disco-tech | Discovery Institute's Technology Blog: Net Neutrality Archives
September 11, 2015
More On What's In Store for the FCC's Open Internet Rules
Hal Singer has discovered that total wireline broadband investment has declined 12% in the first half of 2015 compared to the first half of 2014. The net decrease was $3.3 billion across the six largest ISPs. As far as what could have caused this, the Federal Communications Commission's Open Internet Order "is the best explanation for the capex meltdown," Singer writes.
Despite numerous warnings from economists and other experts, the FCC confidently predicted in paragraph 40 of the Open Internet Order that "recent events have demonstrated that our rules will not disrupt capital markets or investment."
Chairman Wheeler acknowledged that diminished investment in the network is unacceptable when the commission adopted the Open Internet Order by a partisan 3-2 vote. His statement said:
Our challenge is to achieve two equally important goals: ensure incentives for private investment in broadband infrastructure so the U.S. has world-leading networks and ensure that those networks are fast, fair, and open for all Americans. (emphasis added.)
The Open Internet Order achieves the first goal, he claimed, by "providing certainty for broadband providers and the online marketplace." (emphasis added.)
Yet by asserting jurisdiction over interconnection for the first time and by adding a vague new catchall "general conduct" rule, the Order is a recipe for uncertainty. When asked at a February press conference to provide some examples of how the general conduct rule might be used to stop "new and novel threats" to the Internet, Wheeler admitted "we don't really know...we don't know where things go next..." This is not certainty.
As Singer points out, the FCC has speculated that the Open Internet rules would generate only $100 million in annual benefits for content providers compared to the reduction of investment in the network of at least $3.3 billion since last year. While the rules obviously won't survive cost-benefit analysis, I'm not sure they will survive some preliminary questions and even get to a cost-benefit analysis stage.
Chairman Thomas E. Wheeler of the Federal Communications Commission unveiled his proposal this week for regulating broadband Internet access under a 1934 law. Since there are three Democrats and two Republicans on the FCC, Wheeler's proposal is likely to pass on a party-line vote and is almost certain to be appealed.
Free market advocates have pointed out that FCC regulation is not only unnecessary for continued Internet openness, but it could lead to years of disruptive litigation and jeopardize investment and innovation in the network.
Writing in WIRED magazine, Wheeler argues that the Internet wouldn't even exist if the FCC hadn't mandated open access for telephone network equipment in the 1960s, and that his mid-1980s startup either failed or was doomed because the phone network was open whereas the cable networks (on which his startup depended) were closed. He also predicts that regulation can be accomplished while encouraging investment in broadband networks, because there will be "no rate regulation, no tariffs, no last-mile unbundling." There are a number of problems with Chairman Wheeler's analysis. First, let's examine the historical assumptions that underlie the Wheeler proposal.
The Myth That Title II Regulation of Broadband and Wireless Would Be Comparable
Supporters of Title II reclassification for broadband Internet access services point to the fact that some wireless services have been governed by a subset of Title II provisions since 1993. No one is complaining about that. So what, then, is the basis for opposition to similar regulatory treatment for broadband?
Austin Schlick, the former FCC general counsel, outlined the so-called "Third Way" legal framework for broadband in a 2010 memo that proposed Title II reclassification along with forbearance of all but six of Title II's 48 provisions. He noted that "this third way is a proven success for wireless communications." This is the model that President Obama is backing. Title II reclassification "doesn't have to be a big deal," Harold Feld reminds us, since the wireless industry seems to be doing okay despite the fact mobile phone service was classified as a Title II service in 1993.
To be clear, only mobile voice services are subject to Title II, since the FCC classified broadband access to the Internet over wireless networks as an "information" service (and thus completely exempt from Title II) in March of 2007.
Sec. 6002(c) of the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66) modified Sec. 332 of the Communications Act so commercial mobile services would be treated "as a common carrier ... except for such provisions of title II as the Commission may specify by regulation as inapplicable..."
The FCC commendably did forbear. Former Chairman Reed E. Hundt would later boast in his memoir that the commission "totally deregulated the wireless industry." He added that this was possible thanks to a Democratic Congress and former Vice President Al Gore's tie-breaking Senate vote.
As I and others have recently noted, if the Federal Communications Commission reclassifies broadband Internet access as a "telecommunications" service, broadband would automatically become subject to the federal Universal Service tax--currently 16.1%, or more than twice the highest state sales tax (California-7.5%), according to the Tax Foundation.
Erik Telford, writing in The Detroit News, has reached a similar conclusion.
U.S. wireline broadband revenue rose to $43 billion in 2012 from $41 billion in 2011, according to one estimate. "Total U.S. mobile data revenue hit $90 billion in 2013 and is expected to rise above $100 billion this year," according to another estimate. Assuming that the wireline and wireless broadband industries as a whole earn approximately $150 billion this year, the current 16.1% Universal Service Contribution Factor would generate over $24 billion in new revenue for government programs administered by the FCC if broadband were defined as a telecommunications service.
The Census Bureau reports that there were approximately 90 million households with Internet use at home in 2012. Wireline broadband providers would have to collect approximately $89 from each one of those households in order to satisfy a 16.1% tax liability on earnings of $50 billion. There were over 117 million smartphone users over the age of 15 in 2011, according to the Census Bureau. Smartphones would account for the bulk of mobile data revenue. Mobile broadband providers would have to collect approximately $137 from each of those smartphone users to shoulder a tax liability of 16.1% on earnings of $100 billion.
Would the Federal Communications Commission expose broadband Internet access services to tax rates of at least 16.6% of every dollar spent on international and interstate data transfers--and averaging 11.23% on transfers within a particular state and locality--if it reclassifies broadband as a telecommunications service pursuant to Title II of the Communications Act of 1934?
As former FCC Commissioner Harold Furchtgott-Roth notes in a recent Forbescolumn, the Internet Tax Freedom Act only prohibits state and local taxes on Internet access. It says nothing about federal user fees. The House Energy & Commerce Committee report accompanying the "Permanent Internet Tax Freedom Act" (H.R. 3086) makes this distinction clear.
The law specifies that it does not prohibit the collection of the 911 access or Universal Service Fund (USF) fees. The USF is imposed on telephone service rather than Internet access anyway, although the FCC periodically contemplates broadening the base to include data services.
The USF fee applies to all interstate and international telecommunications revenues. If the FCC reclassifies broadband Internet access as a telecommunications service in the Open Internet Proceeding, the USF fee would automatically apply unless and until the commission concluded a separate rulemaking proceeding to exempt Internet access. The Universal Service Contribution Factor is not insignificant. Last month, the commission increased it to 16.1%. According to Furchtgott-Roth,
At the current 16.1% fee structure, it would be perhaps the largest, one-time tax increase on the Internet. The FCC would have many billions of dollars of expanded revenue base to fund new programs without, according to the FCC, any need for congressional authorization.
Allowing broadband providers to impose tolls on Internet companies represents a "grave" threat to the Internet, or so wrote several Internet giants and their allies in a letter to the Federal Communications Commission this past week.
The reality is that broadband networks are very expensive to build and maintain. Broadband companies have invested approximately $250 billion in U.S. wired and wireless broadband networks--and have doubled average delivered broadband speeds--just since President Obama took office in early 2009. Nevertheless, some critics claim that American broadband is still too slow and expensive.
The current broadband pricing model is designed to recover the entire cost of maintaining and improving the network from consumers. Internet companies get free access to broadband subscribers.
Although the broadband companies are not poised to experiment with different pricing models at this time, the Internet giants and their allies are mobilizing against the hypothetical possibility that they might in the future. But this is not the gravest threat to the Internet.
Government cares more about politics than the tech economy
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.
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 T�l�com 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 T�l�com'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.
Reforming Universal Service is Plan C for broadband regulation
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.
Comcast executive David L. Cohen had this to say in remarks at the Brookings Institution:
The Internet is too big and too important for government to ignore... and it is too complex and too dynamic for government to regulate intrusively. Let?s learn from the Internet itself - it is flourishing as a self-governing, self-healing ecosystem, and the more we can take advantage of that model, coupled with reasonable, consensus-based regulation, the better.
Title II for broadband is desperate and ill-conceived
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.
Late last week the Federal Communications Commission voted along party lines to open a proceeding to "seek the best legal framework for broadband Internet access," a process that could culminate in the imposition of stifling, telephone utility style regulations on America's privately financed broadband networks pursuant to Title II of the 1934 Communications Act.
A statement by Commissioner Michael J. Copps explains in more detail than the rest why he thinks regulation is necessary for achieving this country's "broadband hopes and dreams."
The FCC has been deregulating communications services in response to increasing competition for years. Copps and others believe it is necessary to reverse course, although in his statement Copps doesn't question the policy of deregulating a competitive market. He questions the facts, arguing that broadband is less competitive than it used to be. This is a misleading argument.
Rep. John D. Dingell, Jr. (D-MI), Dean of the U.S. House of Representatives, Chairman Emeritus of the Energy & Commerce Committee (1981-95 and 2007-09) in a letter last week to young FCC Chairman Julius Genachowski regarding Genachowski's proposal to apply telephone-style regulation to the Internet:
I fear your "third way" risks reversal by the courts, especially given the scope of its efforts to expand the Commission's authority. It also puts at risk significant past and future investments, perhaps to the detriment of the Nation's economic recovery and continued technological leadership. More importantly, it may paralyze more holistic regulatory efforts to keep the Internet open to consumers, advance cybersecurity, protect consumer data privacy, and ensure universal access to and deployment of broadband.
Dingell advised Genachowski to abandon an administrative proceeding and work instead with Congress to secure the necessary statutory authorities to permit the "appropriate and effective regulation of broadband."
Although I may be a conservative blogger, personally I consider Dingell -- whom I have met and have observed for many years -- as a national treasure. Few if any in Congress can confront a witness like he can, for one thing. Though I don't always agree with him, he strikes me as like Obi-Wan Kenobi and Yoda or Dumbledore in the wisdom, ability and integrity departments.
National Journalnotes ($) that while Free Press frequently taps the media to slam its opponents as fronts for special interests who won't reveal their funding, much of Free Press's own funding is concealed.
Free Press staff members "want to call everyone else a front group ... [but] they don't subject themselves to the same scrutiny," [Phil] Kerpen [of Americans for Prosperity] contended. The charges of Astroturfing that Free Press aims at other groups, [Mike] McCurry [a former White House spokesman, who now runs Public Strategies Washington, a government-relations firm whose Arts+Labs coalition supports the telecoms in the net-neutrality debate] said, carry "a little whiff of hypocrisy."
Always better to debate the arguments, isn't it? Shooting the messenger is usually an act of desperation that tends to reveal the weaknesses in one's case. As this revelation shows, it can also make one look foolish.
The article points out that Free Press -- which is urging Democratic policy makers to regulate the Internet and enact subsidies for media professionals -- is "firmly allied with media professionals who provide content to niche markets." It's former press chief, Jen Howard, is now the press secretary for FCC Chairman Julius Genachowski, and its talking points and arguments match the statements of administration officials.
According to McCurry, the group and its allies "hate everything about capitalism, corporations and profit-making."
Congress will revisit the Communications Act of 1934 (see this and this) in the aftermath of an appellate court decision limiting the Federal Communications Commission's ability to regulate the Internet.
"Stakeholders" will be invited to participate in a series of bipartisan, issue-focused "meetings" beginning in June, according to the congressional statements.
Hopefully congressional leaders are contemplating a transparent process consisting of public hearings. If they are planning closed-door listening sessions with special interest representatives, that could encourage self-serving agendas and obscure horse-trading which can wind up costing consumers a bundle.
Before it wrote the Telecommunications Act of 1996, the Senate Commerce Committee alone compiled an 817-page hearing record (S. Hrg. 103-599) on the basis of hearings on Feb. 23, Mar. 2 and 17, and May 4, 11, 12, 18, 24 and 25, 1994. The House Energy & Commerce Committee conducted a separate set of extensive hearings.
A letter signed by 74 House Democrats warns FCC Chairman Julius Genachowski that imposing telephone-style regulation on the Internet could undermine a bipartisan consensus that has resulted in broadband industry infrastructure investment of approximately $60 billion per year.
In the last decade, multiple providers and the hundreds of thousands of workers they employ have brought high speed connections to 95 percent of U.S. households where two-thirds of Americans now access the Internet through broadband at home.
The lawmakers claim Genachowski's proposal to regulate broadband services will create uncertainty that will "jeopardize jobs and deter needed investment for years to come," and requests that the FCC refrain from taking further steps to regulate broadband services without additional direction from Congress.
A separate letter from 37 Republican senators cautions Genachowski that he is seeking a "major shift in FCC policy that is highly controversial and has been previously rejected by Congress and both Democratic and Republican administrations." The senators advise Genachowski to leave the Internet "free from common carrier regulations."
The FCC's newest plan for seizing control of the last-mile broadband connections we all use to access the Internet would classify broadband as a 'telecommunications service,' which will put the FCC under constant pressure to resurrect the "unbundling" regulations that precipitated the telecom crash of 2000 by requiring owners of last-mile links to homes and offices to share their lines with rivals.
Remember the CLECs? They were essentially a hothouse product of regulation, and they not only failed to deliver bandwidth but they brought down the whole high tech economy. As a result of that carnage the FCC drew back, last-mile bandwidth was declared to be an 'information service,' and thus not subject to the labyrinthine rules that were applied before as if they were voice telephone lines.
With business investment flooding into this arena ever since, the U.S. has accomplished a broadband miracle, with residential bandwidth up 54 fold, wireless bandwidth to consumers up 542 fold.
With sufficient investment in bandwidth, carriers will have no economic incentive to discriminate. If bandwidth is scarce, carriers will be forced to set priorities or else slow everything down to the lowest common denominator.
Investment is what determines whether there is abundance or scarcity and whether network neutrality in practice is just a carnival for lawyers to litigate telecom and Internet companies.
Nothing can so wither broadband investment as murky mandates from Washington.
This is the FCC's third major attempt to regulate broadband services, as my colleague Jim Harper pointed out in conversation today. I think it will also be the FCC's third strike.
Genachowski is engaging in a futile attempt to slice and dice the Internet as a definitional matter for the purpose of expanding his agency's regulatory grasp while hopefully containing many of the harmful consequences of regulatory overreach.
Regulating an essential component of the Internet as a "telecommunications service" would still amount to a form of Internet regulation in violation of a long-standing bipartisan consensus favoring competition and private investment over regulation and public subsidies. It is a quixotic quest.
For one thing, FCC jurisdiction isn't necessary to protect consumers, because the Federal Trade Commission guards against deceptive business practices and applies the antitrust laws to protect competition.
Network neutrality regulation could also negatively impact jobs and investment. A study by the Brattle Group, for example, just concluded that more than 65,000 jobs could be put in jeopardy throughout the economy in 2011 as a result of net neutrality regulation, with the total impact growing to almost 1.5 million jobs affected by 2020.
The good news is broadband providers invested almost $60 billion in 2009 alone in broadband networks, according to one estimate. The bad news is regulation cannot compel private investment, but it can discourage it by creating uncertainty and risk for investors.
Even if confined to a limited portion of the Internet, there is no way to limit the potentially heavy-handed and costly consequences of regulation. The reality is regulation usually results in unintended consequences, which regulators subsequently try to fix with more and more regulation. No one can predict where it will lead.
Protecting the Internet from the heavy hand of government regulation is not just a Republican goal. The following excerpt is from a 1999 speech by former FCC Chairman William E. Kennard (appointed by President Bill Clinton):
What I would like to do is take the opportunity here today to talk to you a little bit about why I believe the best way to achieve these values is to resist the urge to regulate right now. One reason is because of my vision that we will have multiple broadband pipes -- cable, DSL, broadband wireless, satellite, terrestrial broadcast. That is why I think the debate that we are having today about unbundling and access to this cable pipe is fundamentally different from the debates that we had about the telephone industry, when everybody knew that we only had one wire for the foreseeable future.
We have in the broadband world the conditions developing for choice and once you recognize that, and you recognize how quickly this world changes and how quickly networks get deployed today, you realize that this access issue is a transitional issue. It is a transitional debate that we are having.
And second, and very importantly, we should resist the urge to regulate because I think that it is likely that the market will sort this out. You need regulation when market-based incentives are not aligned with the needs of consumers. That is really why we have our jobs. But I believe that there are market incentives that will drive openness in the broadband world. One is the prospect of alternative pipes that I have talked about. The second is the culture of the Internet that has grown up in this country. Consumers love the openness of the network. Those early adopters who are going to migrate from the narrowband world to the broadband world grew up in a culture of openness on the Internet. They are going to insist that they have that same culture of openness in the broadband world.
And broadband providers will have to learn to accommodate it and deliver it. Otherwise they are not going to be competitive in a broadband world, particularly one where there are multiple broadband pipes.
Now, third, we must also recognize that regulation has costs. We all know that. And I come to this debate as a battle-scarred veteran of the telephone wars. I have been in those battles. I helped write the regulations implementing the 1996 Telcom Act. I was general counsel when that process was on-going. I defended those rules all the way up to the United States Supreme Court. I am still defending them. I believe in them. But I also know that it is more than a notion to say that you are going to write regulations to open the cable pipe. It is easy to say that government should write a regulation, to say that as a broad statement of principle that a cable operator shall not discriminate against unaffiliated Internet service providers on the cable platform. It is quite another thing to write that rule, to make it real and then to enforce it. You have to define what discrimination means. You have to define the terms and conditions of access. You have issues of pricing that inevitably get drawn into these issues of nondiscrimination. You have to coalesce around a pricing model that makes sense so that you can ensure nondiscrimination. And then once you write all these rules, you have to have a means to enforce them in a meaningful way. I have been there. I have been there on the telephone side and it is more than a notion. So, if we have the hope of facilitating a market-based solution here, we should do it, because the alternative is to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America.
I have talked to many, many people about this issue, on all sides. No one has offered a practical solution to me that avoids drawing us into this quicksand of regulation and embroiling what is a very nascent marketplace in a situation that I do not think we will be able to work our way out of anytime soon. So, when I look at the cost of regulation versus the benefits, when I look at the prospect that we can have a robust, competitive broadband marketplace, I conclude that we have to resist the urge to regulate and let it play out for just a while longer.
Former FCC Chairman Michael Powell, reacting to a proposal to reclassify broadband as a "telecommunications" service under Title II of the Communications Act of 1934, in an interview with Cecilia Kang of the Washington Post:
Here's the bottom line, to talk about going to Title II is talking about doing something relatively epic, novel and unprecedented. It doesn't mean they couldn't do it, but I might challenge it.
* * * *
I hate the idea of Title II for broadband. I think we would really regret it because for a regulator versed in what it means, it means thousands and thousands of pages that would fall into this space and we would spend our lifetime trying to clean it up. And the real worry is that we will enter another prolonged period of litigation.
A federal takeover of the Internet, according to President Obama's former special assistant for science, technology and innovation policy, is as simple as formally relabelling Internet access services as "telecommunications services," rather than "information services," as they are called now. Susan Crawford argues that this wouldn't be unprecedented at all.
Until August 2005, the commission required that companies providing high-speed access to the Internet over telephone lines not discriminate among Web sites * * * * But under the Bush administration the F.C.C. deregulated high-speed Internet providers, arguing that cable Internet access was different from the kind of high-speed Internet access provided by phone companies * * * * This was a radical move, because it reversed the long-held assumption that a nondiscriminatory communications network was essential to economic growth, civic welfare and innovation.
An illuminating submission by broadband services providers notes, among other things, that such a plan would be an "about-face" that would be problematic as a legal matter and would likely plunge the Internet into "years of litigation and regulatory chaos."
As the Supreme Court explained in Brand X, "[t]he entire question is whether the [broadband Internet access] products here are functionally integrated (like the components of a car) or functionally separate (like pets and leashes). That question turns not on the language of the Act, but on the factual particulars of how Internet technology works and how it is provided, questions Chevron leaves to the Commission to resolve in the first instance." In other words, the Commission may reverse its longstanding statutory interpretation only if it has a factual basis to determine that--less than three years after it last examined this question--broadband Internet access is no longer offered as a "functionally integrated" information service, but rather as a stand-alone, naked transmission service.
* * * *
Broadband Internet access services are, if anything, even more integrated with enhanced functionality today. For example, even apart from such core functionalities as DNS look-up, which by themselves suffice to support an information service classification, broadband Internet access providers often include some or all of the following as part and parcel of their residential Internet access service: security screening, spam protection, anti-virus and anti-botnet technologies, pop-up blockers, parental controls, online email and photo storage, instant messaging, and the ability to create a customized browser and personalized home page that automatically retrieves games, weather, news and other information selected by the user--all of which involve "generating, acquiring, storing, transforming, processing, retrieving [and/or] utilizing" information. In addition, a significant and growing number of providers offer their Internet access services with a variety of network-oriented, security-related information processing capabilities that are used to address broader threats against their Internet access service and customers. These include processing Internet access traffic flows to check for telltale patterns of worms, viruses, botnets, denial of service attacks and the like; scrubbing email traffic to remove spam; and other techniques that involve interaction with stored information (e.g., databases of known computer threats) to address security concerns. (footnotes omitted.)
On a separate but related note, a recent Rasmussen poll indicates that there is approximately as much public opposition to Internet reform (53%) as there is to healthcare reform.
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. § 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.
From George Gilder's column in today's Wall Street Journal,
Meanwhile, Secretary of State Hillary Clinton and the president's friends at Google are hectoring China on Internet policy. Although commanding twice as many Internet users as we do, China originates fewer viruses and scams than does the U.S. and with Taiwan produces comparable amounts of Internet gear. As an authoritarian regime, it obviously will not be amenable to an open and anonymous net regime. Protecting information on the Internet is a responsibility of U.S. corporations and their security tools, not the State Department.
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.
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.
At CNET News, Larry Downes writes that the Obama administration has lost some of its enthusiasm for aggressive regulatory intervention of the Internet. The latest evidence, according to Downes, is a comment this week by White House deputy CTO Andrew McLaughlin noting that the FCC has yet to determine whether Net neutrality is needed to preserve the open Internet.
The administration is clearly backtracking. But why?
Part of the reason is some unexpected political pressure, including a letter signed by 72 congressional Democrats opposing the FCC's proposed rules soon after they were announced.
But the bigger explanation is the growing priority within the administration for nationwide, affordable broadband service. In the course of preparing the national broadband plan, mandated by the 2009 stimulus bill, universal high-speed access has taken on increased significance in the government's hopes for a rapid economic recovery. Beyond the current financial woes, Congress, the FCC and the White House all recognize the importance of improving the communications infrastructure to maintain U.S. competitiveness in technology innovation.
By glancing at the authors, it's no surprise that the 14-essay pamphlet's thesis is that net neutrality regulations would ultimately be harmful for consumers and thwart innovation. The table of contents has familiar names: Randolph May (Free State Foundation), Wayne Leighton (Empiris), John Mayo (Georgetown University) and Hance Haney (Discovery Institute), to name just a few. You most likely already know their positions.
"What we're talking about here is not discrimination, but differential pricing," added Hance Haney, director and senior fellow of the Technology & Democracy Project at the Discovery Institute. Banning such a practice will force providers to "recover the entire cost of investment from consumers," he added.
Whoops! Berkman study shows "open access" reduces broadband consumption
A paper by George S. Ford at the Phoenix Center for Advanced Legal & Public Policy Studies shows that a correct interpretation of a study by the Berkman Center for Internet and Society at Harvard University is that "open access" does not stimulate broadband consumption -- as its authors claim -- but reduces it.
Sound empirical research of treatments and outcomes requires the researcher to ignore the observed outcomes in formulating the hypothesis tests and choosing the empirical methodologies. Yet, the Berkman Study peeks at the outcome and then tries to formulate some procedure to attribute observed differences to one factor or another. In other words, throughout the Berkman Study, the authors are separating the sick rats from the well ones and then assigning the treatment ex post. This scheme is taboo among research scientists, since such outcomes-driven analyses are likely to render biased results, both in a statistical sense and by the introduction of researcher bias.
The Berkman study was prepared in coordination with the FCC. "Smart Cop" Julius Genachowski of the FCC apparently believes both that facts and data justify more FCC oversight of a "dynamic network" and that if the FCC is guided by facts and data bureaucratic mistakes can be avoided.
So far facts and data prove that "open access," aka network neutrality regulation, will impair broadband adoption, an inconvenient truth that civil rights groups have been citing.
The groups conversely contend that "Many feel that these [pro-net neutrality] organizations are pushing a regulatory perspective that would regressively shift the costs of bandwidth onto middle- and low-income consumers," and in their letter describe the net neutrality advocates in question as "elite digital organizations" who "peddle" "destructive racial rhetoric."
White House senior adviser Susan Crawford resigned last week, according to the American Spectator, because of unease within the administration about network neutrality.
White House sources say that [Crawford] ran afoul of senior White House economics adviser Larry Summers, who claimed he and other senior Obama officials were unaware of how radical the draft Net Neutrality regulations were when they were initially internally circulated to Obama administration officials several weeks ago. "All of sudden Larry is getting calls from CEOs, Wall Street folks he talks to, Republicans and Democrats, asking him what the Administration is doing with the policies, and he isn't sure what they're talking about," says one White House aide. "He felt blind-sided, and Susan was one of those people who heard about it." In the end, the proposed regulations were slightly moderated from the original language FCC chairman Julius Genachowski, a Crawford ally, circulated.
Although he favors regulation of broadband service providers, Google CEO Eric Schmidt thinks it would be a terrible idea for the government to involve itself as a regulator of the broader Internet, according to the Washington Post.
It is possible for the government to screw the Internet up, big-time.
For one thing, regulation isn't easily contained. For another, if the government "screws" Internet access, the Internet as a whole could suffer.
Google's continuing support for network neutrality regulation underlines the fact that Google has a higher market share than any of the broadband service providers it seeks to regulate. Google is the subject of an antitrust probe; broadband service providers are not.
The Internet Policy Statement adopted by the FCC during the Bush administration provided that "consumers are entitled to competition among network providers, application and service providers, and content providers."
Consumers may no longer be entitled to competition among Internet application, service and content providers, according to the Washington Post's Cecilia Kang.
According to sources, that language is rewritten in the draft proposal by [FCC Chairman Julius] Genachowski and has been changed in a way that suggests broadband access providers cannot impair competition for Web applications, service and content providers.
Google has previously stated that the FCC only has jurisdiction to regulate broadband service providers.
The FCC's open Internet principles apply only to the behavior of broadband carriers -- not the creators of Web-based software applications. Even though the FCC does not have jurisdiction over how software applications function, AT&T apparently wants to use the regulatory process to undermine Web-based competition and innovation.
But according to a letter submitted by AT&T, the FCC's jurisdiction may be may be quite a bit more expansive than Google assumed.
In order to offer Google Voice, Google uses more than just "software." Google also uses computer servers to control and route incoming and outgoing Google Voice calls; storage devices to store the email addresses, phone numbers, passwords, contact lists, call logs, configuration preferences, and other data belonging to Google Voice customers; transmission links to carry calls to and from their destinations; and a host of other facilities to support Google Voice.
* * * *
Google Voice (just like Google Search, Gmail, Google Docs, Google Chat, Google Wave, Google Maps, YouTube and many other Google products) unquestionably qualifies as "interstate and foreign communication by wire or radio" under the Communications Act and is subject to the FCC's jurisdiction. And even if some aspects of Google Voice do not qualify as a telecommunications service as Google alleges, they would nonetheless qualify as an "information service" under the Communications Act because they would offer a "capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications." These services are thus no less subject to FCC jurisdiction than is broadband Internet access service, which is an information service. (footnotes omitted.)
In any event, apparently Google and its FCC supporters aren't taking any chances, and the language is being rewritten to resolve any doubt that Google and other Internet-based information service providers have no obligation to provide consumers with a free and open Internet experience.
AT&T points out the FCC would be powerless to prevent Google from
blocking disfavored websites from appearing in the results of its search engine; or prohibit Google from blocking access to applications that compete with its own email, text messaging, cloud computing and other services; or otherwise prevent Google from abusing the gatekeeper control it wields over the Internet? For that matter, how could the Commission stop any other Internet-based information service provider from engaging in similar behavior that compromises the openness of the Internet ecosystem?
FCC oversight of any segment of the Internet ecosystem would be a tragedy, as it will tend to skew private investment decisions and innovation. Plus, as this discussion indicates, there are few guarantees where regulation might lead.
The Communications Workers of America have shared some advice with the FCC regarding proposed network neutrality regulation expected to be unveiled next week.
We cannot afford a repeat of the near-freeze on capital investment by telecom compannies that took place in the early part of this decade in response to a regulatory framework that ignored market realities. We are still paying for that decline as we play catch up to other nations in high-speed broadband deployment.
This is a reference to the debacle FCC Chairman Julius Genachowski's former boss concocted when implementing the 1996 Telecommunications Act.
Robert W. Crandall of the Brookings Institution has said
... much of the new policy of assisting small-scale entrants was a failure, inducing investors to squander billions of dollars while producing little in the way of new services or innovation. In fact, the new entrants substantially depressed productivity growth in the sector.
* * * *
Regulators may not have created it, but they did contribute to the [telecom] bubble [of 1998-2000] by encouraging entrants having little hope of survival.
(See:Competition and Chaos: U.S. Telecommunications Since the 1996 Telecom Act (Brookings, 2005) at vii and 156.
CWA recommends that a fifth principle protecting competitors should include a
robust carve-out for managed networks and reasonable network management. Consumers will benefit from telemedicine, education, energy conservation, entertainment, and other applications and services that will require considerable network management. In addition, revenues from managed services are an essential component of the business case for broadband investment. Higher capacity networks in turn produce a robust public Internet alongside managed networks.
CWA also points out that network operators' capital expenditures were $151 billion over the past 2.5 years versus slightly over $7 billion for net neutrality supporters Google, Yahoo and Amazon.
The FCC is expected to issue a proposed network neutrality regulation next week, and in a column entitled "The Coming Mobile Meltdown," Holman W. Jenkins, Jr. observes
Unless we miss our guess, this dynamic is about to rudely change the subject from net neutrality to a shortage of wireless capacity to meet enthusiastic consumer demand.
* * * *
usage-based pricing could potentially pull the rug out from under the business models of Google and other Web powers, whose services now appear "free" to customers. Imagine if broadcast TV had charged by the minute. Your dad would have turned off the set during the commercials.
Chairman Genachowski will find he is caught between giant grindstones. On one side are the phone companies and wireless companies and cable companies, wearing their Internet-service-provider hats. They are interested in revenue, and they are interested in serving the majority of their customers by slowing down communication speeds for a few voracious content providers who hog the bandwidth while paying the same as others who use it less.
Their simple answer could be to charge the content providers for expedited service, and charge more to those who burden scarce bandwidth in the last mile.
If bandwidth is not scarce, higher charges will not stick. If it is scarce and expensive, new cables will be laid until prices come down.
On the other side are Microsoft , Google and entertainment distributors. They are united in the belief that only content owners should charge for content. Transmission should be a flat fee. On their side, for the time being, are the consumer-protection activists, who believe that everything should be free. They are willing to start with the service providers; they'll get around to content in good time, starting with other peoples' property.
Our government has settled on a new formula for regulating industry, and they are applying it to one industry after another. While they haven't yet made it to the restaurant business, at this pace we may not have to wait too many years for the following to happen: Every restaurant is mandated to only offer food in the form of an all-you-can-eat buffet. The government decides on what needs to be served on this buffet, at a minimum, in order to be compliant. No restaurant is allowed to deny a customer service, and all customers must be charged the same price. After all, eating is no longer one half of an exchange of private property, but a "right" entitling a consumer to his neighbor's property.
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.
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.
... ISPs, which have poured billions of dollars into building infrastructure, would have little control -- if any -- over the kinds of information and technology flowing through their pipes.
* * * *
Mr. Genachowski claims that the FCC "will do as much as we need to do, and no more, to ensure that the Internet remains an unfettered platform for competition, creativity and entrepreneurial activity." He will advance this goal by insisting on transparency; he will jeopardize it -- and stifle further investments by ISPs -- with attempts to micromanage what has been a vibrant and well-functioning marketplace.
A Google representative worries that the company's investment in Google Voice could be undermined if the service is subjected to common carrier rules.
Whitt said it would become "a real challenge" to justify Google's investment in Google Voice if the FCC declared it was subject to common carrier rules. "Imposing legacy common carriage requirements would be unfortunate not just for Google Voice, but also for lots of innovative companies, large and small, who are using the Web to revolutionize the way people communicate with each other," Whitt said.
Aren't common carrier rules what Google wants to impose on broadband service providers through network neutrality regulation?
Of course they are.
Google seems to realize that common carrier rules are antagonistic to investment and innovation, so it's difficult to understand how the company's efforts to induce policymakers to impose these rules on Google's broadband service suppliers is anything other than a bald attempt to exploit the regulatory process to shift costs on to someone else.
DirecTV and Verizon's FiOS service have recently announced app stores modeled directly on Apple's App Store, notes the New York Times.
This doesn't seem consistent with the rationale for the proposed "Internet Freedom Preservation Act of 2009," (H.R. 3458) introduced by Reps. Edward Markey (D-Mass.) and Anna Eshoo (D-Calif.), which assumes that broadband service providers will discriminate against unaffiliated applications in the absence of heavy-handed regulation.
Internet access service providers have an economic interest to discriminate in favor of their own services, content, and applications and against other providers.
A network neutrality policy based upon the principle of nondiscrimination and consistent with the history of the Internet's development is essential to ensure that Internet services remain open to all consumers, entrepreneurs, innovators, and providers of lawful content, services, and applications.
But the DirecTV and FiOS app stores illustrate that, in fact, openness is in the economic interest of broadband service providers.
"The beauty of the iPhone is that there are a lot of applications that Apple would not have imagined people want," said Sree Kotay, chief software architect for Comcast. "We want people engaged with television in ways we haven't thought of yet."
The article points out that the cable and satellite industries have experimented unsuccessfully for years with interactive news, weather and sports features through their set-top boxes, "leading many in the industry to conclude that all most people want to do with their TVs is watch." Turns out they were wrong.
Their only viable solution is to open the door to independent applications developers.
This is not to argue that firms do not have an economic interest to discriminate, only to point out that it is simplistic to conclude that is their only economic interest. The app stores illustrate there are times when it is not in the interest of vendors to discriminate.
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.
FCC Chairman Julius Genachowski promised to investigate exclusivity arrangements between handset manufacturers and wireless carriers and "act accordingly to promote competition and consumer choice."
But according to Nielsen, only 6.4 percent of 25,000 wireless users surveyed rated choice of handset as the most important factor in choosing wireless service.
Prohibiting exclusive handset deals doesn't sound like a very good use of the FCC's time if only 6.4 percent of consumers care enough about a particular handset that it would affect their choice of wireless service.
A representative of one of the smaller rivals who are seeking FCC intervention claims that exclusive handset deals have made it "significantly harder for smaller carriers to attract and retain subscribers, and to effectively compete in rural areas."
If you were a wireless carrier, the prospect of losing 6.4 percent of your customers to a competitor who offers the coolest handset on an exclusive basis would be scary, but it wouldn't kill you.
The solution would be redouble your efforts to exploit your own comparative advantage, if you have one (or if you don't, perhaps that is the problem you need to solve?).
If you were a wireless carrier and you had the option to carry the coolest handset on an exclusive basis, you would consider the prospect of capturing 6.4 percent of the entire market (representing all consumers for whom handset matters most) a worthy reward justifying the effort.
For example, you might be willing to negotiate your customary profit margin, compromise the level of control you normally exercise over the product design, promise to make special efforts to promote the product and provide technical support, and even make fresh investments in your network or back office systems to fully exploit the product's innovative features.
This is innovation, and it's good for consumers.
Before the FCC prohibits exclusive handset deals it should assess whether, on balance, the burdens on rivals outweigh the incentives for innovation from a consumer perspective. The Nielsen survey suggests that the burdens aren't as significant as some have assumed.
If you ever wondered how net neutrality could possibly arouse as much passion as it does, The Bullet, a socialist newsletter from Canada, has an illuminating interview with Free Press co-founder Robert W. McChesney in which he discusses the big picture:
... Instead of waiting for the revolution to happen, we learned that unless you make significant changes in the media, it will be vastly more difficult to have a revolution. While the media is not the single most important issue in the world, it is one of the core issues that any successful Left project needs to integrate into its strategic program.
* * * *
The first issue is the Internet. The battle for network neutrality is to prevent the Internet from being privatized by telephone and cable companies. Privatization would give them control over the Internet, would allow these firms to privilege some information flows over others. We want to keep the Internet open. What we want to have in the U.S. and in every society is an Internet that is not private property, but a public utility. We want an Internet where you don't have to have a password and that you don't pay a penny to use. It is your right to use the Internet.
Net neutrality for all
McChesney also acknowledges that net neutrality ultimately isn't just about telephone and cable companies. The Left is using a divide and conquer strategy, in which the telephone and cable companies are merely the initial targets.
[Interviewer]: By making net neutrality the law of the land, is there any risk of lending support to the accumulation interests of digital capitalism's dominant corporations? Is the network neutrality fight also expressive of a rivalry between old media interests such as the telephone and cable companies and the interests of new media firms such as Google, eBay, Amazon, and Microsoft?
[McChesney]: Absolutely. One of the reasons we've been able to win this fight is that most of the new digital capital community is not supportive of the telephone and cable monopolies either. We have been in bed with some media companies that on other issues we are mortal enemies with. For a lot of people on the political Left who practice their politics on a barstool, we've committed a high-crime and misdemeanour for building a short-term alliance.
But I've learned, by participating in over a decade of specific media struggles, that when you are in the short-term and you are fighting to win, sometimes you make tactical alliances. You don't sacrifice your principles and embrace someone else's lame political agenda. If you want to win public credibility and advance a progressive media agenda that actually has a broad impact, this is what you do. That is how politics works. Most progressives understand this.
The ultimate goal, of course, is to completely overthrow capitalism itself.
So now you know why some people consider net neutrality regulation a matter of transcendental importance.
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.
A paper by M. Chris Riley and Ben Scott for Free Press ("Deep Packet Inspection: The End of the Internet As We Know It?") concludes that improper use of DPI technology -- which enables Internet service providers to inspect the content of messages in real time and which is currently used to priortize time-sensitive traffic when networks become congested -- will have dire consequences for innovation and consumers.
Yes, DPI can help alleviate problems of congestion in a network, thus improving the user experience. But the same DPI technology -- the same electronics equipment, in fact -- also allows providers to monitor and monetize every use of the Internet ...
Riley and Scott believe this is bad for consumers for two reasons. First,
[t]he technology permits network operators to reduce the amount they spend on network upgrades by allowing them to oversell their networks while simultaneously increasing the amount the average customer pays, through the creation of new revenue streams.
If the market were noncompetitive, this might be a worry. But in a competitive market, if a service provider tries to restrict output it merely creates an opportunity for rivals to steal sales by offering a better value proposition -- such as superior service and/or lower prices.
The vast majority of consumers have a choice between competitive broadband services provided by phone, cable and wireless providers. Therefore, competition will protect most consumers. A small percentage of consumers have fewer competitive options. It is legitimate to ask whether competition is sufficient to protect the minority.
That begs the question, why have some competitors chosen not to serve some consumers. In some cases, it just isn't economical with current technology. In other words, service providers are not confident that if they built the facilities sales would allow them to recover their investment plus a competitive return on their capital. The effects of current regulation as well as regulatory uncertainty contribute to this skepticism.
Government could promote broadband deployment by reducing unnecessary regulation and regulatory uncertainty, but so far politicians would rather subsidize with stimulus funds than deregulate.
The second concern advanced by Riley and Scott is that DPI "may hurt innovation in high-bandwidth applications, reduce consumer choice and shackle the free market of Internet content and services" because ISPs might use DPI to "force application providers to pay for priority access to avoid being deprioritized and to remain competitive."
This argument is really nothing more than a barely-concealed plea for the preservation a particular business model at the expense of potential business models, for the benefit of certain politically-favored reliance interests.
Since we all want service providers to increase they amount they spend on network upgrades, why would we want to limit their ability to find ways to pay for it given that the market is competitive and consumers should be able to take it or leave it?
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 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 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.
This week in the Tech Policy Weeklypodcast, Adam Thierer of the Progress & Freedom Foundation, James Gattuso of the Heritage Foundation, Jerry Brito of the Mercatus Center, Jim Harper and Tim Lee of the Cato Institute and I discuss FCC's ruling against Comcast for managing its network to relieve congestion by delaying uploads using the BitTorrent protocol .
FCC Chairman Kevin Martin received a reprimand from the Republican Leader of the House of Representatives, John A. Boehner, based upon reports that Martin plans to side with the commission's two Democrats on Friday to interfere with the network management decisions of broadband providers in the matter of Comcast delaying the uploading of P2P file sharing when necessary to relieve network congestion:
When a small minority of subscribers -- often using these applications to share pirated music and movies -- began clogging the networks to the harm of the large majority of users, broadband providers began taking steps to alleviate the congestion. This, in turn, has prompted peer-to-peer developers to collaborate with broadband providers to find better ways to manage traffic. It is this market-based self-governing nature of the Internet that is the key to its success. Your heavy-handed attempts to inject the FCC into the middle of that process threaten to hijack the evolution of the Internet to everyone's detriment. It will also deter the very broadband investment we need for the Internet to continue growing to meet the increasing demands being placed upon it.
Comcast has already adjusted its policy based upon public reaction and perhaps the threat of regulation. The question is whether this incident needs to be enshrined in permanent regulation or whether it indicates that the market actually works to protect legitimate consumer interests in the absence of regulation. I think it's the latter.
For the FCC commissioners, this is a choice between good politics and good policy. Good politics would be to hammer Comcast, although that wouldn't buy popularity for the Bush administration or any of its appointees. Their enemies are their enemies. Good policy would be to declare that this matter has been resolved. Ultimately, appointees of the Bush administration will be judged on their policies, not their politics.
The Federal Communications Commission, according to the Wall Street Journal, is prepared to stop Comcast from blocking peer-to-peer file sharing later this week -- although the commission won't fine the company because it wasn't "previously clear what the agency's rules were."
Now, according to Multichannel News, comes word that there is a wireless broadband provider who explicitly prohibits all uses that may cause extreme network capacity issues, and "explicitly identif[ies] P2P file sharing applications as such a use."
I am not familiar with the wireless broadband provider's practices in this area (nor even of its relevant terms of service, even though I am a customer). However, Comcast delayed file sharing only when necessary to relieve network congestion. Absent congestion, Comcast permitted file sharing. A cable broadband network typically experiences congestion during the early evening hours. Which means that if file sharers were willing to avoid those hours they could share files on the Comcast network the rest of the time.
So it will be interesting whether the FCC bans network management which prohibits file sharing, in which case cable and wireless networks could become congested to the annoyance of millions of ordinary users. Or whether it allows broadband providers to practice network management so long as they clearly disclose it, in which case file sharers may discover they can't use a broadband wireless or cable connection to share files, ever. Or maybe the brilliant politicians at the commission will require disclosure in sufficient detail to enable hackers to defeat network management altogether, permitting congestion to reign but ensuring that providers, not the commission, will be blamed.
As everyone who reads this blog knows, the architecture of cable, wireless and wireline networks is completely different. Each have unique congestion challenges, and in the short term all providers must have flexibility to find appropriate solutions.
The key point is that all broadband providers are trying to increase bandwidth as fast as they can. The proper role for the commission is to eliminate barriers to investment, of which regulatory uncertainty is one of the most significant.
If a particular company, Comcast, is the target here primarily because it refused to pay certain political dues or tribute, as I suspect it is, we should acknowledge that and take the company's side.
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.
Communications Daily ($) cited my recent post comparing Google's limited objectives for the 700 MHz auction with the expansive objectives it outlined to the Federal Communications Commission last summer, and it included the following reaction to my comments from Richard Whitt of Google:
Whitt said in response that Haney had misread his company's comments from last summer. "We consistently have argued that the open access license conditions adopted by the FCC would inject much-needed competition into the wireless apps and handset sectors, but would not by themselves lead to new wireless networks," he said Monday. "Only if the commission had adopted the interconnection and resale license conditions we also had suggested -- which the agency ultimately did not do -- would we have seen the potential for new facilities-based competition."
Another way to look at this is if there wasn't any potential for new facilities-based wireless competition without the interconnection and resale license conditions Google wanted, why would Google have submitted bids for the spectrum which it might have won and had to pay for?
I do agree that prior to the FCC's adoption of two of the four open platform principles Google proposed the company consistently premised its commitment to participate in the auction on the FCC adopting all four principles. I also agree Google was clear that it believed all four principles were necessary to promote competition.
Then it participated in the auction anyway.
This case may reveal how some regulators and some legislators are shrewd, have their own ideas about how to get what they want and even think they know what's in the best interest of corporations like Google.
It makes sense, as Whitt told Communications Daily, that the interconnection and resale license conditions would seem necessary to a hypothetical competitor who is a network provider. But in its Jul. 9th letter (and in the statement to Communications Daily) Google characterizes all four principles as being relevant to whether a new entrant would bid for the spectrum. For example:
Should the Commission not adopt the four open platforms requirements listed above, we believe it is doubtful that even the most determined and committed new entrant will be able to outbid an equally determined and committed incumbent wireless carrier, or consequently pave the way for second order competition.
In other words, each of the principles could be of interest to a new entrant who might bid for the spectrum. That seems logical, and the proof is Google. A new entrant who isn't a network provider -- such as Google -- might be more interested in open platforms for applications and handsets upon which its lucrative advertising plans depend. It might be worth it for Google to become a wireless broadband competitor in order to promote its highly profitable legacy business model.
Google was presenting an all-or-nothing-offer. But in Washington all-or-nothing-deals are rare. Google must have known this. Google got half of what it asked for (the typical return on investment here). And half a loaf seemed to be enough in view of the fact Google participated in the auction.
If in its prior conduct Google was saying only that it intended to ensure that the reserve price was met but it had no interest in owning the spectrum itself, that wasn't particularly clear.
Reasonable people might differ, but I think if Google never intended to win the spectrum (unless there was no way around it), and it was merely advancing its hypothesis that the four open platform conditions would summon forth hypothetical new entrants that wasn't especially clear at the time, either. Nor would it have seemed convincing to many people. Google's proposal wouldn't have acquired much momentum. The excitement was around the possibility Google would become the competitor. Google's previous Jul. 9th letter to the FCC said "Google remains keenly interested in participating in the auction" and its subsequent behavior continued to highlight that interest.
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 naïve 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.
I have said that 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.
And James Gattuso, noting that Comcast and BitTorrent were already working with one another on a solution to their network problems "long before this story broke," correctly chided me for overlooking how public opinion is also a credible deterrent. James is right, particularly when there is a competitive market. And like it or not, the broadband market is competitive.
A "duopoly," you say?
Allow me to quote Cornell Professor Alfred E. Kahn (formerly chairman of the New York Public Service Commission, chairman of the Civil Aeronautics Board under President Jimmy Carter and a father of airline deregulation) from testimony before the Federal Trade Commission last year:
There is no consensus among economists about the likely sufficiency of competition under duopoly--in the present instance, between landline telephone and cable companies in the offer of broadband access to the Internet--although evidence of active competition between the two, such as is actually occurring, might provide sufficient basis for deregulation, particularly in light of the aforementioned rapidity of technological change. By the same token, the presence of an actively competing wireless provider or providers--would, in the mind of most, justify--indeed demand--de- or non-regulation. Wireless voice service is one of the great success stories in telecommunications over the last few decades. I understand that the prospects for wireless data in the near future are excellent. Any analysis of future competition in Internet access must consider the possibility--or likelihood--that the cable and telephone duopoly will be joined by three or four wireless suppliers in the near future.
Of course, wireless broadband is a likelihood. It's even a certainty. Check out the latest broadband competition report from the Federal Communications Commission: There are actually more mobile wireless high-speed lines (defined as more than 200 kbps in at least one direction) than cable modem or DSL lines (35 million mobile wireless versus 34 million cable modem lines and 27 million DSL lines).
I realize mobile wireless broadband access isn't yet identical in terms of price and speed. But we all know it's heading in that direction. The point is, if landline telephone and cable companies who offer of broadband access to the Internet abuse their market dominance they will merely accelerate the growth of mobile wireless broadband services. The correct measure of competition isn't what we have today but what we will or could have tomorrow.
Call it what you will: The threat of regulation, public opinion, enlightened self-interest or simply the desire to be a good corporate citizen -- Despite the absence of regulation Comcast is rolling out DOCSIS 3.0 beginning in the Minneapolis and St. Paul region -- providing up to 50 mbps downloads and 5 mbps uploads; Comcast expects to deliver even faster speeds of up to 100 Mbps to its customers over the next two years with the capability of delivering higher speeds of 160 Mbps or more in the future.
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 §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. §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.
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 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 (May/June 2005).
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.
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.
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.
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.
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.
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.
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.
Scott Wallsten of the Progress & Freedom Foundation says we should experiment with new broadband pricing plans. I agree.
With vast differences in broadband usage from one consumer to the next, and with video moving to the Internet, telcos invading the cable TV space, the Net disaggregating traditional content companies, new advertising and subscription paradigms bursting onto the scene, and ill-advised calls for Net Neutrality to regulate (and stifle) this fast-changing landscape, new pricing schemes can accommodate the diversity of the exaflood and leave Net Neutrality in the dust. New network processor technologies from the likes of EZchip are incorporating sophisticated OAM (operations, accounting, and management) capabilities to monitor and price fine grained flows if needed.
We don't know what pricing schemes will win. What will the various mixes be along the many axes of the mediasphere? Flat-fee vs. per-bit, per-use, or per-view ... advertising vs. subscription ... consumer pays for bandwidth vs. content company pays for bandwidth ... bundling vs. a la carte ... content aggregating middle-men vs. total content disaggregation? But to find the best solutions in this new era, we should, as Wallsten says, let service providers, content creators, and consumers experiment.
I was honored to participate on Grover Norquist's "Leave Us Alone" radio program with guest host Derek Hunter to discuss Comcast's attempts to "block" certain Internet traffic, as reported last week:
NEW YORK (AP) -- To test claims by users that Comcast Corp. was blocking some forms of file-sharing traffic, The Associated Press went to the Bible.
An AP reporter attempted to download, using file-sharing program BitTorrent, a copy of the King James Bible from two computers in the Philadelphia and San Francisco areas, both of which were connected to the Internet through Comcast cable modems.
We picked the Bible for the test because it's not protected by copyright and the file is a convenient size.
In two out of three tries, the transfer was blocked. In the third, the transfer started only after a 10-minute delay. When we tried to upload files that were in demand by a wider number of BitTorrent users, those connections were also blocked.
Comcast concedes it "delays" some Internet traffic, temporarily, during periods of peak load, to improve surfing for the majority of its customers. None of the traffic is permanently blocked.
Cable companies have invested over $100 billion in the last decade upgrading their networks. Still, no broadband network has infinite capacity. A small number of users generate a disproportionate share -- over half -- of the traffic on Comcast's broadband network. When necessary to relieve congestion, Comcast delays file sharing, which allows users to download content stored on someone else's PC rather than a corporate or institutional file server. File sharing, of course, has made headlines in the past because many use it to swap copyrighted materials without permission -- although there are many other legitimate uses.
During periods of peak usage, network operators can either let all packets of information crawl at the same slow speed or they can allow higher-priority traffic to travel faster by slowing down some of the low-priority stuff. It's like the difference between traffic congestion on a highway -- where everyone gets trapped; versus a railroad -- where trains carrying perishable cargo go first.
Most network operators do manage broadband traffic.
Comcast and other broadband providers are constantly increasing their network capacity. Reuters reported last month, for example, that Comcast shares have "fallen as investors worried the company's cash flow will be hurt as the company needs to spend more to cope with stiffer competition from rivals." Saddling Comcast with additional regulation would further diminish investor appetite for costly upgrades.
Some say Comcast's customers have no way of knowing how much bandwidth usage is too much, and that isn't fair. But think about it: If Comcast were forced to specify a bandwidth cap, that could unnecessarily limit what the heavy users can do when there isn't congestion.
Full disclosure sounds great in theory, but would lead to more detailed restrictions which could be inconvenient for everyone.
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. 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. 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. There is no free lunch.
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. McDowell also said that he thinks localized market analysis is the correct basis for determining whether deregulation is warranted. Since there are hundreds if not thousands of localities, this would only magnify the problem.
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. 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. 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). 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 primary headache facing CLECs, just the easiest for lobbyists to fix. As COMPTEL acknowledges, CLECs "do not have the scale and scope to compete with the Bells for the major purchasers of special access." 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. 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.
We can't have it both ways. 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. In that case, their offerings will simply mirror the incumbents' and the incumbents will search for investment opportunities that don't require profit-sharing. This is not a recipe for innovation.
Eric Schmidt and Laurence Tribe on common carriage and net neutrality regulation
Over at Huffington Post, Timothy Karr claims that "One attendee -- a member of the Darwin-challenged Discovery Institute -- sought to argue that the Internet be completely free of regulation" during the question and answers following Google Chairman and CEO Eric Schmidt's address to the Progress & Freedom Foundation's Aspen Summit. That would be me. Actually, I make no such argument. There is a place for antitrust enforcement (provided it aims to protect competition, not competitors) and consumer protection. I draw the line at economic regulation, or competition policy, which tries to ensure that everyone who can afford to hire a lobbyist profits and no one who can afford to hire a lobbyist fails in the marketplace.
I asked Schmidt how he would feel if Google were unable to cut deals with broadband providers, for example, to feature the Google search bar as the default search bar for all of the broadband provider's customers because a future Congress or FCC applies common carrier requirements which prevent broadband providers from differentiating between content in any way? He responded that if indeed there were a common carrier structure he would hope it would be defined "pretty narrowly," focusing on bit rates. He said he hopes carriers wouldn't be prevented from monetizing their services in any way they chose. Schmidt said he thinks common carriage -- which would regulate "how carriers make their money" -- is a mistake, adding that "you're much better off regulating -- if you have to regulate -- at a level of equal access, equal treatment."
In my opinion, there is little, if any, difference between common carriage and "equal access, equal treatment." A common carrier serves all comers at a standard, published rate; it doesn't discriminate at all. Many people frequently think of common carriers as heavily-regulated entities. For example, the rates that telephone companies can charge for basic service are set by regulators, who aim to keep the rates as low as possible while still allowing carriers to earn a "reasonable profit." But airlines are also common carriers. Although airlines appear to be the antithesis of common carriers because they charge vastly different prices for the same seats, in fact what they have done is create separate products (low fares with high restrictions and high fares with low restrictions) in an effort to offer lower fares to leisure travelers while maximizing profit. But each product is offered to all comers, while supplies last, at a standard, published fare. Many people also tend to think of common carriers as government-protected monopolies who are not allowed to compete in adjacent markets (I believe one of the primary goals of net neutrality regulation, in fact, is to interfere with the ability of broadband providers to sell advertising). Even when we talk about common carriers, therefore, it is not always clear what we are talking about.
What I was attempting to get at with my question is the difference between common carriers and private carriers -- such as newspapers, television and cable. None of these entities are treated as mere conduits for the views of others; they all get to exercise some degree of editorial control.
Anyway, also attending the summit was Harvard Law Professor Laurence H. Tribe (hardly a Reaganite, to borrow the description Karr applied to others). Professor Tribe was asked by another participant whether he thought broadband providers should be allowed to censor music lyrics critical of the President of the United States, for example. Tribe rephrased the question: Can broadband providers be forced to act as common carriers? and answered in the negative,citing Tribe cited Hurley v. Irish-American Gay, Lesbian & Bisexual Group of Boston, 515 U.S. 557 (1995) as the decision that "would probably apply here." In that case, the organizers of a parade did not want to include among the marchers a group espousing a view with which the organizers did not agree. The Supreme Court ruled that the parade was not merely a conduit for the speech of participants. The Court contrasted the parade organizers with cable operators who were the subject of Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994) by noting that cable, unlike a parade permit, confers a "monopolistic opportunity to shut out some speakers." But guess what? Like it or not, cable doesn't confer a monopolistic opportunity anymore.
Don't get me wrong (as Adam Thierer would say): I don't want anyone to be able to limit what I can do on the Web; no one does. But I am more confident, apparently, than some that broadband providers will seek to satisfy consumer expectations. I suspect that broadband providers will experiment with advertising, since companies like Google are making a fortune from online advertising. But if their efforts annoy consumers, advertisers will balk and the efforts will fail. My guess is that the broadband providers will ultimately be forced to collaborate as partners with Google, Yahoo, Microsoft and others.
Schmidt stated, optimistically, that if we did end up with common carriage then "there would be other ways in which we would work with the operators and carriers to help monetize their services. There's a lot of money to be spread around here." Schmidt makes a good and often overlooked point here that is worth repeating: Content and conduit providers are reliant on each others' success. One would think these people could get together and do a deal. Considering their relative strengths and weaknesses, they probably have much less to fear from each other than they realize. For example, the conduit providers are not imaginative risk-takers, and the content providers are not cautious and deliberate. But obviously no one wants to be a junior partner.
Schmidt's remarks overall were very thoughful and contributed to better understanding in what has become a frustrating debate. I wish, if the format of the question and answer period and the late hour permitted, I could have prefaced my question -- which sounded more confrontational than I would have liked -- with a brief statement of appreciation for Google's enormous contributions to the popularity of the Web and to learning, among other things (for example, I consider Google Book Search to be one of the greatest contributions to humankind in my lifetime).
Hal Singer of Criterion Economics has a good article opposing Net Neutrality in the current Cato Institute journal Regulation:
With the advent of streaming video and other bandwidth intensive applications, the demand for bandwidth is projected to overtake the existing supply quickly. Regulators and legislators should not interfere with a broadband service provider's ability to manage this "coming exaflood" with intelligent networks. At best, the price of Internet service will skyrocket if broadband service providers can meet the coming traffic using only expanded infrastructure. At worst, the Internet experience for all users will deteriorate. Given the tremendous uncertainty over the future of the Internet and the need to encourage innovation and investment, it seems dangerous to interfere with heavy-handed regulation at this juncture.
You've probably heard of online phishing, where Web stalkers purloin sensitive information through trickery and deceit. But you will be glad to know legislatures across the country are banning an even more serious form of online predation.
The Humane Society of the United States last year mailed more than 50,000 people an urgent message, underlined and in bold type: "Such horrific cruelty must stop and stop now!"
The cruelty in question was Internet hunting, which the animal-rights group described as the "sick and depraved" sport of shooting live game with a gun controlled remotely over the Web. Responding to the Humane Society's call, 33 states have outlawed Internet hunting since 2005, and a bill to ban it nationally has been introduced in Congress.
But nobody actually hunts animals over the Internet. Although the concept -- first broached publicly by a Texas entrepreneur in 2004 -- is technically feasible, it hasn't caught on. How so many states have nonetheless come to ban the practice is a testament to public alarm over Internet threats and the gilded life of legislation that nobody opposes.
But we wouldn't want to discriminate against our aquatic friends, so
California also banned Internet fishing. Nobody is doing that, either.
All this talk of banning something that doesn't even exist reminded me of the overheated Net Neutrality campaign to prohibit the blocking and degradation of bits.
If legislators ever put these two phenomena together, watch out.
Imagine the specter of big telephone companies degrading access to your 802.16q HoIP 12-guage, your iChat .22, or your terabit FoIP fly rod. This ain't shooting fish in a barrel -- between me and the savannah I need high-def, real-time, low-jitter, no-latency, high-powered, long-range, long-haul optical targeting. Or what if the cable TV companies create a "walled game preserve" where only their broadband customers can remotely roam and poach unsuspecting prey. A competitive Google digital preserve with avatar antelope and bit-substitutes for ballistics and blood just won't do. Online hunters want the real thing. We want QoS thruput to our meat-space big game. Open access poachers of the world unite!
P.S. HoIP = hunting over IP; FoIP = fishing over IP
Podcast on open access regulation in the 700 MHz band
This week in the Tech Policy Weeklypodcast, Adam Thierer, James Gattuso, Jerry Brito, Tim Lee and I discuss FCC Chairman Kevin Martin's reported plan to encumber a portion of the 700 MHz band with open access rules sought by Frontline Wireless LLP, Google and others.
We react to a statement issued by a top executive at AT&T claiming that the draft FCC order -- which none of us have seen -- would "simply take one block of the upper 700 band being auctioned to allow an experiment with an alternative open-devices/open applications business model of the type proposed by Google and others," and that "the proposal does not mandate a wholesale business model in any particular block, nor does it mandate net neutrality style regulations on the other commercial spectrum being auctioned."
Also, the AT&T statement claims there would be a reserve requirement to ensure that no one would be able to obtain any block of spectrum without paying an "appropriate price to the US Treasury." If bids for this particular block do not meet the reserve requirements, or if no qualified bidder comes forward, the block would be withdrawn and re-auctioned without the open device/open applications requirements.
Google wants the Federal Communications Commisison to make net neutrality a licensing requirement in the Upper 700 MHz spectrum band -- "(1) open applications, (2) open devices, (3) open services, and (4) open access." According to media reports, FCC Chairman Kevin Martin is circulating draft rules which would impose such a requirement (see: this, this and this).
What's Martin's agenda? I suspect he thinks he's come up with a brilliant strategic maneuver -- give Google the chance to acquire a nationwide broadband wireless footprint on the cheap and maybe the company will give up funding the advocates of net neutrality regulation. AOL ended its support for open access the minute it merged with Time Warner, didn't it?
But as we learned from the 1996 Telecommunications Act, procompetition policy is tricky and unpredictable. That debacle proved Thomas Sowell's observation that a self-equilibrating system like the market economy means a reduced role for intellectuals and politicians. Unfortunately, as Sowell added in an interview with Jason Riley, "even today many still haven't accepted that their superior wisdom might be superfluous, if not damaging." Nowhere is this more true than in communications policy.
It might be one thing if the FCC auctioned the spectrum with no strings attached, so the winning bidder could enter the market with the same advantages and disadvantages as the incumbents. That would offer the best hope for sustainable competition, the kind that doesn't require extensive oversight and participation by regulators into the future. The artificial kind we saw in the aftermath of the 1996 law with the competitive local exchange carriers (CLECs), who endlessly clamored for more regulatory favors, precipitated years of rulemaking and litigation.
But I realize I'm missing the point: It wouldn't be precompetitive if an incumbent bid for the spectrum and won, would it? As I've pointed out, the incumbents are effectively barred from the bidding by a requirement that the successful bidder must "adopt open access policies ... on any other licensed spectrum it holds." It would lead to less regulation if the FCC explicitly precluded AT&T, Alltel, Sprint, T-Mobile, Verizon et al. from participating in the upcoming auction instead of encumbering the successful bidder as a less transparent means of excluding the established carriers. Then we could expect the successful bidder to sink or swim without further regulatory intervention.
There doesn't seem any prospect for sustainable competition in this instance, if a letter filed with the FCC by one of Google's attorneys is any indication. In it, Google identifies itself as a "new entrant" (which is code for a client of procompetition policy) and cites a very long list of competitive "disadvantages" it apparently has belatedly discovered it will have to overcome with the help of regulators:
Since filing its comments some six weeks ago, Google has undertaken further internal analyses, including meeting with auction experts and conducting extensive game theory scenarios, to determine whether and how it makes sense to participate -- and do so successfully -- in the upcoming auction. Our analysis has confirmed the view that incumbent wireless carriers are likely to prevail in a spectrum auction when they compete head-on with a potential new entrant like Google. This especially appears to be the case when incumbents and would-be new entrants are bidding for large, unencumbered blocks of spectrum, such as the 22 MHz REAG Block proposed by the Coalition for 4G in America.
Simply put, large incumbents have significant built-in advantages that are very difficult to overcome. While some argue that Google could simply choose to outbid any single entity in the auction, the notion of "deep pockets" alone is not the correct measure in this particular instance. Instead, the decisive factors include other significant economic and operational barriers to entry, and the relative value and usefulness of spectrum to the bidders. In particular, Verizon and AT&T are well-established, vertically-integrated incumbent providers of wireless and wireline services. By contrast, Google is a Web-based software applications company, not a service provider, with little pertinent experience in the wireless market and no legacy business models to protect. The incumbent carriers have an embedded national network of towers, backhaul, customers, retail outlets, and advertising. The incumbents also have far more ready cash flow at hand, and the willingness to spend it in furtherance of existing business plans. Consequently, the spectrum simply has more economic value and overall usefulness to incumbents like Verizon or AT&T, than to a would-be new entrant like Google.
To overcome these disadvantages, Google is also asking the FCC for a dynamic auction mechanism,
where a designated entity would provide access to spectrum on an as-needed basis. Payments would be made in perpetuity as the spectrum is being used, rather than months or even years in advance. Such a dynamic auction would facilitate infrastructure build-outs, remove barriers to entry for smaller and more innovative infrastructure.
And, oh yes, the company has told the FCC that "overly stringent deployment mandates will only harm the very entities that offer the greatest promise for independent broadband platforms." In other words, Google wants more time than the agency would normally allow a successful bidder to build out its network.
I'll predict it won't end here. If necessary to protect its investment, Google won't hesitate to seek more special favors for itself or more obstacles for its rivals. The company's track record demonstrates that it sees government as a tool, useful idiot or both. The letter cited above will serve down the road as a convenient "I told you" -- the first step in laying the groundwork to petition the FCC in a year or two. But of course, by then Martin will be gone.
I'm old-fashioned, I confess. I believe the market will deliver open-access -- if allowed to function freely -- because that's what consumers will demand.
Google obviously doesn't believe a broadband wireless network operating on an open access principle would be competitive, or it wouldn't seek regulatory advantages. I'd like to see Google put its money where its mouth is. Show the world that skeptics of net neutrality regulation don't know what they're talking about. Bid on the spectrum, with no strings attached, and voluntarily adopt an open-access model.
Policy makers should be wary of enacting regulation solely to prevent prospective harm to consumer welfare, particularly given the indeterminate effects on such welfare of potential conduct by broadband providers and the law enforcement structures that already exist.
The report indicates FTC staff believes it is "impossible to determine in the abstract" whether allowing content and applications providers (or even end users) to pay broadband providers for prioritized data transmission will be beneficial or harmful to consumer welfare. Similarly, staff feels broadband providers have "conflicting incentives" relating to blockage and discrimination against data from non-affiliated providers and that, in the abstract, "it is impossible to know which of these incentives would prove stronger for each broadband provider."
For example, prioritization may provide benefits such as improved incentives for investment and innovation in networks and improved quality of content that require higher-quality data transmission, as opponents claim. Or, prioritization may reduce the incentives for innovation by content and applications providers, as proponents of net neutrality regulation claim. Similarly, the incentives of broadband providers
may cut both ways: for example, despite potentially having an incentive to favor affiliated content and applications, access providers have argued that they have an interest in providing access to a wide range of content and applications, which are essential complements to the services they sell.
Antitrust law recognizes that some conduct is always or nearly always injurious to competition and to consumers, but other conduct can be good or bad depending on the circumstances. The former, conduct that is always or nearly always bad, generally is deemed per se illegal under the antitrust laws (meaning that it is forbidden regardless of the circumstances), because bright-line tests are easier to administer. But conduct that has the potential to be either anticompetitive or procompetitive is analyzed under the rule of reason to determine the net effect on consumer welfare.
In recent years, economists have demonstrated that many forms of conduct assumed to always be anticompetitive in fact sometimes can be procompetitive. For a recent example, check out an opinion handed down by the Supreme Court today (Leegin Creative Leather Products, Inc. v. PSKS, Inc.) which concerns Leegin's refusal to supply retailers who discount its products. Retail price maintenance has long been deemed per se illegal, but the Court noted that a significant body of research supports the view that while retail price maintenance tends to reduce intrabrand competition (various retailers competing to lower the price of a particular brand), it also may promote competition between different brands. The Supreme Court ruled that retail price maintenance now falls in the rule of reason category, meaning that the net effect will govern.
For the reasons cited in the FTC staff report, which I have briefly noted here, prioritization and differentiation of network traffic should receive rule of reason analysis, in my opinion, and apparently also in the view of the FTC staff. Proponents of net neutrality regulation appear to prefer making most prioritization and differentiation per se illegal. If policymakers reject that approach, as I think they should, where does that leave content and application providers and consumers?
According to the staff, the FTC has the authority and expertise to intervene to protect content and application providers and consumers if it needs to:
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 ....
The FTC has been involved in the Internet access area for over a decade and will continue to be involved in the evolving area of broadband access. The FTC Act is sufficiently flexible to allow the FTC to enforce the antitrust and consumer protection laws in most industries, including those involving new and ever-changing technologies. The fundamental principles of antitrust and consumer protection law and economics that we have applied for years are as relevant to the broadband industry as they are to other industries in our economy.
Therefore, if Congress does nothing, allegations of unfair prioritization and differentiation of network traffic are and will nevertheless be subject to rule of reason analysis under existing antitrust jurisprudence.
Google makes some excellent points in the comments it filed with the Federal Communications Commission in a proceeding examining proposals for network neutrality regulation.
First, Google argues that packet prioritization (i.e., Quality of Service) is a "poor proxy for additional bandwidth."
[T]he engineers at Internet2 conducted a detailed technical analysis of QoS
in broadband networks. Their conclusion is that QoS is a relatively poor proxy for additional
In most bandwidth markets important to network-based research, it is cheaper to buy more capacity and to provide everybody with excellent service than it is to mess with QoS. In those few places where network upgrades are not practical, QoS deployment is usually even harder (due to the high cost of QoS-capable routers and clueful network engineers).
Second, Google argues that packet prioritization doesn't have a material impact unless it can be activated across the network, which requires cooperation among network operators. That's something they haven't been able to manage.
QoS may not even provide the supposed benefits that its supporters suggest. In order for prioritization to have any material impact on a stream of Internet traffic, it must be activated all the way through the Internet, from the content provider's side of the Internet "cloud" through the backbone networks and finally to the end user. Because any one network operator does not own and control every potential route through the public Internet, numerous multi-party business agreements and/or uniform standards would be required among all Internet service providers to achieve end-to-end QoS. Such arrangements have eluded the parties to date. For example, British Telecom apparently will not employ a QoS-based scheme in its network.
Third, Google argues that network providers have higher incentives to invest in an open Internet.
There are both academic and real-world illustrations of how an open Internet actually creates enhanced incentives to invest in broadband facilities. For example, a recent econometric study at the University of Florida found that the cable and telephone companies providing broadband services are more likely to further develop their infrastructure, resulting in higher data speeds, if they do not charge Web-based content companies for preferential treatment. As the authors concluded, based on detailed economic analysis, "the incentive for the broadband service provider to expand under net neutrality is unambiguously higher than under the no net neutrality regime." Obviously this outcome "goes against the assertion of the broadband service providers that under net neutrality, they have limited incentive to expand."
Fourth, video -- not packet prioritization -- will pay for network upgrades.
[T]hose same broadband providers arguing to policymakers that paid QoS from Internet and technology companies will help finance broadband build-outs, have been telling a very different story to Wall Street investors. There, the providers present well-documented claims that fiber facilities actually pay for themselves, and that proprietary video services -- not
prioritization-based fees -- will be the primary revenue generator for fiber networks.
These points, along with citations (all of which I have omitted), can be found on pp. 26-32 of Google's above-referenced comments.
Well, if network providers have more incentives to invest in an open Internet with more bandwidth, why do we need regulators? Regulation is a nuisance, a point even Google acknowledges when it pleads:
It also would be helpful if our opponents were to agree that it would be desirable to
preserve the Internet as an open platform for edge-powered innovation without permission.
Google, can't you see your proposals would require your opponents to seek permission -- the very thing you wish to avoid -- every time they work to improve their products and services?
David Isenberg says investment-killing Net Neutrality regulations aren't enough. What we really need is something more draconian...more radical...more "permanent"....What we really need, Isenberg says, is "structural separation" that would break up the cable and telecom companies and confine their business to a superslim niche of delivering bits. In other words, prohibit the communications providers from selling applications or content or services. Digital technology and abundant bandwidth is pushing in this direction over the long term -- it's what we call the separation of content and conduit, where specialization yields (1) network companies that primarily supply bandwidth and (2) app, content, and services firms that focus on software, videos, e-mail, etc. But it is not an absolute law of business or economics. All industries undergo waves of vertical integration or disaggregation, depending on the economics of the era's technology. Imposing the rigid end-result of "structural separation" on such a dynamic, evolutionary, and tricky business environment as the Internet via blunt legislation from Washington would yield catastrophe. It would stop much-needed fiber-optic and wireless investment in its tracks and guarantee Americans didn't get any more bandwidth over the next decade. The Exaflood would recede and yield to a data desert. Isenberg's favored content and applications companies would search in vain for bandwidth that wasn't there.
Ten years ago Isenberg's "stupid network" theme was a clever play on words that illuminated a new bit-centric paradigm of digital abundance. Too bad his stupid network is no longer an ironic figure of speech.
Price increases are likely to occur as a result of network neutrality regulation, according to Pociask. It which would preclude network providers from experimenting with different pricing or service models, forcing consumers to bear the entire cost of network upgrades.
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.
The Federal Communications Commission will conduct an inquiry into broadband market practices that will hopefully lead to a more fact-specific discussion around net neutrality regulation. Commissioner Michael J. Copps complained that "we proceed too leisurely here," warning that broadband providers can build networks with "traffic management policies that could restrict how we use the Internet."
Don't take my word for it. It was the Wall Street Journal that said large carriers "are starting to make it harder for consumers to use the Internet for phone calls or swapping video files."
Copps didn't mention that the same article highlighted the burden that a small number of users impose on the network and that it's unfair to the ordinary users.
In August alone, one cable broadband subscriber consumed a total of 1.5 terabytes, the equivalent of 1,500 standard-definition movies, according to CableLabs, the cable industry's research and development arm. Fewer than 10% of the subscribers of Time Warner Inc.'s cable unit consume more than 75% of its bandwidth, says Mike Lajoie, chief technology officer of Time Warner Cable. "It can be frustrating for people using email or sending pictures to their moms," he says. "It tends to slow down the rest of the network."
The inquiry will examine whether broadband providers "charge different prices for different speeds or capacities of service" and whether the FCC's own policies should "distinguish between content providers that charge end users for access to content and those that do not." Shifting part of the focus onto the business practices of content providers who are financing the campaign for net neutrality regulation is an unfortunate new twist, since two wrongs don't make a right.
Also, interested parties will be able to comment on whether the FCC should adopt a policy principle of nondiscrimination and, if so, what it should look like. For example, is it okay if Comcast and Google share advertising revenue?
Google has shared advertising revenue from searches generated on Comcast.net, with Comcast's cut expected to be about $70 million this year, people familiar with the matter say. But Comcast feels that its share should be at least $100 million, these people say. Comcast.net, which gets about 15 million visitors a month, is one of the biggest non-Google sources of search queries handled by Google.
The full story is here. Under a pure nondiscrimination requirement, Google wouldn't automatically get to provide the search results every time a user of the Comcast.net portal enters a query into the default search box on the site. It would be discriminatory if Comcast provided preferential placement or access to any particular content. Google may not mind paying Comcast $70 million or even $100 million, but what if the cable operator wants $1 billion? After all, Google agreed to pay Dell $1 billion over 3 years to preinstall its software on up to 100 million Dell PCs, and it agreed to pay MySpace.com a minimum of $900 million in ad revenue over 3 years in exchange for a Google search box appearing on every MySpace page. It would be hard to draft a nondiscrimination requirement to permit the former but restrict the latter.
Everyone agrees competition beats regulation, but we're always told things aren't competitive enough yet to justify deregulation.
If eventually we develop a truly competitive marketplace with consumers enjoying broadband speeds like those available to our counterparts in other industrial countries, we can step back and rely on the genius of that marketplace.
The words of FCC Commissioner Michael J. Copps. When they say "truly competitive," I think people like Commissioner Copps have in mind the textbook definition of "perfect competition" (many suppliers in the market, each supplier so small that its actions have no impact, the product all of the suppliers provide is the same, all agents have perfect information, all firms have acces to all production technologies and any firm may eneter or exit the market as it pleases), though they would never admit it. Luis M.B. Cabral describes perfect competition in Introduction to Industrial Organization. Cabral also says it doesn't exist, and that if it did suppliers would have zero profits. What investor is going to sign up for that?
A group of 16 prominent economists who, I guess, don't want to marginalize themselves in this debate by taking sides, are saying that the broadband market is "workably" competitive.
While not all geographic markets are served yet by multiple broadband providers, the data suggest that broadband markets are, in general, dynamic and competitive. By December 2005, according to the FCC's latest statistics, 93 percent of all zip codes in the U.S. had two or more broadband providers, and 82 percent had three or more. Just because a zip code has multiple providers does not mean that those providers compete directly, so whether "enough" firms compete yet is debatable; the trend, however, is positive. Furthermore, consumers are making greater use of new technologies. Mobile wireless use went from fewer than half a million subscribers in 2005 to more than 10 million subscribers in 2006. In short, more people are getting served by more providers and more platforms.
Consumers are benefiting from this competition. For example, between 2001 and 2005, the average price of a digital subscriber line dropped by about one-third. In the case of cable, the quality-adjusted price declined significantly, as cable connection speeds increased significantly while prices held steady.
In most, but not all, cases, we believe these markets are workably competitive. Moreover, even if some service providers could exercise some market power, the multi-sided nature of the market means that they still have powerful incentives not to block content. In particular, providers need content in order to attract subscribers. If a provider restricted access, its product would be less valuable and attract fewer subscribers. The point is that even firms with market power in one part of the market will not necessarily be able to control content.
The economists are: William J. Baumol, Martin Cave, Peter Cramton, Robert Hahn, Thomas W. Hazlett, Paul L. Joskow, Alfred E. Kahn, Robert Litan, John Mayo, Patrick A. Messerlin, Bruce M. Owen, Robert S. Pindyck, Vernon L. Smith, Scott Wallsten, Leonard Waverman and Lawrence J. White. Their paper is here.
Another relevant dimension of the prequel is whether the supply of broadband is now, or is likely to be, subject to anticompetitive activity. A dispassionate reading of either the history or current status of the telecommunications industry suggests that we ought not to rely solely on laissez faire ideology to assure that the benefits of competition are fully realized. At the same time, the present trends that include rapidly rising output and declining prices are reassuring. It is also, or should be, therefore, calming that no less than three federal agencies (the Department of Justice, the Federal Trade Commission and the Federal Communications Commission) have telecommunications industry oversight responsibilities under existing laws. Collectively, these agencies may, and ought to, set regulatory requirements that are "in the public interest," prevent "contracts, combinations or conspiracies in restraint of trade," and prevent "unfair methods of competition."
Whether a "competitive" market is around the corner or whether it's already here, at least we agree there's nothing to justify net neutrality regulation.
What does game theory say about net neutrality regulation?
Researchers at the Warrington College of Business Administration at the University of Florida have developed a "stylized game-theoretic model" to identify winners and losers under net neutrality regulation. Their conclusion: contrary to the conventional wisdom, broadband providers would actually have more incentive, not less, to upgrade their networks under net neutrality regulation. Here is part of the logic, according to Hearusnow.org, which quotes one of the researchers:
The whole purpose of charging for preferential treatment to content providers is that one content provider gains some edge over the other," says Subhajyoti Bandyopadhyay, who co-authored the study with Cheng. "But when the capacity is expanded, this advantage becomes negligible.
In other words, if there is ample bandwidth there would be nothing to ration. Broadband providers would be able to charge more if there is artificial scarcity. But if private investors are willing to invest in abundance rather than in scarcity, we should encourage them to do that. In the real world, investors actually do pursue temporary advantages. It just depends on the total anticipated size of the return.
Bandyopadhyay's point that the broadband providers' ability to charge for preferential treatment declines as network capacity expands proves only that if we allow market forces to operate, we won't need net neutrality regulation at all.
Digital Prosperity Report Concludes IT Investment Critical
Policy makers should recognize information technology as the centerpiece of economic policy and develop their plans accordingly, concludes the Digital Prosperity study published this week by the Information Technology and Innovation Foundation.
"In the new global economy information and communications technology (IT) is the major driver, not just of improved quality of life, but also of economic growth," writes Foundation president, Dr. Robert D. Atkinson, author of the study.
Atkinson is a widely respected economist who formerly served as project director of the Congressional Office of Technology Assessment, and is the former director of the Progressive Policy Institute's Technology and New Economy Project of the centrist Democratic Leadership Council.
Based on reviews of other studies, and Atkinson's own research, the report maintains, "IT was responsible for two-thirds of total factor growth in productivity between 1995 and 2002 and virtually all of the growth in labor productivity" in the United States.
Skype petitions FCC to regulate cellphone carriers
Skype's petition seeking wireless net neutrality regulation lists a couple specific "abuses" the company claims justify FCC intervention. The first one is handset subsidies. All of the leading cellphone carriers heavily subsidize cellphones, because up-to-date handsets utilize spectrum more efficiently. The carriers recoup the subsidies via two-year service contracts. Criticized for discouraging consumers from switching providers, these arrangements nevertheless do help hold down the cost of service. Skype doesn't like the fact that the subsidies put the carriers in a position to control the software that can be loaded onto the phones. Cellphones will soon roam seamlessly between 3G, Wi-Fi and DSL. Skype would like to cut deals with manufacturers to embed its software as a default setting. According to Skype:
as innovative "smart phones" marry the versatility of computers with the convenience of mobile equipment, manufacturers are poised to equip handsets with Skype features but are reluctant to do so if such features threaten wireless carriers' established business model....
The Nokia E61, a high-end e-mail device and phone seen as a competitor to the BlackBerry and Palm's Treo, was released in Europe in the summer of 2006 and received favorable reviews. In the United States, however, Cingular (now AT&T) was the exclusive vendor of a stripped-down model known as the E62 -- a crippled model which lacked, among other features, Wi-Fi connectivity, a feature that is increasingly popular among on-the-go consumers....
Intentionally removing Wi-Fi functionality from the Nokia E62 interferes with a consumer's ability to place Internet calls, thereby harming innovation and price competition.
Sure, Skype could save some time and money if it could bypass Cingular altogether and cut distribution deals directly with Nokia, LG, Motorola, Samsung and so on. But there's no consumer benefit in that. Preventing Cingular from benefitting in any way from advertising and distribution deals would force the carrier to recover all of its network costs from subscribers.
There is a free market solution to the "problem" in which Skype finds itself. Skype could become a carrier itself and qualify for roaming privileges. Companies like Netgear and Belkin already produce Wi-Fi-enabled mobile phones. These phones could be made compatible with the GSM networks operated by Cingular and T-Mobile, for instance. Both of these carriers operate their own Wi-Fi hot-spots, incidentally, and have an interest in facilitating cellular-Wi-Fi roaming. Skype is seeking a regulated advantage over its competitors and should be rebuffed. The FCC should reject this petition and let the market sort this out.
More interesting estimates of the bandwidth requirements of certain Internet applications, which begs the question: Who's gonna pay for the required network capacity?
World-wide, spending on new telecom infrastructure is expected to rise to $240 billion in 2008, up 19% from 2005. Moreover, a greater proportion of that spending is expected to be plowed into accommodating capacity-hogging Internet traffic like video.
The new files can be clunky and costly to handle. A typical Internet video file eats up 1,000 times as much bandwidth as an average email message. And while sending 100,000 emails costs a telecom company around 20 cents, transmitting 100,000 low-resolution videos costs around $15, and sending 100,000 high-definition movies costs around $10,800 (emphasis added), according to Infonetics Research.
How does Columbia Law Professor Tim Wu justify his proposal to impose massive new regulation on cellphone networks? Wu is finishing a paper in which he proposes the following:
(1) Allow any consumer to attach any safe device to their cellphone, and
(2) use the applications of their choice and view the content of their choice.
(3) Require cellphone providers to disclose, fully, prominently, and in plain English, the following information: * Limits on bandwidth usage; * Devices that are locked to a single network; and * Important limitations placed on features; and
(4) reevaluate their "walled garden" approach to application development, and work together to create clear and unified standards to which developers can work.
Wu acknowledges critics will point to vibrant competition in the cellphone industry as the main reason we don't need this. Although most people don't, Wu completely dismisses the fact that the industry is extremely competitive. According to him, it's a "textbook oligopoly with four major players, premised on a bottleneck resource."
Well, in an oligopoly prices could be expected to rise, service deterioriate and innovation suffer. But this is precisely the opposite of what we see in the cellphone space. Cellphones used to be a luxury item, now they're ubiquitous. The FCC noted that during the five-year period ending in June 2002, the number of cellphone subscribers increased from 48.7 million to 134.6 million. This is a result of falling prices, improved coverage and the introduction of new features. None of this would have happened if the market were broken.
Wu's oligopoly argument rests on two faulty premises:
According to Wu,
... it is often said that the wireless mobile market is "highly competitive.[sic]" as though starting a competitive cell phone company were as easy to start as a hot dog stand .... Structurally, the mobile wireless industry has a natural and major barrier to entry--acquisition of sufficient spectrum ... The oldest fact in broadcast, spectrum scarcity, in [sic] a physical fact that cannot help but affect the conditions of competition in the wireless world.
At the outset, it's worth noting that Wi-Fi and WiMAX are creating an enormous new competitive threat to the cellphone providers, and that technology companies, the FCC and local governments are helping reduce the cost of deploying these systems.
Setting that aside, it has always been thought that spectrum is a scarce resource although history has shown it's abundant. For example, when ways needed to be found to make more efficient use of mobile wireless spectrum so the service would be more appealing to mainstream consumers, the market responded. A company in San Diego invented CDMA (code division multiple access), which was twenty times more efficient than the cellular technology it displaced. Spectrum may be a finite resource, but we are constantly discovering better ways to exploit it.
There is widespread belief that radio spectrum use in the US is either crowded or becoming very crowded ... the shortage of spectrum is often a spectrum access problem. That is, the spectrum resource is available, but its use is compartmented by traditional policies based on traditional technologies. New radio technologies may enable new techniques for access of spectrum and sharing of the spectrum resources that may create quantum increases in achievable utilization.
Wu also seems to claim that ordinary people are simple people who don't always understand what's good for them:
It is relatively easy for consumers to compare firms by metrics like price and network coverage. But taking the time to do comparisons on the basis of whether the carrier cripples technological feature sets is something only a select group of consumers have the time or expertise for.
Somehow I'm sure when Wu's "select group" detects instances of carriers crippling technology that it's members will know what to do. It's easy to publish one's views on the Internet. If consumers care, they will respond. But it could also be that the value of a particular innovation is in the eye of the beholder. Maybe the fear here is that consumers won't care about a particular innovation, or that they may value other things, like price, convenience, reliability, etc., higher.
Besides pointing out that the Internet is anything but neutral and that net neutrality regulation would be a boon for lawyers and bureaucrats, as Bret noted, Peter Huber also points to a favorite theme of mine, i.e., net neutrality regulation would prohibit network operators from from providing free or reduced-price broadband connections supported by advertising (see, e.g.,this, this, this and this).
Not long ago Google successfully bid to deploy a municipal Wi-Fi service for the city of San Francisco. As one part of that proposal, it promised to offer a free tier of wireless access to all. Free means paid for by advertisers, whose pitches will be the first thing you see whenever you log on to San Francisco's Google-neutral network. The whole free broadcast network--radio and television--was built this way. But the net neutrality law would outlaw any comparable arrangement on the Net. It would be verboten, that is, for content providers to share the cost of running digital connections to the customers they most want to reach.
As usual, Peter Huber clarifies a complex topic -- how the Net actually works. The Net isn't "neutral" -- never has been...and shouldn't be in the future. "Neutrality" laws, says Huber, would be a boon for telecom lawyers like himself but a huge source of frustration for Internet companies and consumers.
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."
"If the goal is to encourage people to build new capabilities, then the party that takes the lead is probably only going to have it on their net to start with and it's not going to be on anyone else's net. You want to incentivize people to innovate, and they're going to innovate on their own nets or a few other nets...."
"I am totally opposed to mandating that nothing interesting can happen inside the net,"
Senator Byron Dorgan (D-ND) reintroduced last year's unsuccessful net neutrality bill, the Internet Freedom Preservation Act. The new bill is numbered S. 215 and it was introduced on Jan. 9th. The list of cosponsors reads like a who's who of potential Democratic presidential candidates: Obama, Clinton, Kerry ... Oh yeah, it includes a single Republican, too.
Sen. Dorgan, an MBA by training, observed we wouldn't need net neutrality regulation if the broadband market was competitive,
Now perhaps if we had a competitive broadband market we would not need to be concerned about the discriminatory intentions of some providers. In a market with many competitors, there is a reasonable chance that market forces would discipline bad behavior.
But this is not the case today: FCC statistics on broadband show that the local cable and telephone companies have a 98 percent share of the national broadband residential access market.
For those that say, the market will take care of competition, and ensure that those that own the broadband networks won't discriminate, that cannot be so when at best consumers have a choice of two providers.
Engadget has a fascinating interview with Bill Gates, including this insightful discussion of net neutrality regulation:
It's really unfortunate that some of these networks in Europe are not being built because of these regulations and I think a lot of people want to know that Microsoft is on the same side as the consumer and they want to enable networks to be built that are not regulated by net neutrality laws.
Right! But you're either a network company who don't want any restrictions, or a content company who doesn't understand the disincentive to building out the networks. There were tons of things proposed that would have made the US just like Europe. These are complex issues. What the consumer wants, in terms of, hey, my network gives me access to everything but it's also very high-speed -- that's the ideal for us. And as a big company in the industry, it's incumbent -- it's a part of our responsibility is to learn these complex issues and not let either the extreme things block what really should happen. The US did have a problem in the 1996 act that it had as an assumption that sub-leasing could do this magic thing, and how did that go? Why is Korea ahead of us? It's a complex thing. I think we're doing the right things. Go and look at the AT&T filing; I haven't looked at it specifically, and see if you think that strikes a good balance.
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).
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).
The Wall Street Journalreports 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.
CNET reports that Google has been contacted by cell phone carriers who don't want their customers accessing Google Maps from their cell phones. One Google executive claims: "we've been getting notes from some of the telco carriers who are saying 'look, you need to stop our customers from downloading this thing'." If the report is true, it says a lot about whether or not we need heavy-handed government regulation to protect basic Internet freedoms.
Google Maps one of the best cell phone features I have ever used and I would be angry if my cell phone carrier tried to take it away. They could, of course. They're under no network neutrality-type obligations. Any cell phone carrier could block access to Google Maps tomorrow. But if the media report is true, some have decided to appeal to Google instead. Maybe they fear a customer backlash if they take action on their own. Dissatisfied customers could jump ship. There are four major cell phone carriers to choose from. But existing customers are locked into service agreements, so one would assume the carriers are in a strong position. What they fear, I suspect, is bad press and resulting damage to the brand. They also may be afraid of provoking Washington. Either way, they already seem to feel there are limitations on what they can do even in the absence of net neutrality regulation.
Will net-neutrality build a world-class Internet infrastructure?
If you thought "net neutrality" is primarily about preventing telephone and cable companies from blocking access to particular web sites or degrading someone else's services and applications, you would be wrong. AT&T and BellSouth, who are seeking approval from the Federal Communications Commission to complete their merger, will voluntarily commit not to do those things. Consumer groups, however, want the FCC to impose an "additional fifth principle of non-discrimination" on AT&T and BellSouth as a condition of their merger.
If you're keeping track, here are the four principles that are no longer subject to debate:
If the FCC falls for this suggestion, to impose a non-discrimination requirement on network providers, it would outlaw the partnership, bundling and pricing strategies that are the basis for all advertising efforts. That would harm consumers, who benefit the most from advertising.
Online advertising revenues a target of net neutrality regulation
Congress seems prepared to outlaw blocking or degrading Internet sites, services and applications, yet supporters of net neutrality regulation aren't satisfied. Oregon Senator Ron Wyden, for example, promises to block legislation that would benefit consumers with higher bandwidth and lower prices for video services unless it provides for stronger net neutrality regulation.
My theory is the real objective of net neutrality regulation is to protect Google, Yahoo, MSN and the other Internet content providers from having to share online advertising revenue with companies like AT&T and Verizon who deliver their content. Online advertising generated $12.5 billion last year, and the content providers captured all of it. That's not usually how it works when it comes to newspapers, broadcasters and other media. Advertising usually supports both content and delivery.
Last week a distinguished panel debated net neutrality regulation at George Gilder's Telecosm conference. The panel featured Stanford Law Professor Larry Lessig, Peter Huber of the Manhattan Institute, eBay's vice president and deputy general counsel for government relations and others. I asked the panel if anyone thought it would be wrong if AT&T or Verizon were to hold an auction where Google, Yahoo and MSN could bid for the right to feature their search bar on a portal or a browser that AT&T or Verizon provide as a default setting to their millions of customers? Assuming that it's illegal for Verizon and AT&T to block or degrade acces to the others, is there anything wrong if Google wants to pay each of the carriers a billion dollars to feature its search bar as the default setting?
LESSIG: ... Totally fine ... it's exactly what we should be encouraging.
HUBER: ... If [net neutrality regulation favored by Wyden and other supporters] becomes law, it's illegal. [AT&T and Verizon] are giving preferential access to one advertiser ... it cannot be done.
Considering that Lessig supports net neutrality regulation and Huber opposes it, I thought the responses were quite interesting.
The marketplace should allocate advertising revenue, in my opinion, not lawmakers. A problem with most of the proposals for net neutrality regulation, perhaps unbeknownst to many supporters, is they would make it illegal for broadband providers to receive advertising revenues. In this sense, net neutrality regulation is anti-consumer because it would deprive providers of additional revenues which they could use to accelerate the build-out of their networks and to lower the subscription fees their customers have to pay.
Consumer groups issue dire prediction and renew their call for network neutrality
A report by S. Derek Turner for Free Press, the Consumers Union and the Consumer Federation claims that,
Other countries' broadband success can be largely attributed to their successful implementation and use of non-discriminatory, open access policy.
Scott Wallsten at AEI has already looked into this and concluded that, "Most economists and most studies conclude that unbundling in the U.S. reduced incentives to invest in high-speed Internet infrastructure." He points out that Korea became the world leader in broadband connections per capita before it required local loop unbundling in 2002, and that broadband penetration in Korea has "barely changed over the last few years." Wallsten concludes that population density is the most important determinant, and that some regulations appear to be beneficial while and others are harmful. For example, if regulators price something below cost, the incumbents will have little incentive to upgrade it when they have to sell it at a loss to competitors. Wallsten also compares the benefits and harms of particular regulations. It's interesting, but the problem is few regulations are perfectly calibrated. Most lead to unintended consequences, and create new constituencies who constantly clamor for more.
Net neutrality regulation wouldn't solve this problem
Nearly 20 percent of Internet telephone test calls experienced unacceptable call quality over the last 18 months, according to Brix Networks. The company provides a free voice quality testing portal (TestYourVoIP.com) for measuring the quality of broadband Internet phone connections.
Wall Street Journal columnist Lee Gomes interviewed Brix Chief Technology Officer Kaynam Hedayat about the findings:
Why the decline?
With the emergence of sites like YouTube, and music downloads and emails with large attachments, there is just more traffic on the Internet.
Why are phone calls so susceptible to Internet traffic increases?
Voice calls are very real-time-sensitive. If the other person's voice drops off, you can't carry on the conversation. It becomes like the old days when you called international over a satellite. The delays were so long that you had to say a sentence, pause a couple of seconds without saying anything, and then wait for a response from the other end.
If Congress enacts net neutrality regulation, network providers could prioritize VoIP services but they would have to do so on a nondiscriminatory basis. That means they'd have to act as a disinterested wholesaler, treating every retail provider of VoIP services, including their own affiliates, equally. Would they do that? Or would it be more profitable to let all VoIP services deteriorate so consumers place a higher value on traditional phone services? You be the judge.
The Chairman of the Federal Trade Commission made a significant contribution to understanding the proper role of government in ensuring net neutrality. Speaking at the Progress & Freedom Foundation's Aspen Summit this week, Deborah Platt Majoras cited the principle that, absent clear and specific evidence of market failure or consumer harm, policymakers should not enact blanket prohibitions of particular business models or conduct.
Deborah Platt Majoras
Second, she reminds us that broadband Internet access services are within the FTC's jurisdiction and that the agency's powers are proven. The FTC has successfully targeted Internet service providers who have allegedly enganged in deceptive practices and it has also required a cable system to provide open access to Internet service providers. This track record makes it pretty clear the FTC not only has the power but it also has the inclination to preserve openness and other values associated with the Internet. The allegation is that the D-word (deregulation) is coming to broadband services. Aside from the FTC, the FCC and the Antitrust Division also have jurisdiction over broadband services. Contrary to what one might think from listening to the appeals of net neutrality advocates, there are three levels of government oversight of broadband services.
Third, Majoras acknowledged that important questions have been raised and more information is needed. She announced the formation of an Internet Access Task Force to examine issues related to net neutrality and other matters. Net neutrality has been a debate about hypotheticals, which is part of the reason it has seemed so unproductive. This task force will be made up of economists and attorneys from throughout the FTC who are competition and consumer protection experts. Unlike the FCC, which only does communications, the FTC has wide-ranging experience and expertise arising from their involvement in every sector of the economy. This makes the FTC, perhaps, less beholden to some of the passions and prejudices which animate the special interests that have a dog in this fight. The FTC's involvement will probably contribute greatly to the debate. With this kind of comprehensive look at all the facts underway, I'll bet many-to-most in Congress will prefer to review the findings before they cast a vote.
Mainstream media wrongly claims there is no telco innovation for net neutrality regulation to chill
In an essay for Business Week, Mark Gimein quotes a former industry source who says, "[The telcos] do very little fundamental research and very little advanced development." Gimein claims that the only example of innovation he could find in San Antonio (home of AT&T) is a feature which allows Homezone (the service that combines DSL with satellite TV service) to play music on a television set. Then, he condescendingly suggests that AT&T ought to look, in this trivial feature, for "a hint of what AT&T might achieve if it spent on research and development even half of what a company like Intel does." Wade Roush makes a similar argument in Technology Review ("compared with the computing industry, telecoms invest little money in actual research and development").
To understand what is happening, first you could ask yourself why did the cable industry invest $100 billion in broadband networks over the past 10 years while the telephone coompanies didn't? Answer: The 1996 Telecom Act deregulated cable and allowed the FCC to micro-manage the phone companies.
The impact of regulation on the companies can also be seen in their stock performance. If you bought a share in Bell Atlantic (now Verizon) in 1996, you would have paid $66. There was a 2 for 1 split in 1998 and one share is worth $33 today. Therefore, your investment is worth the same today as it was then (excluding dividends, which amounted to approx. $1.50 per share, per year). Most likely, you would have been better off investing in government savings bonds. On the other hand, if you invested in Comcast your investment would have doubled.
The telephone industry used to lead innovation. Remember that the computer revolution began at Bell Labs, as George Gilder pointed out to one of the writers. Wil Lepkowski, among others, have chronicled the amazing achievements of the Bell Labs scientists. According to Lepkowski,
Digital computer technology was invented at Bell Labs for its own internal use in switching, along with the information theory that formed the basis of clear voice communication. Transistors and semiconductors had their functional birth there, along with the laser and fiber optics. Cellular telephone technology also had its start at Bell Labs. Linux, the operating system that serves as the basis of Internet content rose from Bell Labs, as did, earlier the coaxial cable and millimeter wave guides.
Lepkowski laments the demise of Bell Labs, but he also notes that divestiture in 1984 and the Telecom Act of 1996 both played a significant role. Prior to divestiture, the government encouraged generous subsidies for Bell Labs and guaranteed that AT&T could recover the amounts spent there. Although, the government didn't aways encourage applications, because it wanted to keep phone rates low and because, after all, the phone network was regarded as the best in the world, a national asset. But then, as Bell Labs discoveries made it possible for competitors to enter telecommunications and offer steeply lower prices, the government changed its mind. AT&T was broken up, and line-of-business restrictions were imposed on the Baby Bells. They couldn't cross LATA boundaries or engage in electronic publishing, equipment manufacturing or even alarm monitoring. If you had been running one of these companies at the time, you would have asked what's the point of investing in innovative services if it would be illegal to bring them to market?
The line-of-business restrictions eventually got peeled away, but the micro-management of the court that supervised the breakup and by the FCC in the name of promoting competition, required the Bells to seek prior approval for anything of significance. Under Chairman Kevin Martin, the FCC recently eliminated two pro-competition mandates -- the requirements to share fiber optic deployements and DSL with rivals at government-imposed discounts (both of these mandates could be characterized as forms of net neutrality regulation). These deregulatory initiatives have led to renewed investment by AT&T, Verizon and BellSouth. But there's still lots to be done. A prime example is the requirement that the phone companies negotiate with 33,000 cable franchise jurisdictions, all of whom want to micro-manage the advanced network deployments and seek costly concessions on top of 5% of gross revenues.
The argument that net neutrality regulation couldn't possibly deprive of us of any innovation because the phone companies don't invest anway is invalid, and the bottom line is that innovation is needed in content and delivery -- as I and many others have repeatedly noted. Net neutrality regulation would subsidize innovation in content and starve innovation in delivery. The free market, on the other hand, would allocate resources for innovation to where they would generate the highest return, which is the same thing as where innovation is most needed.
A story by Amol Sharma in today's Wall Street Journal illustrates the nightmare scenario that is motivating companies like Google and Yahoo! to push for self-serving net neutrality regulation under the misleading guise of protecting consumers, mom-and-pop businesses and innovators who who toil at night in their garage.
Medio Systems of Seattle and JumpTap of Cambridge, Mass. will provide web searcing services optimized for mobile devices, which the cellphone companies will integrate into their phones. Does this mean a cellphone customer won't be able to search the net from their cellphone via Google or Yahoo! ? That's not likely to be a problem -- the FCC has declared that customers should be able to go anywhere on the web they want.
But it does mean preferential treatment for Medio or JumpTap. The cellphone carriers could design their phones so Medio or JumpTap are the home page or are only one click away. If you wan't Google, Yahoo! or some other search engine, you'll have to bookmark their page -- meaning that it will take a couple extra steps. The majority of cellphone subscribers presumably will take the most convenient route by picking Medio or JumpTap.
Of course this is all about money. Sharma writes: "By aligning themselves with start-up search companies, the carriers believe they will keep a greater share of the generated advertising revenue, say people familiar with the matter. The wireless companies also worry that their brands will be diluted if they gave a prominent marketing slot to a major Internet brand."
This scenario is an example of one of the ways that a portion of the billions of dollars in online advertising revenue could be diverted from content to delivery, as I talked about here.
Confusion in the Senate -- Vote for cable? Or for competition?
Senators have a lot on their minds, so its not surprising when some of the details get overlooked or confused.
Here's the choice Senator Ron Wyden faces: He can protect the status quo, in which the cable company is still the dominant provider of video and broadband services in many markets and it isn't illegal for the cable company to block or degrade access to the Internet. Or, he can vote for a Senate Commerce Committee bill that would remove local barriers to the telephone companies -- who are ready to invest billions in competitive video and broadband services -- and would make it illegal for any provider to block or degrade Internet access. Sounds like a no-brainer. But Wyden vowed again Friday to block telecom reform unless it is amended to prohibit extra fees for priority service.
Q: Will net neutrality regulation help consumers? A: No.
The most controverial item in the proposals to regulate net neutrality concern whether broadband providers should be allowed to practice "price discrimination." Of course they should. And pro-consumer Senators should welcome it. Unfortunately, they have adopted an unrealistically narrow definition of consumer welfare and are missing the forest for the trees.
According to Senator Barbara Boxer,
Consumers will suffer if network operators are allowed to discriminate against their competitors' use of the network by giving certain content preferential treatment (emphasis added).
Senator Byron Dorgan makes a similar point:
Consumers have an expectation that all websites and services will work equally well when they access the internet, just as they do when they make a phone call, but network operators have become increasingly interested in acting as gatekeepers on the internet and providing faster delivery for only certain information of their choosing (emphasis added).
A definition of "preferential treatment" and "equally well" are needed. Boxer, Dorgan and others of course want to make it illegal for broadband providers to block or degrade access, but that is only a small part of the agenda and not what they are talking about here. The idea is that, absent net neutrality regulation, content providers could be given the option of paying for different levels of service. Consumers could see differences in the speed or reliability of Internet services depending on whether the content provider chose to pay for premium service. In most cases, the content provider will offer basic or premium service to the consumer just like online and catalog retailers offer standard or overnight shipping. This really doesn't hurt anyone.
The content providers most alarmed by all of this are the ones who collect millions or billions of dollars in advertising revenue. What would stop a broadband provider from charging for premium service based on a content provider's ability to pay? Nothing.
Is it bad for consumers?
Price discrimination is what allows airlines to stick it to business travelers and offer really low fares to leisure travelers. It also allows telephone companies to overcharge commercial accounts and undercharge residential subscribers. In both cases, the people with deep pockets subsidize everyone else. In an excellent op-ed earlier this month in the New York Times, Cornell University Professor Robert H. Frank argued that price discrimination benefits everyone -- including the customers who pay the highest prices.
The same thing ought to happen in broadband. Let the broadband providers charge content providers higher prices so they can charge consumers less. It is argued, correctly, that a market must be competitive for prices to fall. But prices are falling and/or services improving where AT&T and Verizon are offering video and broadband services in competition with the cable operators. To argue that this market is not competitive is to ignore reality.
Should the government ensure that online advertising revenues flow into the pockets of content providers, or should it allow the market to determine the best way to allocate this resource? That's what the net neutrality fuss is all about. Advertising revenues support both content and delivery in other media, enabling providers to charge consumers little or nothing. An analysis of the consumer interest ought to take this into account.
Roberta Combs, president of the Christain Coalition, wonders:
What if a cable company with a pro-choice Board of Directors decides that it doesn't like a pro-life organization using its high-speed network to encourage pro-life activities? Under the new rules, they could slow down the pro-life web site (emphasis added), harming their ability to communicate with other pro-lifers - and it would be legal.
The legislative proposals that were passed by the House of Representatives and especially by the Senate Commerce Committee fully address the concerns of the Christian Coalition. The group should declare victory and go home.
Specifically, the Advanced Telecommunications and Opportunity Reform Act, approved by the Senate Commerce Committee on June 28th, includes a provision which would indisputably make it illegal for a carrier to slow down access to a pro-life web site:
"SEC. 904. APPLICATION OF THE FIRST AMENDMENT.
Consistent with the First Amendment to the United States
Constitution, as applied to the States through the Fourteenth
Amendment to the United States Constitution--
"(1) no Federal, State, or local government may limit,
restrict, ban, prohibit, or otherwise regulate content
on the Internet because of the religious views,
political views, or any other views expressed in such
content unless specifically authorized by law; and
"(2) no Internet service provider engaged in interstate
commerce may limit, restrict, ban, prohibit, or otherwise
regulate content on the Internet because of the religious
views, political views, or any other views expressed in
such content unless specifically authorized by law."
Besides making it illegal for a carrier to slow down a pro-life web site, the bill also specifically outlaws blocking access to lawful Internet content for any other reason:
"SEC. 903. CONSUMER INTERNET BILL OF RIGHTS.
"(a) IN GENERAL.--Except as otherwise provided in this
title, with respect to Internet services, each Internet service
provider shall allow each subscriber to--
"(1) access and post any lawful content of that
"(2) access any web page of that subscriber's
"(3) access and run any voice application, software,
or service of that subscriber's choosing;
"(4) access and run any video application, software,
or service of that subscriber's choosing;
"(5) access and run any email application, software,
or service of that subscriber's choosing;
"(6) access and run any search engine of that
"(7) access and run any other application, software,
or service of that subscriber's choosing;
"(8) connect any legal device of that subscriber's
choosing to the Internet access equipment of that subscriber,
if such device does not harm the network of the Internet
service provider; and
"(9) receive clear and conspicuous information, in
plain language, about the estimated speeds, capabilities,
limitations, and pricing of any Internet service offered to
I have criticized most of the net neutrality mandates as unnecessary or overly broad elsewhere on this blog. These particular provisions are unnecessary, but they clearly address the Christian Coalition's stated concerns without tending to chill investment in a faster and more reliable Internet.
Insights into Christian Coalition's curious support for net neutrality regulation
Conservative advocacy groups are nearly unanimous in opposing net neutrality regulation. Then there is the Christian Coalition, which has inexplicably joined forces, on this issue, with groups who normally oppose its religious and social conservative goals. In a recent column, Dick Armey comments that this is not the first time leadership at the Christian Coalition has "sided with the forces of big government and against good sense and the rest of the conservative movement." The Christian Coalition has also supported tax increases, according to Armey, and local chapters are distancing themselves from the organization's Beltway leadership.
EU's Review 2006 of telecom rules risks repeating the mistakes of U.S. telecom reform
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."
Brian C. Anderson, who wrote about mainstream media bias in South Park Conservatives (2005), and who is Senior Editor of City Journal, weighs in on the net neutrality debate with an aricle that quotes George Gilder, Adam Thierer, James Gattuso, James DeLong and others.
Among Anderson's conclusions:
The deeper agenda at work in the net neutrality debate, insufficiently noticed by most commentators, is the Left's zeal to get a hold of the new media, which have given conservative voices powerful outlets, shattering the liberal monopoly over news and opinion outlets--and regulate those outlets out of existence, so we can all go back to the days when the New York Times and other elite liberal institutions set the agenda.
Intellectuals and politicians mistakenly think of telecom as a perpetual problem: a natural monopoly, an anti-trust peril, a free speech filter, and a forensic circus. Their bright idea of the moment, "net neutrality," is a concept at once so vague and demanding that its penumbra could be litigated in fifty states and up-and-down the federal court system until all our Internet traffic has to be diverted through Seoul and Beijing merely to avoid lawyer spam. By any name, as Larry Darby points out in an important recent paper, "net neutrality" means price controls on some of the most complex many-sided markets in all industry and thus is sure to do for the rollout of broadband what Sarbox has done for IPOs. -GG
Terrible net neutrality provision in latest Senate draft
The latest Senate draft telecom rewrite, issued Friday, includes page after page of weird new language on net neutrality.
The Separation of Powers Doctrine provides for Supreme Court -- not Congressional -- interpretation of the Constitution. Yet Section 904 of the new draft includes two paragraphs describing how the First Amendment shall apply to the Internet. In a priceless example of an exception-that-swallows-the-rule, the first paragraph begins with "no Federal, State, or local government may..." and concludes with "...unless specifically authorized by law." Section 904 would arguably immunize any action of the legislature regardless of First Amendment implications and therefore seems utterly unconstitutional. (Does the Christian Coalition realize this provision would prevent cellphone providers from enforcing their extensive policies designed not only to prevent child pornography but all manner of objectionable content?)
Next, Section 902 contains this:
Congress finds that the Federal Communications Commission should seek to--
(1) preserve the free-flow of ideas and information on the Internet;
(2) promote public discourse on the Internet;
(3) preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services unfettered by Federal or State regulation;
(4) encourage investment and innovation in Internet networks and applications markets through a diversity of business models; and promote deployment of broadband networks nationwide.
These are roughly the same principles that have justified the Fairness Doctrine, common carrier regulation, media ownership limits, universal service, public access, program diversity and all of the other tools that enlightened regulators at the FCC and 50 state commissions use to deliver humanity from darkness to utopia. This regulation is based on a dubious "scarcity" rationale that is plainly inconsistent with the rise of innovation and competition in the communications industries. Legislative Findings may not (always) be accorded signficant weight by the courts, but are nonetheless troublesome because they can be cited endlessly to justify preserving or expanding regulation and will tend to encourage some partisans to litigate or to obstruct.
Section 905 requires any Internet service provider to offer a stand-alone Internet access product regardless of the economics of combining complementary services. Cellphone carriers would be forced to disaggregate voice and data, for example. For what possible purpose?
Section 907 sets up an enforcement mechanism under which "subscribers" (defined as retail end users) can file complaints. The FCC already has an enforcement mechanism for consumers and competitors. This provision doesn't create anything subscribers don't already have, nor does it carry out Chairman Stevens' stated objective of letting the corporations hire their own lawyers -- by which I think he means reorienting the FCC to intervene when necessary to protect consumers adn not competitors. A noble goal that got lost in the drafting.
George Gilder makes the following observations about net neutrality in a podcast interview with Scott Cleland at NetCompetition.org, a subsidiary of Precursor.
"Net Neutrality is just another layer of lawyers. It's nothing else."
"We've tried regulation, and it didn't work."
"There will not be an adequate broadband economy in the United States if this current regulatory approach continues. Its not the regional Bells who decide [investment in broadband networks]. Its Wall Street who decides . Wall Street will decide whether they're willing to support the stocks of the regional Bells as they make these risky and far-reaching investments of scores of billions of dollars in deploying fiber to homes and neighborhoods. If Wall Street says no, they won't be able to do it; it doesn't matter whether Google says "yes" and Microsoft says "yes" and eBay claps its hands -- it won't happen if conditions are created where these investments won't yield a profit."
From today's session of the House Judiciary Committee, during which net neutrality legislation was approved by a vote of 20 to 13:
* * *
"The very same people who are advocating for net neutrality have been telling us to stay out of Internet issues. It's a bad idea to legislative in this area, they said." --Rep. Anthony D. Weiner (D-NY)
* * *
"Should we attempt to set out rules of a rapidly evolving market before we know where it is going? I think it would be smarter to leave this to the courts to adjudicate on a case by case basis." --Rep. Lamar Smith (R-TX)
The House Judiciary Committee has approved H.R. 5417, the "Internet Freedom and Nondiscrimination Act of 2006" mostly along party lines. The committee's Democrats and a few Republicans voted to expand government oversight of the marketplace, and, specifically, to require that consumers bear the full cost of maintaining and upgrading the Internet, rather than permitting telephone and cable companies from spreading these costs amongst consumers, vendors and advertisers. This isn't how television became a cultural phenomenon -- that required billions of dollars in advertising -- nor, in all likelihood, will it allow the Internet to reach its full potential.
The debate in the committee was exceptionally shallow and misinformed. No one, for example, asked whether broadband will have to be priced out of the reach of many consumers, thus forcing public subsidies down the road.
The committee's chairman, F. James Sensenbrenner (R-WI) claimed that "Most Americans are subject to a broadband duopoly [or a monopoly]." Aside from the cable and telephone providers--who are the biggest contributors to congressional campaigns and thus apparently get most of the attention of lawmakers--cellular, Wi-MAX and satellite providers are also rushing into this space. Regulation and taxation are the chief obstacles to competitive entry, not hypothetical risks of anticompetitive behavior. USF subsidies, RUS lending guidelines, local franchising and rights-of-way management, industry-specific taxes and a shortage of spectrum all distort the risks and opportunities of entering the broadband market.
Rep. John Conyers (D-MI), the committee's ranking member, was also misinformed when he stated that "Last year, in August, the FCC voted to change the way it enforces Internet rules, deciding to no longer enforce net neutrality." The FCC deregulated DSL. Then it issued a set of principles which it will incorporate into its future policymaking.
(1) consumers are entitled to access the lawful Internet content of their choice;
(2) consumers are entitled to run applications and services of their choice, subject to the needs of law enforcement;
(3) consumers are entitled to connect their choice of legal devices that do not harm the network; and
(4) consumers are entitled to competition among network providers, application and service providers, and content providers.
This is a far cry from a decision to not enforce net neutrality, and it would be nice if Congressional leaders would get their facts straight.
Here is one estimate of the cost to the consumer of upgrading the Internet to handle video and high-definition video if the cost is borne primarily by consumers. Which is what would happen under net neutrality regulation.
The real issue is where will the big bucks come from to create an Internet capable of handling the services now envisioned, let alone those not yet dreamed up. BellSouth's Chief Architect Henry Kafka told an audience in March that a typical broadband user today consumes about two gigabytes of data a month, at a network cost of $1. Once TV has gone high-definition and on-demand, a typical user will consume about 1,120 gigabytes a month at a cost of $560 (that's in addition to the administrative, sales and service costs that today make up the lion's share of the user's bill) (emphasis added). "Clearly that's not what the average user is going to pay per month for their video service," Mr. Kafka said. "That's why we need help."
This week Senate Commerce Chairman Ted Stevens (R-AK) introduced comprehensive telecom reform legislation which, as Adam Thierer notes, is a 135-page monster, represents a counterproductive obsession on the part of some policymakers over the smallest details of communications policy and doesn't tear down any of the old regulatory paradigms that it sould.
That said, the proposal would move the country in a positive direction in several respects.
-- Unlike the House bill, which grants the FCC specific new authority to enforce the commission's net neutrality principles -- and which is guaranteed to lead to questionable enforcement proceedings and perhaps litigation between grasping and delusional competitors -- the Stevens bill wisely requires the FCC to merely keep a watchful eye on industry practices and issue annual reports for 5 years. The reports may contain recommendations, but the commission may not recommend new rulemaking authority for itself. Unfortunately, the commission shall report on peering and other business arrangements that are appropriate objects for antitrust -- if egregious -- but not for an agency which is not governed by a clear and principled competition standard which emphasizes consumer welfare, as Randy May and the Regulatory Framework Working Group have outlined. It is unnecessary to include any provision regarding net neutrality in telecom reform legislation, as I have argued here, for example. However, Senator Stevens has the best net neutrality proposal so far.
Video Franchising -- The proposal encourages negotiations between cities and competitive entrants, but establishes a 30-day shot clock and eliminates the ability of the cities to extort in-kind contributions (beyond 1% of gross revenues for Public, Educational and Governmental channels) or set anticompetitive buildout requirements. It also ensures comparable treatment for cable operators who face competition from a new entrant. Unfortunately, the proposal preserves almost all of the existing video regulations -- such as must-carry, PEG and I-Nets -- even though the market is competitive and all vendors need to be able to raise vast sums of capital to deliver broadband speeds of 50 mbps to 100 mbps.
Universal Service -- On the distribution side, the bill would require periodic audits of universal service recipients and would set up a review process to prevent waste, fraud and abuse. That Senator Stevens, one of the strongest defenders of universal service, acknowledges the potential for waste, fraud and abuse in what is nothing more or less than an entitlement program is welcome and significant. Although this is a great start, ways must be found to ensure that the size of the fund declines as technology reduces the cost of services. One way to do this is to mandate price caps on all recipients. Another way is to auction the loans and/or subsidies for broadband services to the providers and the technologies that can offer the service at the lowest cost.
On the contribution side, the bill would authorize the FCC to expand the contribution base in virtually any conceivable way and would hide everything from the Congressional budget process. Sinces taxes and regulation go hand-in-hand, Senator Stevens' proposal raises the worrisome possibility that not only taxes but also regulation may be coming to the Internet. I'm not sure which is worse: that taxes and regulation could ruin the Internet, or that the Internet might provide potentially limitless opportunities for taxes and regulation to stifle everything else. At a minimum, Congress should cap the fund if its going to give the FCC virtually unlimited authority to collect "fees."
Video and Audio Flag -- The bill would preserve the brodcasting business model by withholding content from the Internet. This is protectionist and anti-consumer. Congress should not pick winners and losers.
Sports Freedom -- The bill would outlaw exclusive contracts with programming vendors for sporting events. In a free market, exclusive contracts can benefit producers and consumers. Government, as a general matter, should not interfere with private contractual arrangements. On the other hand, these particular arrangements are not the product of a competitive marketplace and have the potential to retard competitive entry. A permanent prohibition is heavy-handed and could be damaging, but some kind of transitional relief seems appropriate.
"So often we legislate in these areas when something is evolving [and] we legislate wrongly. The technology just goes around it. My view is, let's wait and see. Let's make sure there's a problem before we legislate."
Senator Gordon H. Smith (R-OR), on the absence of a net neutrality provision in telecom legislation he plans to introduce for Senate consideration
"As a very small content provider (editor of Politech), I'd presumably benefit in the short run from Net neutrality. But I spent over a decade in Washington, DC, more than enough time to realize that government failure is more of a problem than market failure, and to become healthily skeptical of giving the FCC new powers to regulate the Internet."
Separating content and conduit by force -- "net neutrality" -- unnecessarily exalts regulation and elevates bureaucrats over market forces. The million-word re-regulation of the industry that was the Telecom Act of 1996 resulted in the Great Telecom and Technology Crash of 2000-2003. Net neutrality risks a replay of this carnival of lawyers, micro-mis-management by apparatchik, price controls, the socialization of infrastructure and the screeching halt of innovation and investment in the "last-mile" local loop.
For years the doomsayers have said telecom will contrive content-conduit plays like the cable industry, that they will thereby reap profits from broadband content and that it will be the end of civilization as we know it. They forget that content and conduit are naturally separate. If you have the best content, you want it on everyone's conduit. If you have the best conduit, you want everyone's content on it. There are absolutely no synergies between creating attractive and original content and building powerful and available broadband networks. By far the most profitable product in cable is not their pathetic TV content with its endless clutter of ads and spam but their open Internet service. The market will continue to push telecom and cable to provide consumers with more choice not less.
Now with the worst regulatory excesses finally behind us, last-mile telecom investment finally poised take off, and an expectation of a deregulatory path to the future, is Congress seriously contemplating re-regulating the industry again???
Would Ronald Reagan have supported net neutrality? A Republican congressman tried to infer it is consistent with the Reagan legacy because, after all, His Justice Deptartment prosecuted AT&T. Let's set the record straight: Reagan opposed the breakup of AT&T. He reluctantly allowed it to proceed under pressure from zealots at the Antitrust Division. Reagan's personal views are well documented. See, e.g., "Reagan: In His Own Hand," by Kiron K. Skinner, Annelise Anderson and Martin Anderson (eds.) at 316-17. It includes the following transcript of a 1979 radio address by Ronald Reagan:
"I hear the govt. is going to or already has sued the phone company again. It makes you wonder how they have the nerve....
"What with busy signals, wrong numbers, etc. it's easy to have a grudge against "Ma Bell." Truth is the old girl deservesa big thank you from all of us. For one thing here is a major service none of us feel we can do without, yet in this age of continual inflation that service keeps dropping in cost....
"Back in the 1930's a long distance call across the country cost $9.50. That was 300 times as much as it cost to send a letter. Now that phone call is only 9 times as expensive as a letter--$1.30 while stamps have gone up to 15 cents...
"Today the miracles we already have are going to be topped by video phone; there are recorder gadgets to take phone calls & messages when you are absent and now they talk of electronic mail. If the cost differential continues at the present rate, it is possible the telephone may put the post office out of business within the next 10 or 20 years. Do you suppose that's why the government is suing the phone company?"(emphasis added)
Reagan believed in the free market, not big government. Most realize that net neutrality is not a core belief for Republicans. This helps explain why a pro-net neutrality amendment failed 23-8 today in the House Telecom Subcommittee.
House Energy & Commerce Chairman Joe Barton (R-TX), Ranking Member John Dingell (D-MI) and others worked hard to get a broad bipartisan agreement on telecom reform. That effort failed over some absurd demands of greedy local officials, high tech companies and "consumer advocates" who act as if telecom and cable vendors are nonprofit agencies. Such expectations are hardly surprising, since telecom and cable vendors basically require government approval to innovate their services.
A new proposalbearing the imprimatur of three Republicans -- Chairman Barton, Rep. Fred Upton (R-MI) and Rep. Chip Pickering (R-MS) -- as well as Rep. Bobby Rush (D-IL) provides some welcome middle ground.
Any provider of video services could obtain a national franchise that would be subject to defined local taxation and regulation. Local bureaucrats would get 5% of gross revenues plus another 1% for publlic, education and government access in addition to the right to manage public rights-of-way. The secret consumer tax -- the in-kind shakedowns which supposedly amount on average to another 3% of gross revenues -- would finally end.
The right to construct municipal networks would be guaranteed. Enlightened regulation and taxation would do away with the need for most municipal networks, which expose taxpayers to unnecessary and in many cases significant risk. But mayors and city councils were elected for their brilliance and would rather tax, regulate and then subsidize; because otherwise they might not have anything to do -- no reason to get out of bed in the morning, in the words of former FCC Chairman Reed Hundt.
Cities may not grant any preference or advantage to any network they own, control or are affiliated with. As long as cities are required to observe competitive neutrality, they should be treated like any other 18-year old. But its curious that the draft doesn't guarantee recourse to the FCC for aggrieved commercial interests. Isn't litigation costly and unpredictable? And what about the fact that this draft does not specifically authorize a right of action? Which brings us to net neutrality, or, "Enforcement of Broadband Policy Statement."
"The Commission shall have the authority to enforce the Commission's broadband policy statement and the principles incorporated therein." There are some companies like Google, Amazon, Yahoo, eBay and others who are too poor or too tenuous to hire a lawyer and file a lawsuit if a dominant firm messes with them. The rest of us will have to subsidize a special tribunal with friendly decisionmakers to listen to their sob stories and issue justice that is faster and more efficient than anyone else could hope for. The principles the draft refers to are these:
"(1) consumers are entitled to access the lawful Internet content of their choice;
"(2) consumers are entitled to run applications and services of their choice, subject to the needs of law enforcement;
"(3) consumers are entitled to connect their choice of legal devices that do not harm the network; and
"(4) consumers are entitled to competition among network providers, application and service providers, and content providers."
Principles #1-#3 are noncontroversial. Principle #4 is the problem. The term "competition" means different things to different people. It could mean the right to enter a market, or it could mean the right to succeed in a market. Under this draft, it would be up the the FCC to decide. A political agency, the FCC will usually cut the baby in half.
So what, beyond that, is wrong with simply clarifying that the FCC has authority to enforce these principles? Title I of the Communications Act already provides the FCC with extensive jurisdiction to do virtually anything, but since it is stated in general, not specific terms, the FCC has exercized great caution lest it be overturned on appeal. The draft would upset this careful balance. Years ago, before Congress had spoken on the matter, the FCC used its Title I jurisdiction to regulate cable, and the Supreme Court said okay. The net neutrality cabal fears that if the FCC invoked Title I authority it might not get Chevron-type deference -- a rule which provides that the FCC should be upheld unless it acts completely irrationally. A court might actually examine the substance of the FCC's action, not just whether the agency had the "right" to do it. So, this innocuous-sounding provision in the draft is actually a big deal.
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.
Warnings to lawmakers who are contemplating new regulation of telecom and cable firms
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
Experience should not disqualify FCC nominees, but the agency should have a predictable recusal mechanism to ensure it is perceived as an impartial decisionmaker (and to ensure that federal service is not misconstrued as an opportunity to reward friends and supporters). It does not.
As a congressman, Ron Wyden once said that competition is too important to be left to the marketplace.
Today, Senator Wyden (D-OR) introduced a "net neutrality" bill (S. 2360) which he thinks is needed to prevent the construction of a "priority lane" on the Internet. National Journal's Technology Daily($), paraphrased Wyden saying that "it is perfectly acceptable for broadband providers to charge consumers more for faster speeds, but that it is not acceptable to charge businesses for faster Internet delivery." That's like saying businesses shouldn't pay taxes.
The Wyden proposal may be intended merely to ensure that the Internet will function like the telephone network, but in reality it is a radical proposal that would actually shift future costs from big business to consumers and to mom-and-pop businesses, for that matter.
The fact is consumers do not cover the cost of their phone service. Businesses -- large and small -- massively subsidize residential telephone subscribers. Under Wyden's bill, consumers would pay a fully proportional cost of Internet upgrades.
William Smith, the BellSouth chief technology officer, said in today's Wall Street Journal ($) that 1% of BellSouth's broadband customers drive 40% of Internet traffic. That means they are getting subsidized by the other 99%. Wyden is doing a huge favor here for large corporations like Google and Amazon.
This is ironic considering that Wyden is a champion on issues affecting people like the elderly on fixed incomes. Wyden ought to explain his proposal to them. Would they rather subsidize Google or would they prefer to pay the lowest possible price and possess the freedom to control their cost by adjusting their Internet usage?
The Wyden bill allows an aggrieved party to file a written complaint, which they can do already. But under the Wyden bill, once the FCC accepts the complaint, the burden of proof is on the network operator to show it did not violate the law. No penalty for frivolous complaints, of course. But more importantly, shifting the burden of proof to the accused is what they do in other parts of the world. Here, you are supposed to be presumed innocent until proven guilty.
Wyden also said he does not believe that service providers should be able to pick winners and losers on the Internet. I agree with that sentiment, but obviously not with his bill.
House Energy & Commerce Chairman Joe Barton (R-TX), along with Reps. Chip Pickering (R-MS) and Fred Upton (R-MI) have an alternative plan in mind for cable franchise reform, according to this afternoon's National Journal's Technology Daily ($). 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.
"It is ironic that cellphone service is widely available at low cost [in India] because it was regarded as a luxury and therefore left to the market, while electricity is hard to obtain because it has been regarded as a necessity and therefore managed by the government."
--Former Council of Economic Advisors Chairman Martin Feldstein, writing in the Wall Street Journal, Feb. 16, 2006.
* * *
On net neutrality:
"with or without a new law, the FCC will affect the future in a major way by its approach to the question of broadband's openness. Sometimes called net neutrality, the question of openness is multidimensional. It is hard to define and harder to answer. Chairman Martin and his colleagues have the talent, expertise, and courage to come up with the right answers on this topic."
--Former FCC Chairman Reed Hundt, speaking at George Washington University on the 10th anniversary of the Telecommunications Act, Feb. 6, 2006.
* * *
On video franchising:
"When there was no competition to the telephone and cable companies, local governments could tax and over-regulate both of them and use the extracted revenues for perks and to cross-subsidize consumers or finance unrelated public services. Cable television and phone companies submitted to this over-regulation and over-taxation because their government-sanctioned monopolies meant they could recover their investment by raising prices. Consumers had no choice but to pay. But cable tv and telephone companies are no longer monopolies."
--Senator Jim DeMint (R-S.C.), at the Senate Commerce Committee hearing on local franchising, Feb. 15, 2006.
Net neutrality: part 38...Talk about degrading service...
Maybe Google should look to old-economy providers of rich content to find actual examples of content degradation. It seems Netflix, the popular postal purveyor of DVDs, has been using "fairness algorithms" to slow the mailing of DVDs to its most voracious customers. High volume customers impose higher postal costs on Netflix, which charges a flat fee for all users. Low volume customers are more profitable. Netflix now spells out this policy in its service agreement so customers know what they're getting. Seems reasonable enough. Google and other online content companies have been fretting over the figment of online service blockages and degradation, though no one can seem to find any actual examples. Here's an example of a content company degrading itself because it found customers taking advantage of its business model and platform. Google better look in the mirror for examples of how other companies and individuals might exploit Google's platform, and what Google's response might be. Otherwise the "net neutrality" laws Google thinks it wants to govern the Internet could come back to bite -- hard.
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.
I think its an open secret that Congress is highly unlikely to make significant progress toward comprehensive telecom reform in 2006. That's probably a good thing. While many people, including many members of Congress, recognize that telecom law badly needs an update, there is an astounding lack of awareness that the basic problem is too much regulation. Most of the proposals so far would create more new regulation than they would eliminate. The supporters of net neutrality sense that a window of opportunity is closing, and they are trying to do something about it.
Douglas Van Houweling, the CEO of Internet2, gave an interview to National Journal's Technology Daily, (subscription required) in which he claimed: "If you have enough bandwidth in the pipe, you don't need a quality-of-service model." That's true, but he doesn't mention that the former would be more expensive than the latter by many orders of magnitude (see footnote). Van Houweling, who runs a publicly-funded 10-gigabit-per-second network for universities, thinks innovation in high-bandwidth applications will be stifled if network operators charge content and application providers a premium to ensure the smooth delivery of high-bandwidth applications and services. Okay, so if he is saying that the vendors of content and applications should be given a pass, who will cover the cost? I guess that when it comes to spoils, what's theirs is theirs and what's yours is negotiable.
Here's another interesting argument for net neutrality from John Paczkowski, commenting today on SiliconValley.com:
"By good fortune, not clever innovation, the telecoms found themselves sitting at a choke point in the network, and having fumbled early attempts to cash in, now expect to collect tolls from more successful companies. What we don't need is a new layer of parasites auctioning off the right to reach us."
This is getting personal! The Internet, wonderful though it is, is a work in progress. Enormous investment will be needed to augment bandwidth and elimintate things like jitter and delay for innovative new offerings. The best analogy I have heard is FedEx and UPS, who provide premium service for those willing to pay, and the Postal Service, who provide a slower, albeit reliable product for a lot less. It works beautifully and most everyone is happy. If content and application providers are really worried about being stifled, they ought to consider what will happen if investment in the Internet itself is deflected -- the high-bandwidth pipes they need just won't exist.
Footnote: Bandwidth is replacing QoS, as George Gilder and Bret Swanson have been saying for a long time -- especially in the core of the network. If you were building a network from scratch you would choose bandwidth. However, where a network already exists and there are technologies like QoS or DSL -- which are designed to extend the capabilities and useful life of existing network investment -- it is far cheaper to invest in those technologies. If QoS were to be "outlawed," which some people clearly want but which I can't imagine happening, the effect in a competitive market would be to force carriers to write off existing investment -- needlessly harming investors.
Are Comcast and Verizon bent on slowing your Google and Yahoo! searches to a crawl? Each day, it seems, yet another pundit jumps into the "net neutrality" fray, and that is the impression they give readers. In last Sunday's Washington Post, it was Christopher Stern failing to listen to the technology. Stern's treatment was fairer than most but still drew a false caricature of the complex business and technical issues that have recently dominated the Internet and New Media debate.
"Do you prefer to search for information online with Google or Yahoo? What about bargain shopping -- do you go to Amazon or eBay? Many of us make these kinds of decisions several times a day, based on who knows what -- maybe you don't like bidding, or maybe Google's clean white search page suits you better than Yahoo's colorful clutter.
"But the nation's largest telephone companies have a new business plan, and if it comes to pass you may one day discover that Yahoo suddenly responds much faster to your inquiries, overriding your affinity for Google. Or that Amazon's Web site seems sluggish compared with eBay's.
"The changes may sound subtle, but make no mistake: The telecommunications companies' proposals have the potential, within just a few years, to alter the flow of commerce and information -- and your personal experience -- on the Internet."
The fact is that simple Google and Yahoo! searches or eBay or Amazon transactions are not going to slow down at all. They don't require very much bandwidth. Most of the delay comes in processing the query or transaction at the server cluster. In fact, with advanced new networks delivering broadband speeds of tens of megabits per second, the Net is going to deliver a far better experience for the vast majority of users and applications. After the flood of bandwidth, the key to delivering bits quickly and robustly is "storewidth" -- the capacity of computers to find, sort, process, and serve web pages, applications, answers, services, transactions, and other forms of content with little delay. Customers want quick computing. Slowing down Google searches or eBay transactions would be disastrous for the bandwidth service providers.
The real question, then, is what about large files and huge streams -- namely, rich media such as video and audio. These are the only types of Internet traffic that will impose much of a bandwidth burden on the network operators. Video and audio also happen to intersect with (interfere with?) the content business models of the cable and telecom companies. High definition video packets traveling from coast to coast will require special processing, using priority quality of service (QoS) technologies integrated in the new generation of routers and switches. High definition video consumes massive amounts of bandwidth and requires precise delivery without latency or jitter. New algorithms like Digital Fountain's ingenius "raptor codes" or "fountain codes" can do some of the work. But much of the work will be done through packet prioritization, both in the core of the network and at the edge.
Today, the Internet is a "best effort" system that seeks servers in a roundabout way with algorithms that seek the best route but sometimes hit obstacles or bottlenecks. All sorts of methods have been employed to shuttle VIPs (Very Important Packets) around the Net with faster and more reliable service than their pedestrian counterparts. We've given streaming video and voice-over-IP, for instance, special attention. Very often extra bandwidth is used as an elegant substitute for complicated QoS or geographically optimized content caching. Increase the size of the pipe enough, and all the packets get red carpet treatment. Nevertheless, going forward, some combination of big bandwidth, big storewidth, and QoS will be used to deliver the goods. This stuff costs money, and in many cases the VIPs will cost more to serve than the JSPs (Joe Six Packets). Content companies will pay bandwidth providers for VIP service, as they do today. Bandwidth providers will offer their customers contracts that say we will give you so much bandwidth to the open, best effort Internet for so many dollars. If the bandwidth providers don't provide that access, if they actively block or slow certain sites or certain packets that effectively break that bandwidth-per-dollar contract, not only will they not fulfill their contract, but customers also will find another provider.
The fact that some VIPs will enjoy bandwidth martinis will not prevent Joe Six Packets from drinking as much beer as he wants.
Terabyte-capacity disk drives will soon be available.
A terabyte is 1,000 (actually, 1,024) gigabytes; the PC on your desk probably has 100 or so gigabytes in it; the biggest iPod nano has eight gigabytes.
.... The last time the disk drive crossed such a threshold was in 1991, when the first gigabyte drives were introduced. Back then, all that people used computers for was actual work -- spreadsheets and such -- and it was hard to imagine why anyone would need so much storage. News accounts noted that a gigabyte would store 1,000 copies of "Gone With the Wind," without ever explaining why you would want to. Those first gigabyte drives were priced in the neighborhood of $2,000, which on a cost-per-byte basis is 5,000 times as expensive as the latest model.
Even though not many people are expected to buy them, at least initially, it's not as hard to explain what someone would do with a terabyte drive: record a lot of TV shows and movies. Television, especially high-definition TV, is the savior of the disk-drive industry because it requires vast amounts of storage. A terabyte gets you 250 hours of HD programming: Sopranos, Super Bowls, whatever (emphasis added).
The National Association of Realtors policy enabling traditional brokers to block their web-based competitors' customers from having full online access to all Multiple Listing Services (MLS) listings, and the antitrust lawsuit that was filed yesterday in the U.S. District Court in Chicago by the Department of Justice, highlight a couple things about proposals to codify a set of network neutrality principles and give the FCC new enforcement authority. One is that the universe of players having an incentive and an ability to control what customers can see and do on the Internet is much larger than communications network providers. No network provider is involved here, and none of the net neutrality proposals would have been of any use. Another is the availability of an antitrust remedy, with penalties that really hurt. A violation of Section 1 of the Sherman Act, under which the complaint was brought, is a felony. Penalties for individuals include imprisonment. A plaintiff can seek treble damages.
Vonage could have brought an antitrust suit against Madison River Communications, but it thought that the FCC would be more convenient. Vonage CEO Jeffrey Citron now claims that there is "no law that prohibits (blocking), so you can't adjudicate against it." Tell that to the realtors, who stand accused of "suppressing technological innovation" and "reducing competition on price and quality."
Madison River Communications, like all telephone companies, has common carrier responsibilities that arise from the common law. These duties existed prior to the Communications Act of 1934 and will survive a telecom re-write. Antitrust enforcers built upon the common carrier principle in lawsuits against AT&T, which established a duty to interconnect with competitors. The availability of easy recourse to the FCC has meant that antitrust law has not developed as fully in telecom as it has in other sectors of the economy. The solution is to limit FCC enforcement and let antitrust bloom. As the precedents, which will be based on actual -- not hypothetical -- conduct, accumulate, competitors like Jeffrey Citron will get the certainty he and others like him crave.
The FCC is too small and too limited in both expertise and orientation to protect the online activities of consumers, as this case demonstrates. "Nothing grander than the common law is even practical anymore," writes Peter Huber (1997). "The telecosm is too large, too heterogeneous, too turbulent, too creatively chaotic to be governed wholesale [by a commission]."
Congressman Rick Boucher (D-VA) wants Congress to codify a set of Network Neutrality principles and "bestow clear authority" on the FCC to enforce them. Net Neutrality is code for re-regulation. It is a recipe for overturning the Supreme Court's decision in NCTA v. Brand X Internet Services and for allowing the FCC to apply heavy-handed regulation to every broadband Internet access competitor. Though it may be hard to envision such an outcome under current FCC Chairman Kevin Martin, commissioners and chairmen come and go.
Proponents point to the fact that a telephone company in Mebane, NC recently tried to block its customers from accessing the services of a company which offers cut-rate phone service by exploiting regulatory loopholes. The FCC acted swiftly to enjoin the North Carolina phone company. Yet that didn't stop Boucher from claiming there is a "significant gap in our regulatory structure which will undoubtedly be exploited again." The "gap" refers to the decision of the FCC to cease regulating broadband Internet access provided by phone companies as a "telecommunications service" under Title II of the Communications Act. How will the FCC regulate? There is always Title I of the Act. Although the FCC has rarely needed to invoke it, Title I provides that the FCC "may perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this Act, as may be necessary in the execution of its functions." It doesn't take a lawyer to realize that those are hardly words of limitation.
The debate over Net Neutrality is nevertheless in danger of boiling down to whether the FCC should be directed to issue detailed new regulations or whether it should be granted more explicit authority to intervene if another abuse ever occurs. The distinction is slight. Either way, new uncertainty and new regulatory transaction costs would be introduced just when some of the most serious barriers to investment have finally been lifted in a belated recognition that the market is highly competitive. Broadband requires massive continuing investment, which will never occur if politicians who think they can predict how the market will behave join hands with activists who think that broadband ought to be free, or at least that no one should be allowed to profit from it.
A better approach would be for the industry to demonstrate that it has the will and the capability to self-regulate, such as U.S. Internet Industry Association President and CEO David P. McClure has proposed.
In the hands of the current FCC, the Net Neutrality principles may seem relatively harmless. The danger is that they could be used to justify pervasive regulation. Not too long ago, many saw little likelihood that the unbundling provisions of the 1996 Telecommunications Act could or would ever be transmogrified into one of the most destructive regulatory experiments ever conceived. Under former Chairman Reed E. Hundt, that's what happened.