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August 19, 2009
Legacy regulation killed Google Voice

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.


April 6, 2007
"National strategy" for broadband?

Japan has 7.2 million all-fiber broadband subscribers who pay $34 per month and incumbent providers NTT East and NTT West have only a 66% market share. According to Takashi Ebihara, a Senior Director in the Corporate Strategy Department at Japan's NTT East Corp. and currently a Visiting Fellow at the Center for Strategic and International Studies here in Washington, Japan has the "fastest and least expensive" broadband in the world and non-incumbent CLECs have a "reasonable" market share. Ebihara was speaking at the Information Technology and Innovation Foundation, and his presentation can be found here. Ebihara said government strategy played a significant role. Local loop unbundling and line sharing led to fierce competition in DSL, which forced the incumbents to move to fiber-to-the premises.

Others have taken a slightly different view. Nobuo Ikeda, formerly a Senior Fellow with Japan's Research Institute of Economy, Trade and Industry, says that the "success of Japan's broadband has been brought about by such accidental combination of a Softbank's risky investment and NTT's strategic mistakes." Ebihara acknowledges that the results of the unbundling regulation have been "mixed" in terms of competitors investing in their own local switching and last-mile facilities, as the U.S. discovered for itself.

The whole point of Ebihara's lecture was that the U.S. doesn't have what he and others consider a national broadband strategy. Never mind that Verizon already plans to spend $23 billion to construct an all-fiber broadband network, which will pass up to 18 million homes by 2010, according to USATODAY. And AT&T is spending $4.6 billion to deploy VDSL to 19 million homes by 2008.

Viewed in hindsight, and not because the Bush Administration has done a particularly good job touting its own success, a clear strategy emerges. It consists mainly of relief from unbundling regulation for fiber deployments; flexibility to offer broadband services a common-carrier basis, a non-common carrier basis, or some combination of both; and national guidance for local franchising authorities.

When, on Feb. 20, 2003, the FCC set new rules for telephone network unbundling which freed fiber-to-the-home loops, hybrid fiber-copper loops and line-sharing from the unbundling obligations of incumbent carriers, then-SBC Communications (now AT&T) and Verizon quickly responded. Verizon announced it would begin installing fiber to the premises (FTTP) in Keller, Tex. and that it planned to pass "about 1 million homes in parts of nine states with this new technology by the end of the year." SBC outlined its own plans to deploy fiber to nodes (FTTN) within 5,000 feet of existing customers in order to deliver 20 to 25 Mbps DSL downstream to every home (amd that it would construct fiber to the premises for all new builds. SBC projected that FTTN deployment can be completed in one-fourth the time required for an FTTP overbuild and with about one-fifth the capital investment. Verizon subsequently announced it would hire between 3,000 and 5,000 new employees by the end of 2005 to help build the new network, on which it planned to spend $800 million that year. And that it planned to pass two million additional homes in 2006.

It may look like these major investment decisions didn't depend on subsequent deregulatory actions -- such as the Jun. 27, 2005 decision of the Supreme Court in NCTA v. Brand X Internet Services -- clearing the way for the FCC, on Aug. 5, 2005, to eliminate the requirement for telephone companies to share their DSL services with competitors. The FCC decision finally put DSL on an equal regulatory footing with cable modem services. However, it began to emerge as early as 1998 -- in an FCC Report to Congress -- that asymmetric regulation between the broadband offerings of the telephone companies versus their competitors would be impossible to sustain as a matter of logic. A decision by the U.S. Court of Appeals for the Ninth Circuit in 2000 all but confirmed this. Thus, it was possible to foresee that either cable would have to be regulated or the phone companies would have to be deregulated. When cable modem service achieved a higher market penetration than DSL, and given the Bush administration's preference for less regulation, it became possible to anticipate that DSL would ultimately be deregulated.

The FCC didn't enact national guidelines for local franchise authorities until Dec. 20, 2006, however there was a long history of abuses by local franchise authorities. In a report to Congress in 1990 the FCC said that "in order '[t]o encourage more robust competition in the local video marketplace, the Congress should ... forbid local franchising authorities from unreasonably denying a franchise to potential competitors who are ready and able to provide service.'" Despite howls of protest from local officials, Congress imposed limits on the franchise authorities in the Cable Act of 1992. Similar abuses began showing up when the telephone companies looked serious about upgrading their broadband services. After months of discussion, the FCC began the proceeding which resulted in the current guidelines in Nov. 2005.

There's more to be done. Spectrum policy, in particular, remains mired in special-interest broadcaster and public safety politics and must be fully sorted out. But it's not clear the U.S. should follow the costly Japanese model, with its heavy reliance on tax breaks, debt guarantees and subsidies (see, e.g., this). And don't forget that Japan had zero interest rates. Industrial policy leads to higher costs, because taxpayers are footing the bill. It also relies on policymakers, who usually understand the least about technology. Consider this poignant example, as noted by Philip J. Weiser:

It was the threat of Japan's rise in the 1980s that spurred the course toward digital television that the United States still follows today. Washington committed wide swaths of spectrum to digital television, leaving U.S. mobile-phone providers with less bandwidth than they needed and only about half the amount of their European counterparts. The entire effort assumed that Americans would continue to watch television shows broadcast over the air. Yet over the past two decades, more U.S. consumers have begun to watch cable and satellite television, undermining the rationale for this expensive policy, which has also delayed innovation and imposed unjustifiable costs on the nation.


May 4, 2006
The Stevens bill

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.

  • Net Neutrality -- 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.


March 27, 2006
New House Draft Offers Middle Ground

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 proposal bearing 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.


March 23, 2006
Experts agree that blocking web sites unlikely

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.


February 24, 2006
Barton, Pickering & Upton to the rescue

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.

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