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disco-tech | Discovery Institute's Technology Blog: Net Neutrality Archives
disco-tech | Discovery Institute's Technology Blog: Net Neutrality Archives
April 25, 2008
The bandwidth conundrum
George Gilder
John Dvorak, PCMag.com:
In today's world, bandwidth demand is similar to what processing demand was 20 years ago. You just can't get enough speed, no matter how hard you try. Even when you have enough speed on your own end, some other bottleneck is killing you.
This comes to mind as, over the past few months, I've noticed how many YouTube videos essentially come to a grinding halt halfway through playback and display that little spinning timer. Why don't they just put the word "buffering" on the screen?
All too often, it's not the speed of my connection that's at issue--it's the speed of the connection at the other end. It may not even be the connection speed itself; it may simply be the site's ability to deliver content at full speed under heavy demand.
This concerns me, since I'm an advocate of IPTV and other technologies that need lots of speed to work. We seldom consider the fact that if something becomes hyper-popular (like YouTube), user demand on the system is enormous and can easily break the system from the demand side....
Interesting article that misses the chief recent development on the net: the huge advances in the efficiencies of the datacenters that dispense these web pages. The "cloud" computing paradigm, pioneered by Google, is now going mainstream as Nicholas Carr, Telecosm speaker this year (www.TelecosmConference.com), documents in his intriguing book. For example, Jules Urbach--our movie and virtual world renderman and Telecosm star with his Lightstage corporation--can send images from thousands of different "viewports" per second from his graphic processor based OToy servers, which can scale to millions of users. A company called Azul has developed cheap scalable datacenter technology that delivers terabits per second from its OS neutral Java-based clusters of servers.
The bottleneck is rapidly moving back to where it has long resided: at the last mile, where passive optical networks, such as VZ's Fios, are increasingly necessary. For IPTV, content delivery networks (CDN) from Akamai and its increasing throng of video rivals using a variety of ingenious delivery algorithms will eclipse the cumbersome BitTorrent mesh model, which shuffles video files through underused personal computers across the network.
Normally when you quote someone extensively but selectively and you're making a different (arguably opposite) point, you acknowledge that.
Stanford Law Professor Lawrence Lessig, who got a chance to lecture a captive Federal Communications Commission during a special public hearing on broadband network management this week, began the lesson quoting from remarks Gerald R. Faulhaber, Professor Emeritus of Business and Public Policy at Wharton, made at Stanford on Dec. 1, 2000 when he was chief economist at the FCC.
I think Prof. Lessig is a gifted and well-intentioned scholar and educator. And Prof. Faulhaber framed the issues well, so it's understandable why Lessig quoted him.
But Faulhaber wasn't on Lessig's page.
A transcript of Faulhaber’s full remarks, available on the Stanford Web site, indicates that Faulhaber was merely summarizing arguments made by others and was actually quite skeptical of the “open access” proposal (an ancestor of net neutrality) that was being discussed.
Lessig Thursday credited Faulhaber with observing in 2000 that the “end-to-end” principle (e2e) equals perfect competition:
where does the e2e argument figure into this?
if I translate this into planet economics, that e2e in engineering is the equivalent of the perfect competitive market that economists know and love.
But the full quote makes it clear Faulhaber was summarizing the argument of others:
Now, where does the e2e argument figure into this? Well, the e2e advocates are essentially arguing, if I translate this into planet economics, that e2e in engineering is the equivalent of the perfect competitive market that economists know and love.
Faulhaber made it clear he didn’t agree, a fact which Lessig failed to mention:
But in fact that’s not the way the real world works. It’s neither the economist nirvana of perfect competition nor is it the engineers’ nirvana of e2e. It doesn’t work that way.
First, we notice that customers actually don’t behave as we would wish them to. They keep insisting on things like “I’d rather buy a bundle. I’d rather buy it from one person. I’d rather not have to worry about solving complexity; I’d rather somebody else solve complexity for me,” all of which present enormous profit opportunities for businesses and opportunities to change the technology. And at one level this is what consumers want and this is how it’s going to evolve.
I’ll give you an example, I’ll give you two examples. The first is, and the most obvious, is you should read Dave Clark’s and Marjorie Blumenthal’s paper, which was supposed to be required reading, which will show you that the principles of e2e tend to get violated essentially when, at least in some of the cases that he mentions, customer demand is pushing them to be there. The couple of issues he raised, one is operating in an untrustworthy world, more demanding aps, less sophisticated users.
One of these we seen and we all sort of pooh-poohed, us, you know, cool Internet guys, is the rise of AOL; right? As they put it, somewhat understating the case, “We’re for the people” — “We’re the ISP for the people who go to Jiffy Lube, not the ISP for the people that change their own oil.” And we all pooh-pooh this and we call them “newbies,” and their market share is huge. There’s a market demand for all those nasty things they’re doing. And consumers like it. If we think they’re newbies, tough. So e2e may very well be violated for reasons which are really lower cost or higher value to customers.
Lessig advocates that broadband service provider should obtain permission from regulators before they make any changes in network architecture:
Before we allow it to change the burden should be on those who would change its architecture … show me that innovation won’t be harmed from this change. Show me investment won’t be choked. Show me competition will continue. And until you show me that don’t allow [network architecture] to change.
This isn't as reasonable as it sounds. Following the divestiture of AT&T in the early 1980s, this is exactly what we had, and it was a nightmare.
According to Huber, Kellogg and Thorne (Federal Telecommunications Law [1999], 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.
Check out Taylor Frigon’s blog post, "A paradigm's shift in the way you get information," which links to a story in the Wall Street Journal by Esther Dyson entitled: "The Coming Ad Revolution." Dyson's column discusses major changes in advertising that have been on their way for years but which few people today even see coming. Frigon writes:
The article outlines an impending paradigm shift in the way people find information, which will have a tremendous impact on the advertising business and those that support it.
But this revolution in the way that people find information will impact more than just the ad industry. We wrote about some of the potential implications in the world of search two months ago in a post entitled, "What is the future of search?" And there are thousands of other ways in which the kinds of changes that Dyson is discussing in this article will impact business and life beyond business.
George Gilder predicted these very same revolutionary forces in his 2000 book Telecosm: How Infinite Bandwidth Will Revolutionize our World. In chapter 18, "The Lifespan Limit," he wrote:
"The supreme time waster, though, is television. Many people still have trouble understanding how egregious a time consumer, how obsolete a business model, how atavistic a technology, and how debauched a cultural force it is. [. . .] For as much as seven hours a day, on average, consuming perhaps two thirds of your disposable time, year after year, all in order to grab your eyeballs for a few minutes of artfully crafted advertising images that you don't want to see, of products that you will never buy.
"[. . .] In the future, no one will be able to tease or trick you into watching an ad. Your time is too precious and you are too powerful. Advertisements will truly add value rather than subtract it (247 - 252)."
The value of your trusted circle of friends, family, colleagues, and various networks to which you belong or with which you associate may become much easier to tap into to help you with decisions than ever before, diminishing the power of old-fashioned advertising as Gilder foresaw years ago and as Dyson describes in today's article.
You may well make purchasing decisions based on these existing networks, as well as based on new networks which arise to provide you with access to what products other consumers like you find valuable.
Based on this outlook, the tremendous valuations for companies like Google, whose revenues are based upon a very primitive version of tying advertisements to what you are looking for, may be something of a house of cards. If the paradigm is truly shifting in the ways that are foreseen by Dyson and Gilder, there are new opportunities few see now, and the companies most dominant today may become examples for future discussions of the topple rate.
Markey: "The bill contains no requirements for regulations on the Internet whatsoever."
The long-awaited network neutrality bill of Rep. Ed Markey (D-MA) was unveiled this week. H.R. 5353 establishes a new broadband policy and requires the Federal Communications Commission to conduct an Internet Freedom Assessment, with public summits and a report to Congress.
Broadband Policy
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
Hance Haney
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!
-Bret Swanson
P.S. HoIP = hunting over IP; FoIP = fishing over IP
Podcast on open access regulation in the 700 MHz band
Hance Haney
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-acc
