Internet investment and effectiveness.
Mr. Newmark's statement that "bandwidth is not an issue" is absurd. Today's last mile links to homes and businesses are nowhere near robust and capacious enough to handle the coming surge of high-definition video and other rich Internet content. The empty fiber he cites refers to overcapacity on long haul routes in between cities, or the "core" of the network. At the "edges" of the network, however, we will need to invest some $100 billion in new fiber optic access networks to link end-users to this capacious core. Mr. Newmark, who boasts, "Hey, I'm an engineer," should know better than to misrepresent this elementary distinction between core and access networks. Even the core of the network will require further upgrades as real broadband fills the Internet's existing pipes.
These massive fiber optic investments cannot be made if the federal government micromanages and litigates every price and interaction on the Net, as the "net neutrality" legislation would do. The ill-conceived 1996 Telecom Act, which socialized the physical layer of the Net, already delayed deployment of these networks for the last decade and shifted broadband leadership to Asia. Net neutrality legislation now threatens to repeat the same fundamental mistakes, this time by socializing the logical layer of the Net, and portends another decade of American communications decline.
The Silicon Valley companies who support new regulation of the Net are stupendously short-sighted. Most of their business plans depend on big bandwidth. But the policies they advocate could deep six not only the investment plans of the cable and telecom companies but also their own business strategies that require fast connections to as many consumers as possible. Silicon Valley should reconsider: Do they really want Washington to begin regulating what has heretofore been the globe's freest platform for commerce and culture?
Sen. Ted Stevens (R-AK) rightly worries that current universal service mechanisms are unsustainable as consumers migrate to Internet phone services that are lightly taxed and regulated (these services clearly should contribute their fair share). Stevens and others also believe that rural America won't get broadband services without subsidies (we can't know this for sure, because we have never tried the alternative approach of removing all of the barriers to competition and investment).
Anyway, while Internet content and conduit providers obsess over net neutrality, something equally harmful is lurking in the shadows. A little noticed provision in the Senate's "staff working draft" designed to expand the universal service funding base could have profound consequences.
Currently, consumers of "telecommunications" services contribute billions of dollars to subsidize telephone service in rural areas. "Telecommunications" include telephone, cell phone and, for the moment, DSL services. DSL has been deregulated, and the requirement that it contribute to universal service is temporary. VoIP contributes a small amount, but nothing like a fair share. The Senate staff draft expands the category of contributors and ensures that they all pay equally. Its true that the Internet backbone would not contribute to universal service, but so what? Everything that travels to or from the public Internet would pay.
Here's how this looks:
''(1) CONTRIBUTION MECHANISM.--
''(A) IN GENERAL.--Each communications service provider shall contribute as provided in this subsection to support universal service."
''COMMUNICATIONS SERVICE.--The term 'communications service' means telecommunications service, broadband service, or IP-enabled voice service (whether offered separately or as part of a bundle of services)."
''(A) BROADBAND SERVICE.--The term 'broadband service' means any service used for transmission of information of a user's choosing with a transmission speed of at least 200 kilobits per second in at least 1 direction, regardless of the transmission medium or technology employed, that connects to the public Internet for a fee directly--
''(i) to the public; or
''(ii) to such classes of users as to be effectively available directly to the public."
Setting aside the issue of VoIP -- whose free ride should clearly end -- advocates of expanding the funding base sound like tax collectors when they argue that spreading the burden will lower the individual contributions. Contributions that are set low initially are, of course, much easier to raise in the future. And that will happpen, because there are no limits on the growth of most of the universal service funding mechanisms.
Net neutrality advocates argue that network providers have the ability and the incentive to block access by consumers to the web sites of their choice. At a Mar. 14th Senate Commerce Committee hearing featuring several high-placed Wall Street analysts, this question was addressed:
SEN. STEVENS: Let me ask you about this net neutrality problem that two of you have mentioned substantially. Do you think a network operator could block access to a company like Google or Yahoo! and really get away with it?
MR. SZYMCZAK (JPMorgan): I think that would be very difficult to sustain on an ongoing basis because if we think about it in a competitive nature, if the phone company were to block it, a lot of customers would switch within that day or the next day to a cable operator. So it would always offer opportunities to the fellow who is not blocking it to take customers. So I think that pressure will make it very difficult to block access to an important service like that.
SEN. STEVENS: Go head, Mr. Bourkoff.
MR. BOURKOFF (UBS Investment Research): Thank you, Mr. Chairman. I agree. I think that blocking access would be a devastating outcome, but I think the middle ground is probably that there has to be a tiering structure put in place where some of the higher capacity content over the Internet that really requires a lot more bandwidth, you know, may have to pay more for packet prioritization for some of that content, otherwise there is a risk that the cap ex cycle will continue to increase and that there may be a sort of an un-equitable distribution of that capacity. So there should be equal access, in my view, of video content across the spectrum, but maybe at a defined capacity level. If it gets above or below that, there may be a tiering structure which could help differentiate that.
A group of Wall Street analysts provided key advice to the Senate Commerce Committee at a hearing Mar. 14th. The following excerpts are drawn from both oral and written testimony (emphasis added throughout).
In a nutshell, the consensus is that the investment outlook for broadband is somewhere between uncertain and bleak. Net neutrality or a la carte regulatory mandates would make the outlook worse.
"As media consumption over the Internet develops at a rapid pace, I believe that it is too early to introduce regulation on key issues such as a la carte packaging and pricing and on net neutrality as the market is still in its early stages. In fact, the broader media and communications sector is perhaps at its most dynamic stage of its evolution as media content is available across multiple platforms under various pricing structures. Changes are occurring at such a frenetic pace that any possible regulation today carries a risk of stunting this innovation if it does not build in enough flexibility for the complexion of the sector in the coming years, if not months....
Mr. Aryeh B. Bourkoff
Managing Director, Media - Cable & Satellite, Entertainment Equity & Fixed Income
UBS Investment Research
"Relative to telecommunications, we believe that Wall Street's biggest desire is to minimize the need to constantly re-evaluate the role of regulation in its investment decisions. We have enough to worry about in considering the rapidly changing competitive and technological environment. In other words, we want regulatory stability and certainty....
"I think it is important that we agree now that we can't imagine what will happen over the next ten years. It is then critical that any new regulatory framework takes this uncertainty into account and is sufficiently flexible."
Mr. Kevin M. Moore, CFA
Managing Director, Telecommunications Services Equity Research
"The capital markets see a bleak future for network operators. Cable stocks have suffered five years of valuation declines relative to the broader market. Telecommunications firms like Verizon and AT&T have been given similar treatment. Comcast's stock is punished every time the company's management even mentions the words "capital investment....
"Wall Street harbors grave doubts about the ability to earn a return on network investments. Excessive competition and an uncertain regulatory environment are dampening capital formation and slowing the pace of investment. That investment is critical though because despite a great deal of arm waving from visionaries, our telecommunications infrastructure today is woefully unprepared for the widespread delivery of advanced services, especially video, over the Internet....
"Downloading a single half hour television show on the web consumes more bandwidth than does receiving 200 e-mails a day for a year. Downloading a single high definition movie consumes more bandwidth than does the downloading of 35,000 web pages and it's the equivalent of downloading 2300 songs off of Apple's iTunes website. Today's networks simply aren't scaled for that kind of usage....
"Mandated net neutrality would further sour Wall Street's taste for broadband infrastructure investments, making it increasingly difficult to sustain the necessary capital returns. It would likely mean that consumers alone would be required to foot the entire bill for whatever network investments do get made. Conversely, from a Wall Street perspective, allowing a multiplicity of payers , that is , advertisers, or web services providers, to support network investments would greatly bolster the business case and would offer the prospect of better returns and more consumer choice in the end."
Mr. Craig E. Moffett
Vice President and Senior Analyst
Sanford C. Bernstein and Co., LLP
"...there is a high degree of skepticism that the substantial investment
underway at the ILECs to build broadband networks to the home will deliver a satisfactory return
on the incremental investment. It is true that sometimes investors can be too skeptical, and it
seems that telecom investors have become extremely risk-adverse. However in the case of
broadband access network investments, the skepticism seems entirely rational given that there
has yet to be a proven business model. Memories of the telecom meltdown that started in 2000
and resulted from the big spending programs of the late 1990s which proved to be based on
entirely misplaced hopes and business models contribute to the skepticism. The big question is
whether carriers' plans are more realistic and achievable this time around. It a question for
which one could make either a positive or negative argument, and the answer will come only
with time, and thus the caution."
Mr. Luke T. Szymczak
JPMorgan Asset Management
An article by Robert Litan highlights some of the efficiencies that broadband could mean for health care, as quantified in a recent study by the same author. The potential applications and anticipated savings are fascinating. Litan cites one study, for example, which found that broadband-based remote monitoring for all chronically ill patients could reduce hospital, outpatient, and drug expenses by 30 percent -- reducing overall health care expenses for the United States by roughly one quarter, or about $350 billion annually. (See "Massive Economic Benefits Foreseen:
Ultra-fast telemedicine and telecommuting can save money and improve quality of life," by Robert E. Litan.)
Mayors and city councils are the chief threat to affordable broadband, as my colleagues and I often remark. Many places, like my hometown of Portland, Oregon, for example, tax telecom because they don't have to get taxpayer approval (they know they couldn't get that). But unfortunately for the Portland City Council, Oregon has the initiative and the referendum. The City Council wanted to raise taxes on cellphones, but the industry signalled its intent to call for a referendum (a poll showed that 58% opposed the cellphone tax).
Telecom taxes and cable franchise fees are generally viewed only in terms of local government's insatiable need for cash. As a result, these services are taxed nearly the same as alcohol and tobacco. A growing number of lawmakers are focusing on the fact that localities with higher taxes experience lower investment in broadband networks and increasingly force themselves into the corner of having to subsidize risky municipal networks. In Virginia, where the average phone bill is 30% taxes, the Legislature has taken a huge positive step in establishing a 5% flat tax on all communications (incl. video) services (see "Communications tax passes," in the Richmond TimesDispatch). All competitors will be treated equally, and most taxpayers will see a reduction in what they have to pay for communications services. This is a farsighted move that will attract investment to the state and ensure that Virginia is one of the first and not (like Oregon, I fear) one of the last states to get real broadband.
AT&T, BellSouth and Verizon are pursuing radically different approaches in the quest to deliver real broadband to the American home. With capital expenditure concerns in mind, AT&T and BellSouth are extending fiber to the the neighborhood. There will be a large market for this type of broadband until sometime in the next decade. Verizon has made the decision to bring fiber directly to its customers' premises. Many naysayers are highlighting the challenges confronting Verizon (see, e.g., "Verizon Hits Hurdles in Big Bet on New High-Speed Network" in today's Wall Street Journal). But they ignore that the costs of laying fiber are decreasing rapidly and will be approaching that of DSL later this decade. Verizon's optical network will be mostly installed and paid for when its major rivals scramble to extend and re-engineer their own antiquated DSL architectures sometime during the next decade.
George Gilder analyzes the potential of DSL and fiber in the March 2006 edition of the Gilder Technology Report ("The VDSL2 Silicon Slalom") ($).
One of history's great propaganda experts believed that if you repeat a lie often enough it becomes the truth. A lot of politicians follow this advice.
The Consumers Union and the Consumer Federation of America endlessly wave the same bloody shirt of higher phone rates. The latest incantation is:
"If approved, [the] merger [between AT&T and BellSouth] will lead to higher local, long distance and cell phone prices for consumers across the country."
This is absurd because AT&T and BellSouth do not compete against each other for local or mobile phone services. And any competition between them in long distance is de minimis. The consumer groups see these companies as potential competitors. They have argued unsuccessfully for years that antitrust enforcers should take a more active role protecting and nurturing potential competition. This would require a clairvoyance that government simply does not possess.
The consumer groups also repeat their second most frequent remark:
"Telecommunications has now gone from a regulated monopoly to an unregulated duopoly with just two major players."
The implication seems to be that there is barely any difference between a monopoly and a duopoly. Sometimes that's true, but a fact-specific analysis is required. The answer depends on the barriers to entry. Telecom used to bear the hallmarks of a "natural monopoly" where the barriers were very high. But technology has led to plummeting costs for network equipment and Congress eliminated the legal barriers in 1996. So any company who abuses a dominant position will simply invite competitive entry.
VoIP and cellphones are destroying traditional wireline phone services as the phone companies invest everything they can to become broadband providers. This has got to be one of the most dynamic markets in the world today. Why would anyone want to turn back the clock?
Well, that didn't take long. On Tuesday night the Indiana General Assembly passed the nation's most far-reaching telecom deregulation, which Gov. Daniels has said he will sign. Today, Friday, I see telecom crews surveying rights of way around my neighborhood to lay new optical fiber. Let's start the clock and see how long until the optical multimegabits reach my house. Ready, go....
A survey conducted by the American Consumer Institute documents significant consumer savings as a result of the statewide franchise legislation enacted in Texas. For example:
"The benefits claimed by those who switched were very substantial. According to the survey, customers that claimed benefits from switching to a competitor saved, on average, $22.50 per month on their cable bill, and those switching to any provider saved, on average, $22.27 per month. This suggests that price competition is occurring among the providers. For these customers, the savings represented approximately a 30% decrease in price, which is nearly identical to the FCC's estimate of 27% lower price per channel in competitive markets (footnote omitted). From this, we can safely assume that the new competitor dropped prices and incumbents responded -- either preemptively or post-entry -- by offering similar discounts. The result is that competitive entry has led to heightened price competition, and, as a result, consumers are saving."
The Indiana General Assembly tonight approved the nation's most far-reaching, far-sighted telecom legislation, substantially deregulating the industry and radically simplifying the local video franchising process. Growing up here and living here now, I have a special interest in this effort and hope to see crews stringing optical fiber near my house soon. Gov. Mitch Daniels soon will sign THE BEST telecom law in America. Will other states follow?
House Energy & Commerce Chairman Joe Barton (R-TX), along with Reps. Chip Pickering (R-MS) and Fred Upton (R-MI) have an alternative plan in mind for cable franchise reform, according to this afternoon's National Journal's Technology Daily ($). Like the Dingell plan, the Republican vision includes a national franchise according to which new entrants would pay the customary 5% franchise fee to localities. But the Republican is superior in two critical respects:
- No build-out requirement.
- No requirement to negotiate with local franchise authorities as a pre-condition to obtain a national franchise.
It may sound counterintuitive, but the absence of a build-out requirement is actually better for consumers because it reduces investment risk. Tens of billions of dollars are necessary to extend fiber to the neighborhood or to the home. That investment won't happen if new entrants are subjected to monopoly regulation.
A negotiation requirement, like the one in the Dingell plan, is a waste of time and just increases the likelihood that new video entrants will have to charge higher prices than necessary.
Technology Daily also repeats an earlier report that "net neutrality" is dead, at least for this session of Congress. There is too little time and the issue strikes many as too complicated.
Actually, it is quite simple. Clear away the major obstacle to massive investment in local fiber network capacity (the anachronistic local franchise process) and let abundant new bandwidth do away with the need for Quality of Service algorithms.
A draft franchise reform proposal authored by Ranking Member John Dingell (D-MI) of the House Energy & Commerce Committee, details of which were reported in today's Communications Daily ($), increases the likelihood that final legislation would:
- Allow new video entrants to avoid in-kind contributions to cities (currently averaging approx. 3% of gross revenues) on top of the customary 5% (of gross revenues) fee,
- Would give the new entrants 10 years to provide their service to every household, and
- Allow the incumbent cable operator to opt in to the streamlined process as soon as the new entrant has a 15% market share.
Dingell, who has traditionally defended the cities on franchise issues -- and intends to do so again -- reportedly would establish a default national franchise which would kick in if negotiations between a city and a new video entrant fail. The proposal would also establish a 90-day deadline for negotiations, although either side could restart the clock.
Build-out requirements, although anticompetitive, are defended as necessary to protect consumers. This proposal demonstrates how in fact they are simply a type of negotiating leverage for the cities. If a new entrant chooses to walk away from the negotiations and opt for the default national franchise, it would be stuck with a 10-year build-out requirement while the city would lose any opportunity for in-kind contributions. Clearly, the negotiations are seen as an opportunity for new entrants seeking more favorable build-out terms to contribute to the favorite charities of local officials as a quid pro quo.
Supporters of this process of give and take pretend that there are no victims, which there are. The contributions will be recovered through higher prices for competitive video services, so the in-kind contributions are properly understood as a hidden tax.
This week's hearing on local franchising in the Senate Commerce Committee was breathtaking. Senator after senator expressed doubts about the wisdom of subjecting new entrants to the cable franchise process. Consumer advocates generally supported the phone companies. The same day, a group of 6 Republicans and Democrats on the committee signed a letter stating that Congress should reform the franchise process.
"I think the stars are aligned," noted Senator Jay Rockefeller (D-WV).
One gets the impression that the cable industry hasn't been paying attention for the past 25 years, as they take positions and employ arguments that monopolists have used in the past with little-to-no success (see, e.g., Deal of the Century: The Breakup of AT&T , by Steve Coll).
Most members of the Senate Commerce Committee are committed to "pro-competition" policy, a result-oriented philosophy that embraces regulation and allows for picking winners and losers. A good example of pro-competition doctrine was the observation made by the Consumer Union's Gene Kimmelman at the hearing, that "a transition always requires some benefits to the new entrant."
This is also called asymmetric regulation, and it may produce quick results. But those results can be short-lived -- as in the case of CLECs -- since inefficient compeititon is unsustainable in a deregulated market. Both the telephone and cable companies are big enough to take care of themselves, and, like Senator Conrad Burns (R-MT) said, should be subject to the same rule book.
This week's hearing produced a lot of consensus that a regulatory rule book would stifle competitive entry. Hopefully the committee will draw the logical inference that what is needed now is a deregulatory rule book.
Yesterday the head of the trade association representing most of the nation's telephone companies testified that telephone companies will not block, impair or degrade what consumers and vendors can do on the Internet.
"Today, I make the same commitment to you that our member companies make to their Internet customers: We will not block, impair, or degrade content, applications, or services. That is the plainest and most direct way I know to address concerns that have been raised about net neutrality."
--Walter B. McCormick, Jr.
President and Chief Executive Officer
United States Telecom Association
February 7, 2006
As a practical matter, a voluntary commitment is significant because it is a de facto standard by which the actions of individual companies will be measured by consumers, investors, regulators, legislators, judges and the press. The mistakes and excesses become easier to fix because the range of what is subjectively okay and not okay is significantly narrowed. As if this weren't enough, the FCC has a similar policy. Some argue that the FCC's "ancillary jurisdiction" may limit its freedom of action to enforce the policy. I completely disagree. In 1968, the Supreme Court upheld the FCC's use of ancillary jurisdiction to regulate the cable industry even though Congress had declined to pass a cable act. If the FCC needs to take enforcement action in the future to prevent blocking, impairment or degradation on the Internet, a reviewing court now has a standard as well as precendent to follow.
To the extent that net neutrality was ever a problem, it has been effectively solved.
The Wall Street Journal this morning updates the evolving story of how bandwidth pricing might change as more content and applications move from the traditional phone and cable TV networks onto the Net.
The phone companies envision a system whereby Internet companies would agree to pay a fee for their content to receive priority treatment as it moves across increasingly crowded networks. Those that don't pay the fee would find their transactions with Internet users -- for games, movies and software downloads, for example -- moving across networks at the normal but comparatively slower pace. Consumers could benefit through faster access to content from companies that agree to pay the fees.
The size and structure of the fee systems remain to be worked out, and the regulatory implications aren't clear. But already, the phone companies are meeting heavy resistance from companies that say making them pay for priority delivery of their content amounts to holding them ransom, thus hurting competition and, ultimately, the consumer.
"They want to charge us for the bandwidth the customer has already paid for," said Jeffrey Citron, chief executive of Vonage. Customers who already pay a premium for high-speed Internet access, he said, will end up paying even more if online services pass the new access charges to consumers. "The customer has to pay twice. That's crazy."
Google, Vonage, and many other Internet companies are seeking "net neutrality" legislation to regulate how network operators manage and price their bandwidth. Jeffrey Citron is a brilliant guy -- hey, I'm a happy Vonage customer; I pay him $50 a month -- but his claim that the network providers want to charge twice for the same product is false.
As more and more content and data moves over the Net, and as the nature of that content -- rich video, voice, high-definition video conferencing -- requires more reliable connections with very little latency and jitter, a few things happen: One, network operators must spend billions of dollars on new fiber-optics, electronics, and software to meet this bandwidth surge. Two, revenue from the service providers' traditional products -- telephone voice or cable TV channels -- goes away. This has already happened with voice (long distance does not really exist anymore) and will begin to happen soon with cable (the Net radically affects the cable company's position as content middle-man). But just because the traditional products of the phone and cable companies are being disrupted does not mean these firms are not providing a valuable service. As more and more of our lives move to the Net, that connection to the wider-world becomes ever more valuable. For years I have been saying that far from broadband prices going from $40 per month down to $10 per month, as many hoped and suggested, I thought broadband prices might go up. A reliable big pipe through which you get your entertainment, news, and education, and over which you conduct your business and interact with family and friends, is worth a lot of money. If the companies head in this direction, they won't be "charging twice for the same product," they will be charging more for more bandwidth and more reliable service. Whether they charge the end user, the content provider, or some mix of the two is a matter of business strategy. Not a matter of regulation as Citron and others would like. Someone has to pay for the many tens of billions of dollars the telecom and cable companies are spending to provide these new, advanced network services. Mr. Citron wants them for free. Hey, so do I. But that's not the way it works. Mr. Citron knows that, and so do all the Silicon Valley companies feigning horror. They are just taking a shot at duping politicians into giving them a free lunch.
Although the phone and cable companies will still be in the content business to varying degrees (the less the better from my perspective), they will chiefly be in the business of connectivity. I had been very worried that the telecom and cable companies would try to do it all -- that is, integrate content and conduit while ignoring the vast diversity and creativity of content and applications out on the Net. The new direction they seem to be headed -- charging for connectivity , not focusing only on in-house content or blocking the content of others -- makes me think they are starting to get this key concept of the Net: that millions of content producers across the globe can do it better than can the phone or cable companies using a "walled garden" approach.
Consumer groups are, typically, apoplectic about these changes and are, typically, clueless.
"They want to radically change the way they sell telecommunications service," said Mark Cooper, research director of the Washington-based Consumer Federation of America.
Yes, Mr. Cooper, that's what the Internet is doing: forcing all sorts of companies to adapt to a radically different world. If the telecom and cable companies did not adapt, they would go out of business and leave Mr. Cooper's precious consumers in far worse shape.
A revised staff draft is circulating in the House Energy & Commerce Committee. The proposal is more deregulatory in several important respects and marks solid progress in the effort to promote investment and foster innovation. For example:
- Although competitors would still be required to file registration statements with the FCC, the agency is given far less latitude to pervert the requirement in order to limit or condition entry.
- Immediate access to public rights-of-way and compatible easements is guaranteed for Broadband Video Services (BVS) and, now, for Broadband Internet transmission services, as well.
- The definition of BVS has been simplified. The first draft contained a definition intended to push technology in a particular direction. That definition was reminiscent of the "Open Video System" provision in the 1996 Act that has been so successful that no one has chosen to build a business around it. Although intended to benefit consumers by ensuring access to many sources of content, OVS actually harmed consumers by delaying competitive entry in the video market. The definition in the second draft is closer to letting the market decide, with further simplification needed.
- The placeholder for a BVS buildout requirement has been removed and the video content regulation that would apply to BVS whould be comparable to multichannel video programming distributors not cable operators. This would be less regulatory for BVS, but there ought to be a single new standard that is less regulatory for everyone. Fortunately, the draft does direct the FCC to revisit the regulations in 4 years and eliminate the ones that are no longer necessary as a result of meaningful comptition. That would be all of them.
- The net neutrality provisions have been improved slightly. The goal of preserving consumer access to lawful Internet content and services is commendable. But "network neutrality" overlooks evidence of the profitability of niche content. It is and should be called "Brand X: Plan B," because, like the lawsuit, its purpose is to substitute regulation for competition.
Much work remains. The new proposal would still lead the FCC to regulate the Internet, expand bloated Universal Service mechanisms and molest legitimate competition in the name of net neutrality and interconnection. But its moving in the right direction.
Should it be illegal to offer a discount to a customer who wants to buy a bundled product?
According to Reuters, six firms allege that Qualcomm is stifling competition in the mobile phone chip market by offering preferential terms on patent royalties to manufacturers who also buy Qualcomm's chipsets. The six firms have filed a complaint with the European Union's antitrust regulators, who are sympathetic to any argument that competition is a bad thing when undertaken by a large company.
The report makes no mention of whether the preferential terms are alleged to be predatory, or whether the bundling constitutes tying. The question is whether the complaint is just an attack on legitimate economies of scope and scale.
EarthLink announced it has been awarded an "exclusive franchise" by Anaheim, Calif. to build a citywide Wi-Fi broadband network. Hmmm.
47 U.S.C. Â§ 253(a) says:
"No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service."
City officials in Ashland, Oreg. have delayed their plans to raise electricity rates by $7.50 per month to cover the unexpected cost of their municipal fiber network. Meanwhile, the local newspaper calculates the problem could be solved if 90% of the customers of Charter Communications switch over to the municipal network and "accept steep price increases to top market rates." They might as well outlaw private enterprise while they're at it.
Often lost in the public policy debate on municipal telecom networks is any halfway serious discussion of technology, and thus of economics. Yes, I know that Wi-Fi wireless access has been upgraded to a "fundamental right" in San Francisco even as the Supreme Court says mere property rights have now been Constitutionally downgraded. But beyond these silly new assertions by politicians and judges, what does the technology tell us about where broadband access in general and wireless access in particular are headed?
Helping to answer these questions is a Qualcomm marketing executive named Jeff Belk. Several years ago, Jeff penned a series of popular riffs and white papers chronicling his experiences
with Wi-Fi hotspots. Wi-Fi is great, he insisted, for lots of things. But not as a replacement for ubiquitous mobile voice and data. At the time, Wi-Fi was hyped as a replacement for 3G mobile wireless networks. Didn't happen. Isn't going to happen.
Now Jeff is back with a new paper
on Wi-Fi's bigger but newer cousin, WiMAX. Written for the layman, Belk's paper debunks the "magic" of Wi-Fi and WiMAX often repeated by politicians, journalists, and even many in the technology community. He does not dispute significant roles for these technologies but urges fellow executives and technologists (and by extension, public policy makers) to get real. No more bull that ignores the real performance and practical economics of competing technologies and solutions.
Over the years, George Gilder and I have made many of the points contained in Jeff's paper (most recently in the August 2004 and April 2005 issues of the Gilder Technology Report, which both focused on 3G, WiMAX, and Wi-Fi). Belk's analysis is not exhaustive, but it raises important questions, and although Belk works for the leading 3G wireless technology company, his views are reinforced by the fact that Qualcomm just bought Flarion, a start-up would-be competitor who was developing a type of WiMAX system. Although Qualcomm has been working for many years on OFDM (orthogonal frequency division multiplexing) technologies, the basis for the WiMAX standard, and acknowledges OFDM is and will be useful in many wireless settings, Flarion has developed its own substantial OFDM intellectual property portfolio. Together these companies now probably have more OFDM expertise than the actual WiMAX companies do combined.
Also on point is a new analysis
from Andy Seybold, which questions the rosy deployment scenarios (and thus the performance and finances) of metro Wi-Fi. Tropos, the top supplier of these mesh Wi-Fi systems, is making advances, as its articulate CEO Ron Sege made clear at our recent Telecosm conference in Lake Tahoe. No doubt he is thrilled that his product has been declared a new right. What all CEOs would give for such a declaration.
Sege makes an at-first-blush compelling case that Wi-Fi can "disrupt from below" in the classic Clayton Christensen model of disruptive innovation, where a product that is cheap and inferior, but good enough to attract a niche market, can eventually rise up to displace the robust incumbent. But in the end I don't think Wi-Fi fits the classic case of disruption from below because classic disruption requires the disruptee to be in the realm of overshoot. Overshoot is defined as giving customers more performance and functionality than they really want or need. I don't think either broadband or mobile communications are in a state of overshoot (are you perfectly happy with coverage, speed, and voice quality?). My PC might be in overshoot but not my mobile phone or DSL line.
Anyway, Seybold's analysis, and Belk's, should be balanced against Sege's claims, and those of mayors and hypesters everywhere.
What happens when a municipal broadband network fails to cover its costs? The costs get shifted. Residents of Ashland, Oregon will see a monthly surcharge of $7.50 on their electricity bills. Ashland's cable rate payers will also get hit with a surcharge. (See the article from the Ashland Daily Tidings.) The fact that Ashland's fiber network is not profitable, that Ashland cross-subsidizes it and that Ashland's taxpayers/captive rate payers will foot the bill for a bailout proves what many of us have been saying about municipal networks: (1) Cities lack the expertise to successfully build and operate broadband networks, (2) Cities will discriminate in favor of their own network ventures and (3) Cities are unprepared to continually modernize the networks once built.
The reaction to the draft broadband proposal in the House reminds me of the horror and/or ridicule that greeted each one of the many drafts of what became the Telecommunications Act of 1996. A proposal that is designed to hopefully have a chance of being enacted is always a disappointment (see House telecom proposal opens new frontiers for regulation). Its also not a bad indication where the process would ultimately lead if nothing is done to educate the public about the benefits of deregulation.
The problem is a lack of faith in free markets and a skepticism that deregulation works. Even supporters of deregulation fret over whether there is a right way and a wrong way to do it -- this is the worst thing of all because it leads to partial
deregulation which is always a failure.
Despite the enormous benefits of airline deregulation, many Senators and Congressmen still fixate on the fact that smaller airports used to be served by full-sized jets (that flew mostly empty). Some are also haunted by memories of the breakup of AT&T, which was viewed as a messy failure for years. And many have spent too much time listening to the paranoid rantings of the fly by night "entrepreneurs" hoping to make a quick buck in telecom. Congress should relax, because technology has destroyed barriers to entry. Market forces will correct the problems.
Sadly, I do not think think the underlying political environment has improved since 1995. There is no constituent pressure for telecom reform, and there never has been. The telecom and cable industries have worked hard to educate Congress, but haven't been willing to invest in public education because of the time and expense. The 1996 Telecom Act made it through despite a lack of public support, because some powerful legislators in both chambers were personally committed to it. But the law that passed was weak and ambiguous.
Philadelphia's city-run Wi-Fi project seems to be in trouble before it begins. Mike Langberg of the San Jose Mercury News says the city is realizing initial cost projections were way too low and expections were way too high. I said a year ago the $10 million cost figure was "implausible" and that the number of required network nodes would explode from the original projection of 1,000. PFF also questioned Philly's plan and recaps the story here.
I may have been wrong, however, to suggest last year that Philly's project wouldn't fail: "I doubt any municipal wireless project has failed, or ever will," I wrote. "Have you ever heard of a government program that failed? This is the fundamental failure of non-market activities: the inability to fail. Because you have unlimited inputs and unmeasurable outputs, and because cost and value are unknown and profits and losses are not internalized, there is no feedback, there is no learning curve, there is no signal to stop."
Anyway, maybe I was too pessimistic, and maybe Philly pols have come to their senses. But don't count on it.
Telecom merger opponent ACTel trumpeted the results of a survey it commissioned of telecom managers at Fortune 1000 companies who are customers of AT&T or MCI. ACTel claims its survey shows that roughly two thirds of the managers express concern about the mergers. The timing of the survey suggests that that the merger approval process is entering a critical phase. For ACTel and a few others, the mergers are an opportunity to: (1) Force SBC-AT&T and Verizon-MCI to divest valuable network assets and enterprise accounts at bargain basement prices and (2) Roll back some of the recent efforts by the FCC to reduce harmful regulation.
AT&T and MCI largely abandoned their efforts to compete in the mass market, so the mergers will not substantially lessen competition for consumers. The relevant product market for purposes of this debate is large and medium enterprises, i.e., corporations who have telecom managers and budgets for consultants. These customers can take care of themselves. AT&T and MCI still have extensive portfolios of profitable enterprise accounts, which were built up before competition from wireless, VoIP and the regional telephone companies. The distinction between local and long-distance means nothing today. The same is true of voice and data. That’s why AT&T, MCI and other one trick ponies are finding it difficult to carry on. In fact, AT&T and MCI were probably no longer sustainable. The FCC and the Antitrust Division must not overlook this, nor the fact that these mergers are needed to enable the carriers to reduce unnecessary costs and ramp up investment in innovation.
The danger is that the merger review proceedings offer unparalleled opportunities for competitors to try to expropriate the merger synergies. The FCC is under no statutory deadline to approve or disapprove a merger application, and the agency has found it convenient in the past to sit tight and wait for the politics to settle. FCC merger proceedings, observed former House Commerce Chairman Billy Tauzin, “can leave applicants slowly twisting in the wind to be picked apart by both regulatory enthusiasts and private party shakedown artists.” Merger applicants such as SBC-Ameritech were forced pry their applications loose by cutting deals with their rivals. The deals were called "voluntary conditions," and they went beyond what the FCC could have imposed on the industry by regulation. The self-serving rhetoric of some industry participants reveal that they may be determined to take the agency down this road again.
There was some good news this week: FCC Chairman Kevin Martin is reported to have instructed his staff to begin drafting approval orders.
News that Intel has agreements to deploy Wi-Fi with governments in 13 countries, coupled with (a)burgeoning interest among US municipalities for such deals and (b)rejection of attempts by telephone companies to erect legal barriers to same, all augur a fundamental shift in the structure of teleccom in America, should municipal deployments suceed. (If they fail, everything returns to SQA.) Telephone companies committed the political error of trying to stop deployment outright, arguing that the umpire (regulator) must not also play in the game (of providing local phone service). The argument has merit, but companies whose reputation for customer service is now at rough parity with that for the airlines are in no position to stop politically popular ideas. Better to argue for fair rules of the road. More important, however, is the log-term question: If municipalities provide local basic connectivity, what rationale remains for imposing "last resort" universal service responsibility on local telephone companies? Answer: None whatsoever. Do not expect a shift to take place until substantial facts on the ground change. Just as it took America falling to 15th in broadband deployment to awaken the FCC re the need for deregulation of DSL, it will take massive number shifts in local deployment to make ending universal service obligations possible. It could, however, eventually happen.
Back in 2001 I wrote about a technology company with a funny name that in a round-about way helped make the case for telecom deregulation. Narad Networks had developed sophisticated analog signal processing techniques that dramatically expanded the usable spectrum of the coaxial cables used in cable TV networks. With current analog and digital programming running from 5 to 860 MHz, Narad's network updates would open the spectrum up to 1.2 GHz, boosting by 50 percent the already considerable capacity of the cable companies' hybrid fiber coax (HFC) networks. Over this newly available spectrum, Narad could run Gigabit or even 10 Gigabit switched Ethernet trunks, enabling dedicated switched Internet services of 10, 50, 100 Mbps -- whatever -- to homes....Or to small and medium sized businesses currently served by the telephone companies.
Although most businesses are not wired for cable TV, Narad's research showed that cable networks pass
some 70 percent of the nation's several million SMBs (small and medium businesses). Short runs of coaxial cable or wireless links from telephone poles could easily connect businesses as they signed up. The cable companies already compete in the enterprise market with CLEC leased lines and dedicated fiber connections (e.g., Time Warner Telecom, Cox Business Services), but now they could easily leverage their own existing coax networks and compete with the phone companies for the SMB communications market totalling some $35 billion a year.
Narad, however, struggled during the telecom crash, as all communications providers who didn't go bankrupt severely curtailed capital investments. The company founders, Dev Gupta and Andy Chapman, left, the company almost ran out of money several times, and management continued to turn over. Many of us lamented the surely imminent demise of this innovative company.
Several CEOs and tens of millions in new venture funding later, however, Narad said in late July that Cablevision, New York's main cable TV provider, had successfully trialed its system and would begin offering the new broadband business services
in Oyster Bay on Long Island. Narad has also had some success internationally.
Although the cable companies are still digesting and leveraging their recent $100 billion digital upgrade and have not yet taken the plunge on Narad-like broadband upgrades, cable's potential to compete with the phone companies in the mid-range telecom services market is now clear. The phone companies want to offer video. The cable cos want to offer voice, data, and “storewidth” services. Federal, state, and local officials should be telling them: Go for it.
The Federal Communications Commission's August 5 decision deregulating Digital Subscriber Line, thus giving DSL regulatory parity with cable Internet service, and ending the Computer Inquiry Rules (some of which date back nearly 30 years) is a welcome sign indeed, surprising in both its quick action and its breadth. That the FCC acted so swiftly despite a Supreme Court ruling (the "Brand X" case) giving the FCC carte blanche to continue treating DSL more harshly than rivals, attests that Chairman Kevin Martin, he of the 2003 swing vote for state broadband prerogatives, is a genuine convert to real deregulation. The reluctant acquiescence of the agency's two Democratic commissioners attests to growing Beltway realization that Asia is bypassing US in the race for global telecom supremacy.
Two things should be noted, however: (1) had the Supremes affirmed the Ninth Circuit in Brand X the FCC could still have taken the same action; (2) the vast discretion the Brand X case leaves the FCC with is like a loaded gun, awaiting the next Reed Hundt or William Kennard chairmanship to fire virtually at will.
The Ninth Circuit had merely told the FCC to treat DSL and cable access alike, neither specifying deregulatory nor regulatory parity; it is inconceivable that had the Supremes affirmed the Ninth the FCC would have reregulated cable rather than deregulate DSL.
The Bush FCC now seems solid for deregulation under the 2005 incarnation of Kevin Martin, with the White House now likely to appoint a deregulator as the fifth commissioner (third Republican) and likely to replace departing Commissioner Kathleen Abernathy with another deregulator. Things look good through 2008--far better than they looked to this observer even a month ago.
However, let Hillary win in 2008 and appoint female Hundts and Kennards, and the FCC's vast power will again be abused, with severely curtailed scope for judicial review thanks to Brand X's sweeping deference to the FCC. Giving such power to an agency that has been reversed as frequently as has the FCC, and has also been judicially chastised several times in recent years for evading clear court rulings, is not sound precedent. The 2008 election thus becomes more significant for telecom policy than it otherwise would be.
Somehow FCC chairman Kevin Martin got a unanimous 4-0 vote to reclassify DSL as an "information service," largely freeing it from legacy telephone regulation. After the recent Supreme Court Brand X ruling, Martin said deregulatory moves would be forthcoming, but this is quick action.
The FCC also issued a policy statement on "net neutrality," however, that could open up vast new realms of regulation and must be closely watched.
Two steps forward, one step...we'll see.
There Tom Friedman goes again.
This morning, in "Calling All Luddites," Friedman offers a perfect example of his frequent, curious, and infuriating tendency to find an important topic, report on it with keen and witty observations, and then offer exactly the wrong solution to the problem.
The best example of this is his good handle on globalization and the competitive pressures it puts on Americans and American businesses (he's written two books on the subject). A very big, important topic, the essence of which Friedman captures for a popular audience better than most. Friedman's solution? Raise tax rates on entrepreneurs and investors!
Same thing this morning. He identifies a key shortcoming -- America's lagging communications capabilities compared to our international neighbors. Chiefly bad cell phone coverage and slow or nonexistent "broadband." He correctly says it should be a high national priority. Friedman's solution to this problem, which exists mostly because of too much government involvement via micromanagement and price controls from Washington and the 50 states? Government should jump in to make things better!
The latest broadband deployment report from the Federal Communications Commission (FCC) announced a 34% jump in total high-speed (broadband downstream, narrow-or broadband upstream) lines, from 28.2 to 37.9 million at year-end 2004. 35.3 million of these lines (93%) were to residential and small business users. DSL jumped 45%, from 9.5 to 13.8 million lines; cable modem lines rose less sharply, 30%, from 16.4 to 21.4 million lines. The remaining 2.7 million lines were for miscellaneous access modes, with 700,0000 fiber or powerline and 500,000 satellite. Advanced service (two-way broadband) lines rose 42%, from 23.5 to 28.2 million lines, with 26.4 million of the 28.9 million total (94%) representing residential and small business users. Advanced service thus represented 76% of all broadband connections at end-2004. Bidirectional lines at 2 megabits-per-second stood at 400,000 at end-2004, with 60 percent optical carrier and 21% traditional wireline. The gap between low-income (under $21,465) and high-income (over $53,494 up to $291,938) users has shrunk from 41 points (96% v. 54%) at end-2000 to 15 (98/8% v. 83.3%) at end-2004. Meanwhile, total domestic wireless connections crossed landline at end-2004, ahead 181.1 to 177.9 million, giving wireless 50.4% of the combined total.
Recently new FCC Chairman Kevin Martin called broadband growth a top priority and pledged further deregulation. But he doesn't yet have the votes, with two opposing Democrats (Jonathan Adelstein and Michael Copps), one vacant Republican seat (his, when he moved up to Michael Powell's chairman seat) and one departing staunch Republican deregulator (Kathleen Abernathy). The numbers above provide Martin with useful ammunition in his stated quest for less regulation.
First, wireline dominance is hard to establish with more wireless links in service than wireline. Second, low-income users have sharply narrowed the usage gap between them and wealthier users. Third, while US "fast web page download" broadband--the FCC's definition begins at 200 kilobits-per-second access, about four times dial-up access speed--is growing nicely, the 2 megabit category still is under one million. South Korean and Japanese users have speeds five to twenty times 2 megabits, for many millions of users. They have what amounts to Turbo-Broadband while we make do with access speeds ranging from Narrowband Deluxe to Broadband Lite. Ranked 12th in global broadband deployment, the US is losing broadband leadership to the East.
Will these arguments carry the day? They should, but never underestimate the pressure state commissions can put to resist deregulation. Also, the Bush White House shows no signs of regarding broadband as a serious policy priority. Martin's main job seems to be to keep the FCC from stirring up hornet's nests with either Congress or the press. Thus do the odds still favor glacial movement, if at all, towards full broadband market deregulation.
FCC Chairman Kevin Martin has now offered the closest thing to a constructive and coherent broadband policy the U.S. has seen in the decade following the '96 Telecom Act. (Reed Hundt and William Kennard had coherent, but disastrous policies.) In a statement following the Supreme Court's Brand X decision and in a Wall Street Journal op-ed this week, Martin said the communications marketplace is vibrantly competitive and that "legacy" telecom rules should be pruned or eliminated to encourage broadband investment. This is welcome, if long overdue, news.
Martin errs, however, in comparing U.S. broadband favorably with Asia. Martin lauds new FCC numbers showing rapid growth of U.S. "broadband" users -- the fastest growth rate in the world, he says. The real metric, however, is not "broadband" users, but last mile bandwidth per capita. The FCC's silly 200 kilobit per second definition of broadband makes the U.S. look far better than it is. Some American cable modems that now approach 6 megabits per second might be considered broadband, but by Asian standards the U.S. has very little broadband at all. Martin says Massachusetts has just as much broadband as Japan -- comparable in population density -- but a 750 kilobit DSL user in Massachusetts is not the same as a 20 megabit VDSL or fiber user in Japan.
Japan, in fact, has some 20 times the per capita last mile bandwidth of the U.S. (including 3G wireless). South Korea has about 40 times America’s per capita bandwidth. Adjusting for population density, these Asian nations still have at least 10 times more.
Martin's policy is finally on the right track, but deluding ourselves with misleading statistics will only yield further incremental policy changes when what is truly needed is a swift, far reaching, and strategic unleashing of America’s communications companies and entrepreneurs.
Some have hailed last week’s Supreme Court decision in NCTA v. Brand X Internet Services as a triumph for deregulation, particularly in the wake of Chairman Kevin Martin’s subsequent statements to the press that the FCC will move quickly to establish deregulatory parity between telephone and cable companies. That’s extremely welcome news. But there’s more here than meets the eye.
The Court upheld a regulatory regime in which DSL is subject to costly common carrier regulation and cable modems are not. The record showed that the decision to penalize one and reward the other is based on one set of considerations for the telephone companies (history of regulation, in effect) and another for the cable companies (contemporaneous market conditions). Arguments were made that the inconsistency is arbitrary and capricious, but the Court brushed them aside. Nor would the Court consider how the FCC should or lawfully may treat DSL.
Cable modems have enjoyed a substantial lead in the marketplace vis-à-vis DSL since the FCC began keeping track in the late 1990s. Finally, three years ago the FCC issued a notice in which it tentatively concluded that DSL should be treated the same as cable modems. There is still no final decision, and nothing in last week’s Supreme Court ruling forces the FCC to move.
Discovery’s John Wohlstetter observes that if the decision had gone the other way the FCC would have been forced to do something, and that re-regulating cable would not have been an option. As it is, we shall have to see.
The bottom line here is that the FCC is engaged in a form of “industrial policy” – picking winners and losers – and last week’s Supreme Court ruling highlights the limitations of judicial review.
First, a welcome to all of our new readers.
Grokster's Loss is America's Gain by Thomas W. Hazlett, Wall Street Journal, 29 June 2005, p. A14.
The Price War For Broadband is Heating Up by Dionne Searcey, Wall Street Journal, 29 June 2005, p. D1.
Thomas Hazlett, a fellow at the Manhattan Institute, joins the chorus praising the Supreme Court's unanimous ruling in MGM Studios vs. Grokster. The real title of this piece should have been "Why Brand X is good for America" - referring to the Supreme Court's decision in National Cable and Telecommunications Association v. Brand X, which Hazlett writes makes a "bigger property rights mark" than Grokster (the Grokster case largely followed from the logic of the Supreme Court's earlier ruling against the file sharing service Napster).
The meat of the piece reads:
Marketplace evidence strongly rejects the hypothesis that broadband network sharing rules are pro-consumer, a conclusion bolstered by an interesting experiment. In February 2003, the Federal Communications Commission elected to substantially pare back the network-access obligations shouldered by phone companies. The terms on which independent Internet Service Providers could use telephone networks to provide DSL, were made much less favorable. Newspaper headlines announced that this would increase the price of broadband service and slow its deployment across the U.S.
The reverse occurred. With expanded property rights, and reduced regulatory overhang, phone carriers became much more ambitious in deploying and marketing broadband. DSL price cuts and build-out led to cable-modem price cuts and upward-spiking subscribership. DSL is now running even with cable-modem providers in terms of new subscribers, closing a huge market-share gap. Consumers, expressing their own choices in the marketplace, prefer the less regulated alternative.
Hazlett is referring to regulations in the 1996 Telecom Act that have saddled phone companies with the burden of having to share their networks with competing Internet Service Providers (ISPs). The FCC ruled last year that this regulation did not apply to the cable companies providing broadband Internet services. DSL providers then sued to get the FCC to either establish one standard for both DSL and cable or stop enforcing the regulation.
Brand X essentially returns the issue to the FCC, and hopefully to Congress, which has a duty to either reform or scrap the outdated rules. While most Americans on the Internet, as in 1996, still rely on slow dial-up connections, this is changing fast. Consumers now have more ways than ever to get online.
Even if DSL providers are being unfairly hobbled in competition with cable, the answer is not to hamstring cable Internet as well. Also, the cable ISPs now face stiff competition from rival cable companies in several major U.S. cities. Dionne Searcey's piece focuses on the bidding war between SBC and Comcast, with independent websites highlighting the best deals for customers to take full advantage of their rising pricing power.
The U.S. Supreme Court's ruling this week that cable companies don't have to share their high-speed Internet connections with rivals prompted fears that cable broadband prices will rise in some markets that have few independent providers. But in competitive markets, the ripple effect of SBC's broadband price cut has set the stage for lower prices as phone and companies look to reel in customers and offer them other services.
Furthermore, focusing on the legal sound and fury between lawyers for telephone and cable companies ignores the fact that both will quickly have to face new competition - from wireless ISPs. The wireless marketing strategy is simple - why should customers not prefer to have their Internet service follow them with their cellphones, laptops, and PDAs, rather than being tied to the home or office?
The FCC's goal ought to be different avenues for getting onto the Internet competing for consumer dollars - in the same way that roads, rails and airlines compete for passengers and freight in the field of transportation.
The onrushing wireless revolution only makes the 1996 Telecom Act, and the fights over its interpretation at the FCC, appear more archaic with every passing day.