Wednesday, March 1, 2017

Massive 5G Investment, Despite “Regulatory Uncertainty”

            Riding closely on the heels of substantial investment in Fourth Generation wireless infrastructure investment comes a Fifth Generation.  Wireless carriers in the United States appear to have accelerated the rollout of 5G. See, e.g., http://www.cnbc.com/2017/02/27/momentum-is-building-for-5g-rollout-ericsson-ceo.html; https://www.cnet.com/news/verizon-to-hold-worlds-first-crazy-fast-5g-wireless-field-tests-next-year/; https://www.bloomberg.com/news/articles/2017-02-27/at-t-boosts-5g-networks-rollout-as-online-video-demand-spikes

            Hang on. Aren’t we living an acutely painful world of regulatory uncertainty foisted on the marketplace by network neutrality zealots?  How can carriers invest substantially in a wireless broadband technology if regulators are hell-bent to mandate access and openness?
            It strikes me that wireless carriers in the United States and elsewhere can handle regulatory uncertain and make prudent investments in next generation network infrastructure.

            There are legitimate reasons not to support network neutrality, or to advocate reforms.  But make no mistake: removing “regulatory uncertainty” is a bogus rationale having no real impact on carrier investment strategies.

Monday, February 27, 2017

FCC Chairman Pai’s Alternate Facts Part 3, Privacy "Protection" for Broadband Consumers

            FCC Chairman Ajit Pai has opposed broadband consumer privacy protection safeguards largely based on a false dichotomy: that Internet content providers, like evil Google and Facebook could collect, process and exploit consumer usage data, while ISPs could not. See
Dissenting Statement of Commissioner Ajit Pai, Re: Protecting the Privacy of Customers of Broadband and other Telecommunications Services, WC Docket No. 16-106.https://apps.fcc.gov/edocs_public/attachmatch/FCC-16-39A5.pdf.

            This is a false dichotomy, because consumers willingly opt to barter their usage data in exchange for “free” advertiser supported content access, while broadband subscribers will have to allow such surveillance and sales of usage data as a hidden or obscure cost of service.

            Even though Internet content consumers cannot negotiate with providers and have to accept “take it or leave it terms,” Chairman Pai might perceive a viable marketplace.  Consumers willingly give up privacy protection, because they don’t know what they have to give up, they consider it a fair trade, or they trust Federal Trade Commission safeguards to provide adequate protection. 

            On the matter of FTC protection, Chairman Pai deems an “eviction” the process by which the FCC proposed rules would replace general, FTC privacy safeguards.  He conveniently forgets that the FTC has no jurisdiction to impose rules on common carriers, the regulatory status still applicable to ISPs.  Even if the Pai FCC re-reclassifies Internet access as private carriage, I don’t think it’s a given that the FTC and its apparently acceptable rules to Chairman Pai would seamlessly and quickly come into play.

            More fundamentally Chairman Pai appears to treat conduit function and content as able to operate in nearly identical bartering marketplaces.  I respectfully disagree.  It’s one thing to refrain from using Facebook and even Google’s search function, because one cannot accept the privacy invasions, dossier construction, data mining, and revenue accrual from advertising auctions used by Internet content providers to finance their services.  It’s quite another matter to opt out of wireless telecommunications services, because carriers can do the same things and perhaps even more, based on the location determination, call and IP address recording and other surveillance/network management functions.

            Simply put, wireless voice and data subscribers should not have to abandon any and all privacy protections for the “privilege” of becoming a consumer.  If consumers learn that Chairman Pai is working sleepless afternoon to sanction unlimited trading of wireless consumer data, common carrier safeguards will look increasingly essential.

Thursday, February 9, 2017

FCC Chairman Pai’s Alternative Personalities, Facts, Economics and Law—Part Two

Okay.  Turn off all electronic devices (except one with the screen on which you are reading this       blog!).  Please answer this one question pop quiz.


Who made the following public statement:
What would be best for consumers? My view is pretty simple. Our goal should not be to unlock the box; it should be to eliminate the box. If you are a cable customer and you don’t want to have a set-top box, you shouldn’t be required to have one. This goal is technically feasible, and it reflects most consumers’ preferences—including my own.

            A)        President Donald Trump;

            B)        FCC Chairman Ajit Pai

            C)        Former FCC Chairman Thomas Wheeler; or

            D)        Harold Feld, Senior Vice President, Public Knowledge (an advocacy group)


Perhaps this answer surprises you as the quote would appear to originate from someone with a strong commitment to consumer protection. You might have kicked out answer B) based on Chairman Pai’s removal of the cable set-top box Notice of Proposed Rulemaking without prior notice which he seems to consider necessary in most instances.

Perhaps Chairman Pai will replace the prior set-top box proceeding with one more likely to achieve his stated objectives.  Maybe not.  Chairman Pai appears to send mixed messages.

Wednesday, February 8, 2017

FCC Chairman Pai’s Alternative Personalities, Facts, Economics and Law—Part One

            FCC Chairman Pai has launched a charm offensive showcasing his commitment to transparency and regulatory restraint.  However, behind the scenes, he ignores due process, the rule of law, FCC tradition, bipartisanship and fair play to shut down previous FCC initiatives of which he disapproves. 

            For example, this bi-polar personality makes it possible for the Chairman to claim how much he cares about curbing extraordinarily gouging long distance telephone rates borne by the “captive” 2.2 million inmates in the U.S. even as he instructs his General Counsel to abandon any participation in an ongoing judicial review of prior FCC decision which resulted in rules.  See New Chairman Orders FCC To Abandon Court Defense Of Rule Limiting Prison Phone Rates; https://consumerist.com/2017/02/02/new-chairman-orders-fcc-to-abandon-court-defense-of-rule-limiting-prison-phone-rates/. By ordering his counsel’s no show,—akin to the Democratic Senators’ boycotts of Trump Cabinet nominee confirmation hearings—Chairman Pai facilitates maintenance of the status quo.
            Ironically, the Chairman has acknowledged the inmate calling marketplace fails to support his heartfelt belief that markets usually are infallible and efficient:

I believe that the government should usually stay its hand in economic matters and allow the price of goods and services to respond to consumer choice and competition. But sometimes the market fails, and government intervention carefully tailored to address that market failure is appropriate. Dissenting Statement of Commissioner Ajit Pai as Delivered at the August 9, 2013 Open Agenda Meeting, Re: Rates for Interstate Inmate Calling Services, WC Docket No. 12-375; available at: https://apps.fcc.gov/edocs_public/attachmatch/DOC-322749A4.pdf.

            On the other hand, Chairman Pai willingly works to prevent the consequences of market failure and the need for remedies, if the FCC errs in any way that he believes might establish a precedent for jurisdiction and overreach where market self-regulation suffices.  Better to eliminate in its entirety a ruling containing Pai-identified flaws than subject it to a court test, and refinements under his administration.

            The Pai-identified flaws are based on alternative facts, economics, accounting and law.
The Chairman has determined that the FCC’s prescribed per minute caps would prevent inmate calling companies from recouping costs.  He has interpreted Sec. 276 of the Communications Act as foreclosing any FCC jurisdiction over intrastate calling by inmates.  Additionally, the Chairman reads Sec. 276 as authorizing the FCC to remedy the unlikely instances of below cost rates, but prohibiting the Commission from remedying the far more likely scenario of rate gouging.

            To reach these conclusions, Chairman Pai accepts an alternative reality.  For example, he appears to believe that interested parties report the actual costs of doing business to the last dollar.  The Chairman takes as a fact the calculation made by the National Sheriffs’ Association that annual administration costs for jail-based calling amounted to $244,253,292 around 2012-13, but the FCC’s price cap/safe harbor rate would yield only $136,704,062 in revenue. See Dissenting Statement of Commissioner Ajit Pai, Re: Rates for Interstate Inmate Calling Services, WC Docket No. 12-375; available at: https://apps.fcc.gov/edocs_public/attachmatch/DOC-340632A5.pdf.  He can conclude that the FCC would impose “confiscatory” rates on long suffering inmate calling companies should they have to reduce rates.

             Let’s take a look at the U.S. inmate calling industry and its financial viability.  Two privately owned companies, Global Tel*Link and Securus Technologies control 70% of the market.  These companies pay massive commissions—some would say kickbacks—to jails and prisons. That surely contributed significantly to the Sheriffs’ $244.2 million calculation.  Let’s call them franchise fees.  No stakeholder, no one at the FCC, no one period has provided credible evidence that these inmate carrier costs plus franchise fees are compensatory vis a vis the cost of providing telephone service. Inmate calling companies operate as telecommunications service providers, subject to Title II common carrier regulation.  Their rates have to be cost-compensatory, plus a reasonable profit.  Fees of any sort have to relate to the cost of providing service and not doughnuts, boondoggle trips to conferences and kickbacks.

             Chairman Pai has railed against voodoo economics and the absence of economics.  Yet when it comes to inmate calling, he accepts the accounting of a stakeholder having every incentive to pad the cost calculation.

             The Sheriffs’ calculation and Chairman Pai’s endorsement of it do not pass the smell test.  Outside the penal environment, long distance telephone calls cost retail subscribers about 2-5 cents for interstate calls and about 10-15 cents for intrastate calls.  For example, see http://www.phonedog.com/long-distance.  Outside jail, telecommunications costs are so cheap that it makes financial sense to use cheap overseas labor to provide operator assistance.  Operator assistance is also computerized.

            I don’t believe the Sheriffs have made a credible calculation, nor do I believe their threat to yank out phones if the FCC’s 13 cent rate cap were implemented.  If a jail’s phones accrue $2 million in phone commissions annually, which would management choose: $0, or $1.5 million?  Similarly, I have seen no evidence that jailors are spending millions policing, monitoring, and safeguarding the payphones.

            I readily accept that jails house a lot of “bad dudes,” foreign and domestic.  They have to pay a debt to society, but it does not have to include $15 for a 10 minute telephone call.        

            In this time of alternative realities, apparently the Chairman can be all things to all people.  It simply depends on your selective perception.

Monday, January 23, 2017

An Open Letter to FCC Chairman-Nominee Ajit Pai

Dear Commissioner Pai:

Congratulations on your likely nomination to become Chairman of the Federal Communications Commission.  For the good of everyone in the country, I hope you will lead the Commission with decorum, pragmatism and collegiality, no matter how real your prior grievances.  You owe everyone a renewed commitment toward humility, grace and an open mind, despite real or perceived justifications for snarkiness, sanctimony and hubris.

I am greatly disappointed that the FCC has become so partisan and fractious.  Far too many years ago, Commissioners of both Parties sought compromise rather than self-aggrandizement and accommodation of a few key stakeholders.  The public interest served as a goal worth identifying and serving.

As recently as 2005, all Commissioners could reach closure on basic principles of the role of the FCC in helping shape the Internet.  Every Commissioner agreed that the FCC could achieve a greater good with well-calibrated oversight and a limited regulatory regime, neither interventionist nor libertarian.  This agreement did not take a lot of pages, did not originate in the word processor of an outside law firm, or consultant and did not require endorsement by sponsored researchers, political parties and the most vocal and deep pocketed stakeholders.

Going further back in time, the Republican Party’s public interest mandate included rigorous antitrust enforcement and a commitment to a level competitive playing field.  You might not know that in true Teddy Roosevelt fashion, President Nixon’s Justice Department started the litigation that eventually resulted in the divestiture of AT&T and the unleashing of competitive energies.

I hope you will take every effort to achieve consensus which used to be the usual outcome of matters before the FCC.  Issues did not have a Republican position and an opposite Democratic one.  Most votes were unanimous, because fair minded Commissioners—led by a fair-minded Chairman—could achieve a just and proper outcome, even if it disappointed a major incumbent.

No one had to overreach, or grandstand.  No one had to write 50 page dissents.  No one dared resort to smugness, righteous indignation and arrogance.

I share your excitement about the promise of telecommunications and information technology to enhance national welfare and make life better for all.  Such potential makes it that much more important that you strive to lead by example and refrain from using your considerable power to settle all the grudges you bear.

Best wishes for a successful Chairmanship.

Sincerely,

Rob Frieden, Pioneers Chair and Professor of Telecommunications and Law
Pennsylvania State University

Wednesday, January 18, 2017

TMobile’s 480p Video Delivery Gambit: Tiering, or Throttling?

Predictably, and perhaps appropriately, broadband carriers are spending sleepless afternoons crafting new ways to diversify service without violating the FCC’s Open Internet Order restrictions on traffic blocking, throttling and paid prioritization.

TMobile has opted to give with one hand and somewhat furtively take with the other.  The carrier will offer “unlimited” data, subject to quality of service limitations, including delivery of video at 480 p regardless of what format it received from an upstream content provider or distributor. See, e.g., http://variety.com/2016/digital/news/t-mobile-unlimited-data-plan-video-caps-1201840422/.  TMobile will retain a higher screen resolution provided a subscriber pays a $25 upcharge.

Is TMobile throttling service by deliberately downgrading quality, or is the carrier simply using screen resolution as a tiering option and proxy for bit transmission speed? 

Bear in mind that many wireless carriers have offered “unlimited” data, subject to throttling to 2G or 3G speeds after a subscriber exceeds a stated allowance.  Perhaps a carrier does not throttle if it does so on a nondiscriminatory basis.  The carrier does not single out traffic from a specific content provider or carrier.  Every content source faces service degradation if the subscriber exceeds a still enforceable cap.

So one person’s tiering may be another’s throttling and the FCC places itself in the middle as an awkward judge, jury executioner. 

Monday, January 16, 2017

Who Pays What to Whom in the Internet Ecosystem?

Internet interconnections and compensation arrangements have been based on voluntary terms and conditions after government underwriting stopped. In a commercial context, funds flow on the basis of traffic volume, but also bargaining power (individually, or collectively held).

Last mile ISPs have significant bargaining power in light of their control of access to end users ("eyeballs" to advertisers and content providers alike).  While we could debate about the robustness of competition and last mile broadband options (functional equivalency), few would disagree that most consumers select one and only one last mile wireline provider (where available) for traffic requirements exceeding 10 Gigabytes.  The FCC termed last mile ISPs as "terminating monopolists," appropriate insofar as most consumers are willing to pay for and rely on a single wireline last mile ISP.  Consumers might also subscriber to a wireless broadband carrier, but data caps force conservation and create incentive to retain a wireline option offering unlimited data, or very high caps like Comcast's 1 terabyte monthly cap, plus Wi-Fi tethering.

In the context of platform/double-sided markets model, last mile ISPs have 2 compensation/revenue streams available: 1) last mile broadband subscriptions and 2) payments from upstream CDN and content providers.  While I can see how a credit card company might need to offer free cards, or even pay car users with airline miles and rebates, last mile ISPs have not given up imposing tiered service rates, primarily based on transmission speed (and not data volume like wireless carriers).  Last mile ISPs now want to increase the compensation received from upstream players.

Netflix, Google and other large volume generators of content have been free riders only if one considers content providers/distributors as solely responsible for compensating downstream carriers handling more traffic than generating upstream.  But Netflix is not the sole revenue source: last mile ISPs used to rely primarily (if not exclusively) on their retail subscribers' monthly payments.  The last mile ISPs want to maximize revenues on BOTH sides of their platform and I don't see the same financial constraints like that incurred by credit card companies.

Netflix blinked first, had payer's remorse, but the commercial negotiation process generates winners and losers.  For my part, I don't see how commercially negotiated compensation arrangements trigger network neutrality concerns, unless and until the FCC has jurisdiction to apply Title II, which it now has, plus evidence that the arrangement is discriminatory and/or unreasonable as defined by the FCC.  Bear in mind that the FCC has eschewed requiring tariffs and doesn't apply the prohibition of paid prioritization upstream from the last mile ISP.

So in large part, it seems to me that a maturing Internet ecosystem has diversified from the traditional peering/transiting dichotomy into a variety of hybrid arrangements.  Has such diversification harmed competition and/or consumers?  I'm not sure that it has, even when zero rating has the potential to influence consumers' content choices by injecting a possible cost avoidance factor.

Thursday, December 22, 2016

Insights on Future FCC Decision-making Gleaned From a Judicial Dissent

            As unorthodox as it might seem, Senior Circuit Judge Stephen F. Williams dissenting opinion in a major FCC case offers a likely roadmap on how the FCC will operate with Trump appointees and a Republican majority.  Judge Williams’ extensive opinion in U.S. Telecom v. FCC, available at: http://pdfserver.amlaw.com/nlj/6-14-16%20DC%20Circuit%20net%20neutrality%20opinion.pdf, has a flavor remarkably unlike a legal dissent.  At its best, his work identifies real defects in the logic used by the FCC to reclassify broadband Internet access as a telecommunications service.  Additionally, the Judge raises legitimate questions about the FCC’s rationales supporting a near total prohibition on paid prioritization of traffic. 



            I am not keen on ex ante regulation and can identify significant consumer benefits in having the option to receive “better than best efforts” traffic routing.  Judge Williams offers considerable evidence that consumers do not benefit and may be harmed by a prohibition on price and quality of service discrimination.



            At its worst, the Williams dissent misreads case precedent, misinterprets the statutory duty of the FCC to apply Title II common carriage regulation and shows a penchant for economic analysis regardless whether it is appropriate, helpful or sponsored by a stakeholder.   Additionally, the opinion offers copious sanctimony and snark at a high level even for dissenting jurists.



            Judge Williams believes the FCC failed to provide stakeholders adequate notice that the Commission had opted to use a new standard for assessing whether and how to apply Title II regulation.  He chides the FCC for not conducting a thorough assessment of market power to determine whether the broadband access marketplace operate competitively.  From his perspective, Judge Williams considers the Title II classification as lawful if and only if the broadband marketplace lacks competition. 


            There should be no dispute that common carriage regulation, established in Title II of the Communications Act, can apply even if a telecommunications market segment operates competitively.  For example, Congress ordered the FCC to treat Commercial Mobile Radio Service operators as common carriers (47 U.S.C. §322) regardless whether the wireless marketplace is, or will become competitive. 


            Even as I do not think the FCC should have imposed the common carrier classification, I have no doubt the FCC can lawfully make the call.  Judge Williams would prevent the FCC from applying Title II unless the Commission can prove market failure, an extraordinarily high  standard of proof no law requires.  Additionally, the Judge would deny the Commission any deference based on its expertise to interpret and apply ambiguous statutory language as the Supreme Court established in its Chevron Doctrine.



            Judge Williams appears so enamored with economic analysis, that a failure to showcase it constitutes reversible error.  Nothing in the Communications Act mandates economic analysis as the primary, “make or break” analytical tool the FCC must use.  The FCC has to assemble a complete evidentiary record based on facts, an empirical record, the advocacy documents of stakeholders and the Commission’s assessment of what would best serve the public interest.  Of course economic analysis can help the FCC meet its statutory duties, but it does not constitute a sine qua non. 


            Economic analysis, perhaps even more so than legal analysis, is rife with pitfalls.  Economists do not have to operate with the discipline and rigor of legal advocates, despite the strategic use of mathematics.  Economists can construct a theory, convert it into an unimpeachable rule and offer this rule in advocacy documents for adoption by the FCC. 


            Much of the so-called economics used in FCC proceedings by stakeholders is sponsored advocacy.  The vast majority of this advocacy attempts to legitimize and make scientific policy prescriptions that do not pass the smell test.  For example, any and all mergers promote competition and enhance consumer welfare, but set top box competition would harm competition and consumers.  Economic analysis has a legitimate role at the FCC, but Judge Williams would elevate its importance at the risk of bolstering the potential for sponsored research to provide scientific support for results-driven decision making.  In the words of a former Republican President, the FCC may be headed for a full embrace of Voodoo Economics if it provides the foundation for a desired policy outcome.  Judge Williams appears keen on replacing an “economics-free” FCC to one obsessed with anything masquerading as economics.



            In the snark and sanctimoniousness department, I sense Judge Williams takes great pride in analogizing the FCC’s Open Internet Order to a bicyclist shifting from sidewalk to roadway travel routes.  He chides the FCC for applying common carriage regulation and then abandoning most of the burdensome elements.  From my perspective the FCC evidences flexibility and a keen interest in calibrating the reach and scope of regulation to what tools are needed.



            I fear Judge Williams dissent foreshadows an FCC willing to misinterpret case law and statutory mandates to achieve a desired outcome.  I worry that an infatuation with economics will legitimize bogus rationales that the FCC will embrace hook, line and sinker.  Who needs a maverick wireless carrier like TMobile when economists prove that any and all markets work just fine with 3 competitors? 


            Lastly, I have concerns that FCC decision makers will overplay their hand.  I have seen ample and unjustified arrogance, hubris and political intrigue at the FCC.  It looks like the new management will continue—if not expand—the trend.

Wednesday, December 21, 2016

In Praise of Domestic Engineering

     My dear wife, Katie, broke two ankle bones while walking two dogs only a few hours after arriving at her elderly parents’ home in Medina, Ohio.  Katie reluctantly has ceded home management duties to me.


     While I did not need any reminder to feel and express gratitude, I do have a better sense of the physical, time consuming and expansive work in domestic engineering.  As well, I recognize what a luxury I have had in pursing intellectual curiosity and reading everything in the telecommunications/Internet sphere. 




     For some indeterminate time, I won’t have the chance to read every blog entry, law review article, white paper, sponsored research, FCC decision, web page, etc. out there.  Might this be a blessing, or just an apt reminder?

Wednesday, November 30, 2016

Likely and Behind the Scenes Changes at the FCC

            It should come as no surprise that the Federal Communications Commission will substantially change its regulatory approach, wingspan and philosophy under a Trump appointed Chairman.  One can readily predict that the new FCC will largely undo what has transpired in previous years.  However, that conclusion warrants greater calibration.

            As a threshold matter, the new senior managers at the FCC will have to establish new broad themes and missions.  They have several options, some of which will limit how deregulatory and libertarian the Commission can proceed.

            Several ways forward come to mind:

            1)         Channeling Trump Populism—the FCC can execute President Trump’s mission of standing up to cronyism and rent seeking, even when it harms traditional constituencies and stakeholders.

            2)         What’s Good for Incumbents is Good for America—the FCC can revert to the comfortable and typical bias in favor of incumbents like Comcast, Verizon, AT&T and the major broadcast networks.

            3)         A Libertarian Credo—the FCC can reduce its regulatory wingspan, budget and economic impact by concentrating on limited core statutory mandates, such as spectrum management.

            4)         Humility—without having the goal of draining the FCC’s pond, senior managers can temper their partisanship and snarkiness by refraining from mission creep.

            Each of the above scenarios hints at major and equally significant, but unpublicized changes at the agency.  A populist FCC equates the public interest with what the court of public opinion supports.  For example, most consumers like subsidies that make products and services appear free.  A populist FCC responds to consumers by interpreting network neutrality rules as allowing zero rating and sponsored data plans.

            However, a populist FCC risks overemphasis on public opinion that stakeholders can energize as occurred when companies like Netflix and Google used their web sites for 24/7 opposition to the Stop Online Piracy Act and when Jon Oliver motivated 4 million viewers to file informal comments favoring network neutrality on the overburdened FCC web site.

            On the other hand, a populist FCC can remind rural residents of how much they count in this new political environment.  The FCC can validate rural constituencies by refraining from modifying—if not eliminating--inefficient and poorly calibrated universal service cross-subsidies.  Most telephone subscribers in the U.S. do not realize that they are paying a 10%+ surcharge on their bills to support universal service funding, most of which flows to incumbent telephone companies.  Consumers would quickly contract compassion fatigue if knew about this sweetheart arrangement.

            The favoring incumbents scenario has a long and tawdry history at the FCC.  If the new FCC reverts to this model, the Commission will largely give up fining companies for regulatory violations.  Additionally, it might purport to reintroduce economic analysis to its decision making by adopting incumbent-advocated, but highly controversial templates.  For example, incumbents have touted the “Rule of 3” to support further industry consolidation.  This rule is nothing more than an advocacy viewpoint that markets with 3 competitors generate most of the consumer benefits accruing from markets with more than 3 competitors. Having only 3 competitors may work if 1 of them does not collude and match the terms, conditions and prices offered by the other 2.  But in many markets—think commercial aviation—having only 3 operators risks markets organized to extract maximum revenues from consumers with little incentive to innovate and compete.
           
            An incumbent friendly FCC likely will approve mergers and acquisitions with limited, if any, conditions and negotiated conditions.  This kind of FCC will approve AT&T’s acquisition of Time Warner despite President Trump’s disapproval.  The FCC probably also would have no problem with a wireless marketplace duopoly of AT&T and Verizon controlling 90+% of the national market, because the Commission will have largely abandoned the use of a specific market penetration caps and other indices (such as the Herfindahl-Hirschman index) to identify dangerously concentrated markets.

            Many press analysts assume the FCC will embark on a libertarian bent, possibly leading to the elimination of the agency.  I believe the press has misread advocacy items written by Trump Transition Team members who couldn’t easily pitch a short term gig at the FCC and who readily acknowledge the perennial need for core functions performed by the agency.  A libertarian FCC strictly limits its statutory interpretations and does not seek to expand its regulatory wingspan.  However, the national interest—surely including the corporate interests of incumbents—requires the FCC to participate in global standard setting, radio frequency allocation and Internet governance.  The national interests suffers if the FCC does not attend intergovernmental forums and does not forge alliances with other governments keen on reigning in the motivation of global forums to favor specific governments and expand its reach and significance.

            Last, but not least, the new FCC could emphasize humility and bipartisanship using its independence and expertise to determine what best serves the public interest.  This requires abandonment of results-driven decision making and creative statutory interpretation.  I really like this option.

Sunday, November 27, 2016

Reform the FCC!

In this volatile and contentious time, it has become even more likely that any advocacy position may trigger misperception, intentional or not.  Recently, one of the two FCC transition managers for the incoming Trump administration, has been characterized as calling for the agency’s closure.  See http://www.techpolicydaily.com/communications/do-we-need-the-fcc/.

 
I do not read Dr. Mark A. Jamison as advocating a torch to the very agency he will help staff with senior managers.  Instead, I get a strong message with which I agree: the FCC has become far too partisan and political on matters that do not typically cleave on a Democrat/Republican fulcrum.  For decades, FCC Commissioners did not split on party lines.

Why now?

 
I attribute the polarization of the agency as directly resulting from Commissioner appointments of congressional staffers who in turn hire the same type of professional to serve as their senior staff.  Rather than consider major regulatory issues in terms of the national interest, it appears that baser, political motivations predominate.  We really, really, really need an independent, expert regulatory agency that does not allow its work product to be molded by politics.

 
This is a two-party problem: if Democratic FCC senior management allowed President Obama to lobby for a preferred network neutrality policy to rousing Republican indignation, then these very same folks should resist efforts by President Trump to direct a preferred agency decision on, for example, the proposed merger of Time Warner and AT&T.  Science, or as close to dispassionate scientific analysis, should apply, regardless of what that analysis generates.  Economic analysis does matter, and for the Commission’s part, it must be free of results-driven assumptions and strategies.


Making the FCC apolitical, requires fortitude and the commitment to empirical analysis, rather than the lazy and convenient reliance on sponsored research used in advocacy documents by stakeholders.


We do need to replace the current partisan FCC with an honest broker ready, willing and able to apply science and empiricism.

           

A Curious Blend of Millennial Indignation and Glitchy Bar Code Pricing

            A grocery store cashier called me a liar and shot me the bird yesterday as I insisted a 2 for 1 promotion applied to my pretzel purchase.  Wow! I didn’t think Millennials knew about obscene gestures, nor did I think a representative of this “snowflake” generation could muster the indignation about something having nothing to do with her.


            What a bizarre story I have to tell that combines defective bar code pricing with a Millennial’s reminder that I have no reason to live, much less demand application of a promotional price.  The Weis grocery chain currently offers buy one get one free for their store-branded pretzels.  However, at the same time as the promotion, the company has changed the trade dress, reduced the portion size and changed the bar code for the product.  At purchase, the scanned bar code did not trigger the savings, despite on the shelf price tags touting the 2 for 1 offer.
 

            As this pricing glitch had sucked 20 minutes out of my day on the previous day, I expedited the display of my lawyer tone which offspring and student alike consider “yelling.”  For the record, I cannot yell, having had vocal cord surgery that substantially reduces the volume I can generate.
 

          The 60-something cashier handling my order gladly offered to check the price, but her granddaughter cashier in the next line reported the price without a doubt.  This Millennial refused to accept my report of the discount and quickly escalated the conflict.  How could an old person like myself possibly know the price of an item, or maybe she tagged me as a petit scam artist?
 

            Do Millennial service workers reverse the traditional business premise that the customer is always right?  For my part, I accept that customers are not always right, but surely they cannot always be wrong.


            I had a pleasant, but inconclusive chat with the store manager and suggested that customers do not deserve vilification as liars when challenging a price.  His perception of the situation was influenced by another, more regular customer, who attested to the wonderfulness of the cashier who shot me the bird.


            My university has forced me to reframe the student-teacher relationship into one with high touch customer service in light of Millennial expectations and the cost of post-secondary instruction.  I suspect that lesson has not reached many Millennials when the shoe is on the other foot.

Monday, November 14, 2016

Oh Joy: Another Group of Email Addressees Who Ignore My Correspondence

            As a parent, college instructor and occasional job applicant, I am used to non-responses.  I regularly eat humble pie and I recommend it.  Lately, to maintain my weight and reduce the pain of two arthritic hips, I equate hunger with humility.

            As a former presidential candidate, regularly remarked: I get it.

            I understand email torrents, and confidential email addresses that get you to the person and not his or her agent.  I appreciate how busy people can be, or think they are.  Still, I cannot predict just who will, or will not respond to me.  Bear in mind that in most instances, I seek nothing from the correspondent other than an answer to a question, or the possibility that she might read a recent work in progress, or increase my readership of published works above the average of 10.

            My high average of ignoring respondents crosses party lines, but I suspect my right of center friends will increasingly fail to respond.  Why bother for someone who maintains his independence and offers no certain allegiance?

            For my part, I try to respond to anyone, including high school students who want me to do their homework on network neutrality.  I do not calibrate whether and how to respond based on the person’s celebrity status, or lack thereof. I do not calculate a cost/benefit.

            I try to be a good citizen, academic colleague and seeker of the truth.  I am rewarded when some luminaries readily and regularly respond.  However, I cannot understand why, for example, one Stanford Law School rock star responds and shares his research with me, while another one can’t be bothered ever.  I cannot explain why one Penn State University President responded to an occasional email, but two subsequent ones have used intermediaries that reply with scripts and corporate gobbledygook.

            I know I need to buck up, but it grieves me when my right of center colleagues apparently have become the latest non-responders.  For my part, I have always sought to listen and learn rather than engage in one-upmanship and snark.

            As a trite, but on point bumper sticker states: Let’s try more wag and less bark.  Do respond to your emails.

 

           

Friday, November 4, 2016

A Nuanced Analysis of Zero Rating

            Zero rating has become the next network neutrality issue in light of two simultaneously occurring marketplace developments: 1) wireless and now wireline carriers impose data caps as a part of their revenue maximization strategy and 2) these very same carriers want to create deal enhancers to improve the value proposition of more expensive service tiers by offering zero rating to specific data streams.  Can carriers get away with a strategy of creating scarcity, rationing broadband capacity, despite its low incremental cost, and upselling subscribers to more generous data plans at higher rates?

            The zero rating issue generates the most controversy when carriers ration and tier broadband access. While they may frame the matter in terms of congestion and network management, in application, zero rating provides a convenient way to tier service at different price points.  Broadband carriers largely have eliminated the prospect of actual congestion and they have every right to recoup substantial infrastructure investment.  However, broadband capacity does not closely match the cost characteristics of other metered, public utility services, such as electricity and water.  Broadband carriers incur insignificant extra costs when increasing a monthly data allotment.  How else can they profitably offer truly unlimited voice and text, particularly a few years ago when subscribers primarily relied on their handsets for these services?

            Unfortunately carriers have resorted to zero rating as a solution to problems they have created for consumers: “unlimited data plans” that punish high volume users with throttling at 2G bit transmission rates; disabling subscriber commands not to auto play commercials; and miserly data rate plans with high financial penalties for overages. 

            Also in the mix is the possibility for artificial congestion manufactured by carriers to justify data caps.  Consider the on again/off again congestion subscribers of both Netflix and Comcast experienced. A remarkable thing happened virtually overnight after Netflix agreed to a preferred co-location/paid peering arrangement.  Congestion evaporated without any new facilities construction and Netflix traffic returned to normal.

            Network neutrality advocates fairly point out that zero rating prioritizes specific traffic streams, by making them more attractive to consumers in light of their lower out of pocket cost.  However, I believe they overstate their case, particularly with the premise that zero rating condemns people with low incomes to perpetual hardship resulting from subsidized access to an inferior, curated sliver of Internet content.

            Zero rating offers access opportunities to individuals who want broadband access, but lack sufficient discretionary income.  A subsidy provides an opportunity to test the waters and to decide whether to change spending priorities.  In developing countries, penetration rates continue to rise to near that of developed countries, because even poor people want and will pay for access.

            Zero rating also provides a new incentive for people with sufficient funds who do not see the value proposition in ascending a steep learning curve toward digital literacy, plus making even a small financial commitment in buying a smartphone and subscribing to a monthly data plan.  Surely these people are not condemned to a lifetime of inferior access, because they might opt to pay for access to the entire Internet cloud.

            Lastly, we should consider the consequences if the FCC—or any regulatory agency—rules against a subsidy arrangement that consumers like.  Does the FCC really want to invoke fairness when doing so prevents consumers from “free” access to certain video streams?

            I provide a deep dive on zero rating in a paper available at:  https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928.

 

 

           

Tuesday, November 1, 2016

Direct and Indirect Ways the FCC Will Weigh in on the AT&T-Time Warner Merger

            Depending on your economic and political alliance, I have good, or bad news.  I fully expect the FCC to lend its regulatory “good offices” and provide binding or advisory opinion on AT&T acquisition of Time Warner.  In any event, we have a real time case study in the political economy of regulatory agencies and the incentive to expand reach, budget and significance.

The Direct Link

            The FCC has direct statutory authority to oversee a merger when one or more licenses require approval for a transfer of ownership and control.  Time Warner owns one television station and holds several satellite uplink licenses for remote news gathering.  Section 214 of the Communications Act requires FCC approval of a transfer, albeit on a pro forma, expedited basis. 

Several Indirect Links

            The FCC has available a number of creative and quite possibly lawful ways to assert ancillary authority.  Soon after the market debut of cable television, the FCC asserted jurisdiction, despite the lack of direct statutory authority.  The Commission created a regulatory hook based on the transitive principle in math: A is to B as B is to C.  Therefore A is to C.

            In application, the FCC reasoned that because it has direct statutory authority to regulate broadcasting, and because cable television has the potential to adversely affect broadcasting (e.g., thorough audience fragmentation), therefore the FCC can regulate cable television.  The Commission’s strategy passed muster with a reviewing court in the United States v. Sw. Cable Co., 392 U.S. 157, 178 (1968), but the strategy did not work for network neutrality

            The FCC also has exercised jurisdiction over media cross-ownership, with an explicit concern about content diversity and market concentration, including matters for which it does not have direct jurisdiction over one category of media outlet, e.g., newspapers.  The Commission established rules prohibiting cross ownership of a broadcast television station and a general circulation newspaper in the same market.

            Additionally, on several occasions, the FCC deftly leverages congressional mandate to investigate and report on marketplace conditions as the foundation for establishing rules, regulations and safeguards ostensibly to achieve a legislatively created goal.  For example, Section 706 of the Telecommunications Act of 1996 requires the FCC to assess marketplace conditions in advanced telecommunications capability.  That mandate has morphed into secondary legislative support for network neutrality.

            Lastly, I believe that formally or informally, the Justice Department will collaborate with the FCC--if only to spread the heat/blame if the ultimate decision is no, or conditioned in ways that are politically unpalatable.  The Justice Department has collaborated with the FCC before, even as each agency has a different oversight template: DOJ uses quantitative measures, such as Herfindahl-Hirschman Index of market concentration and the FCC uses qualitative, "public interest" measures.

Monday, October 31, 2016

Another Day, Another $34 Billion in Telecom Industry Consolidation

            Today’s mega-merger combines CenturyLink and Level 3 Communications, two major players, but surely not on most consumers’ radar screens.  CenturyLink has acquired an impressive array of companies over the years including the AT&T spunoff Bell Operating Company, formerly known as US West and before that, Mountain Bell.  Level 3 owns and operates one of the largest inventories of domestic and international fiber optic transmission lines in the world.  If you run a traceroute for just about any web link, Level 3 would have at least one line in the list of networks traversed.  The company also serves as the major Content Distribution Network for Netflix.

            In this time of low interest rates, massive retained earnings and the urge to acquire scale, this merger will generate little concern, or interest.  One can dismiss all the hype about efficiency, scale and synergy gains and still tolerate a merger of this sort, because of how much it differs from AT&T’s recent announcement of its intent to acquire Time Warner.

            With the exception of CenturyLink’s first and last mile, local exchange services and middle mile links between businesses in the Mountain West, both this company and Level 3 operate in mostly competitive markets, or at least ones that lack substantial barriers to market entry.  There are existing facilities-based competitors and technological innovations support new ways to expand transmission capacity and use new radio spectrum options.

            In the vernacular, both companies face inter-modal and intra-modal competition.  Inter-modal competition occurs when there are multiple content transmission options: fiber optic cables, copper wire, satellites, terrestrial microwave radio, Wi-Fi, Wi-Max, 4G and 5G cellular radio, etc. Intra-modal competition refers to the availability of multiple carriers in each of the above content transmission media.

            I am not thrilled when companies have easy and expedient ways to buy market share, instead of earning it through superior business skills.  I wish companies had to devote sleepless afternoons sharpening their pencils and the value position of the goods and services they offer.  On the other hand, we should realize that bigness and unlimited access to capital does not guarantee success.

            Sponsored researchers may wax poetic about the virtues of vertical and horizontal integration and how it only takes 2 or 3 players to achieve a competitive market.  They cannot guarantee that a fully integrated company can achieve best practices, much less ok practices, in each of the industry sectors they choose to operate.

             Telecommunications history provides countless examples of how large companies unilaterally opted to divest non-core assets including Time Warner (print media, films, cable television operators) and General Electric (NBC).  Are their spun off ventures worst off?

Wednesday, October 26, 2016

Make Versus Buy in Information, Communications and Entertainment –Comparing the Strategy of AT&T with Facebook, Google and Other Unicorns

            With ample lines of credit and a relaxed global monetary policy, AT&T can easily move up and down the ICE food chain with massive acquisitions.  Sensing opportunities presented by changing marketplace conditions and threats to legacy business lines, the company has opted to buy market share and expertise. Other major ICE ventures have opted to make new products and services, or to blend make and buy as appropriate. 

            I believe differences in strategy largely depends on the confidence a venture has in its ability to integrate acquisitions into the family by exploiting the skills, expertise and market share the acquired venture offers.  We hear how merged companies will exploit synergies and efficiencies, but doing this requires great finesse.  Can AT&T embrace people, plans and skills not invented from within?

            Consider what Amazon, Facebook, Google, Microsoft and other major firms have done on the make versus buy dichotomy for telecommunications transmission capacity.  These firms have opted to build undersea fiber optic transmission capacity rather than lease it from incumbent carriers on a cost plus, plus basis.

            Making content carriage instead of renting it makes absolute sense, because content companies can achieve savings in a major cost center, but one that is fungible. In other words, transmission capacity has substantial costs that content companies must incur, but transmission capacity does not significantly differ between carriers, or between a self-provisioning venture and one that leases capacity.

            Content does not have such fungible characteristics, because of a far wider range of good versus bad quality. Fiber optic transmission capacity matches, best practice, global standards, while content can be nation specific, idiosyncratic and quite risky to produce.  Perhaps Netflix has found ways to reduce risk of failure through data mining and a business plan where even large investments in single series will not threaten the ongoing viability of the company.  Generally speaking, even today, generating a winning content formula involves gut instinct, a long learning curve and many failures.  That explains why producers stick and copy with winning formulas resulting in countless sequels, prequels and duplicates.

            AT&T has ample funds to experiment, but with such a deep pocket the company risks buying at the top of a market and paying too great a premium over the stock price.  Consider its $48.5 billion DirecTV acquisition.  AT&T has bought a venture that has substantial recurring investment costs including the satellites with ten year useable lives and launch technology that historically has a one third probability of failure or live reducing anomaly.  Worse yet, AT&T did not get any internally generated content for its investment, at a time when consumers appear increasingly disinclined to pay for large and costly bundles of content, only a small portion of which they want to view.

            On the other hand, AT&T has grown and become a major powerhouse through successful acquisitions.  Only AT&T and Verizon remain from the seven divested Bell Companies.  Additionally AT&T knows how to bundle services and bill for it.

            Maybe AT&T can keep its acquisition success streak intact.  If it succeeds, it will have beaten stiff odds and proven its superior management skills, forecasting talent and business acumen.

Sunday, October 23, 2016

AOL-Time Warner ($160 Billion in 2000) vs. AT&T-Time Warner ($85 Billion in 2017): Is It Different This Time?

            A little over 16 years ago, the merger of Time Warner and America Online resulted in an unprecedented loss in market capitalization.  Visions of synergy, efficiency and enhanced share valuation evaporated as reality kicked in quickly.  By 2002, the merged company already had to write off $99 billion in goodwill, an implicit recognition that a lucrative transformation did not occur.  See http://fortune.com/2015/01/10/15-years-later-lessons-from-the-failed-aol-time-warner-merger/.



            A significantly changed Time Warner, in a substantially changed marketplace, welcomes another mega-merger.  Proponents invoke the common refrain: This Time It’s Different.

So is it?  The answer lies in the changes in the company, AT&T and the information, communications and entertainment (“ICE”) marketplace.


            Time Warner has largely spun off non-core ventures, ironically an elimination of the vertical integration AT&T now seeks to achieve.  Time Warner now concentrates on content creation and distribution.  AT&T has invested heavily in migrating from wired and wireless telephony into a fully integrated and ubiquitous ICE venture.  Like Time Warner, AT&T recognizes the absolute need to change its market targets, or risk loss market share and declining prospects.  AT&T sees content ownership as key to its survival as the content carriage business declines.


            So far so good: AT&T vertically integrates and move up the ICE food chain into content creation.  It can better manage its transformation (there’s that word again) into a one stop shop for content access via any medium, including satellite, fiber, copper and terrestrial radio spectrum.


            AOL and a more diversified Time Warner had similar goals and expectations.  To put it mildly, it did not work out as planned. AOL’s stock capitalization dropped from about $226 billion to $20 billion.  The merged company could not come up with a successful strategy for managing the transition from a narrowband, dial up Internet access environment to one with easy and low cost market access by content and app makers using the broadband networks of unaffiliated carriers.


            Even if “necessity is the mother of invention” and adaptation, AOL-Time Warner could not make it work.  Maybe AT&T-Time Warner can with new synergies and enhanced consumer value propositions.  For example, AT&T offers its wireless subscribers a nearly unlimited data plan if they add DirecTV.  Such upselling and bundling positively exploits synergies and the merits in one stop shopping.


            We shall see in 2017 onward, because I expect the deal to achieve grudging, conditional, but not harmful regulatory approval.

Saturday, October 22, 2016

AT&T—Time Warner and the Mixed Results in Vertical Integration by Bellheads

              Another day, another multi-billion dollar merger in the telecommunications marketplace.  See http://www.wsj.com/articles/at-t-reaches-deal-to-buy-time-warner-for-more-than-80-billion-1477157084.  Despite the disinformation about how incumbents have closed their pocketbooks to investment because of network neutrality and assorted regulation, AT&T appears ready to push the antitrust envelop with yet another massive $80 billion acquisition.  Not content to acquire more than 50% of the satellite television market, with its $49 billion acquisition of DirecTV, AT&T has its sights on the content Time Warner creates.




            AT&T has a business plan to integrate vertically throughout the information, communications and entertainment (“ICE”) ecosystem.  Acquisitions provide the fastest way for the company to move up and down the ICE “food chain” of content creation, syndication, distribution and delivery to consumers.



            Vertical integration can achieve operational efficiencies as a single company can achieve savings through scale and a wide footprint of related business ventures.  On the other hand, it takes remarkably talented and nimble management to handle different components in the food chain.  Companies like General Electric have succeeded, but ironically this company has launched a campaign to divest itself of non-core business lines.  Other companies have failed even when they thought consumers would welcome having a “one stop shopping” opportunity, e.g., one call to book air travel, rental car and hotel.



            Depending on how your rate AT&T senior management, the company has wisely invested in the convergence of content and conduit, or it has unwisely deviated from its true competency.  Bear in mind that at divestiture from AT&T, companies like Verizon (then Bell Atlantic) invested heavily in content creation.  Verizon failed, because it did not ascend the content creation learning curve quickly enough.



            Simply put, the ICE marketplace has Bellhead, Nethead and Contenthead players with core competencies in legacy network conduits, next generation, Internet carriage and content, and core expertise in entertainment content.  The Bellheads historically have concentrated on installing and managing the networks needed to deliver content.  Incumbent Bellheads see the conduit business as having declining profit margins coupled with substantial capital expenditure requirements in new distribution technologies.  Bellheads have a twin mission to eliminate the need to maintain the fast becoming obsolete copper wire telephone networks, but also to invest in 4th and 5th generation wireless infrastructure.  Additionally, they hedge the network bet by moving up the food chain into content.



            Bellheads envy the profit margins Contentheads sometimes achieve and the business plans of some Netheads who use software to achieve unicorn status (multibillion dollar valuation with miniscule staff and investment) by using Bellhead networks for value added content delivery.



            Can you teach old dogs new tricks?  Bellhead telephone company senior management have to acquire the skills and understand the culture of Netheads and Contentheads.  Companies like Verizon and AT&T have made the transition into the Nethead world through acquisitions of companies such as MCI and UUNet.  Now comes an even harder challenge to embrace the Contenthead culture of Hollywood.   Good luck with that!

Thursday, October 20, 2016

Regulation by Contractual Fine Print

            Advocates for telecommunications deregulation work themselves into a lather when thinking about how government regulation kills jobs and robs stakeholders of the incentive to invest and innovate.  Sponsored researchers provide cover with selective analysis of data and its quite bogus extrapolation.  For example, even as incumbent carriers like Verizon and AT&T spend billions on content and future technologies, like 5G, to deliver it, the carriers and their consulting advocates attribute regulation as severely dampening any reason to invest in new plant.

            Let me get this straight.  Incumbents have no reason to keep their business alive and fresh with cutting edge technologies, because regulators will prevent them from reaping the fruits of their labor by forcing network sharing and imposing network neutrality requirements? 

            Does this pass smell test?  Why would Verizon spend over $4 billion to buy Yahoo and its considerable inventory of content and customer base if the carrier business was being starved of funds to increase transmission speed and capacity? 

            Let’s consider the dead weight social loss in regulation.  I’ll readily admit that uncalibrated and unwarranted government oversight can harm consumers and competition.  Incumbents do not want you to know this, but they welcome regulation that imposes a disproportionate burden on competitors and creates barriers to market entry by prospective competitors.

            Incumbents also do not want you to know that their service contracts—and the regulated tariffs that preceded them—impose far worse costs on consumers than anything the FCC could impose.  Regulation by contractual fine print refers to the anticompetitive and consumer harming language carriers sneak into their terms of service.

            Here are some examples:

            Unlimited data does not mean unmetered and boundless downloading opportunities. Fine print in service terms, like that offered on a “take it or leave basis” by TMobile, offer metered service and severe penalties for exceeding a cap on so-called unlimited data service.  Should a subscriber exceed a data threshold, then the carrier downgrades network performance to a rate incapable of transmitting most data applications.

            How many commercial ventures can deliberately ruin their service with an eye toward forcing customers to upgrade to a more expensive tier?  Pretty risky proposition, but wireless carriers can get away with this strategy.

            Here’s another example: AT&T and other carriers, as well as content providers, like Yahoo, reserve the option of scanning anything you do and say online, mining it, collating it and marketing it. For ventures like Yahoo and social network like Facebook, subscribers accrue value in exchange for abandoning most privacy protection.  But in the case of carriers like AT&T, the scanning and marketing of subscriber usage data does not result in the offer of discounted service.  Just the opposite.  AT&T and other carriers floated a trial balloon of offering to eschew some customer snooping in exchange for additional monthly compensation.  Such a deal!  Customer can pay for somewhat better privacy, but the default is abdication of virtually all privacy.

            Another example is compulsory arbitration on terms set by the carrier using a venture hard wired to favor the carrier in light of the business it generates for the arbitrator.

            Consumers face a non-negotiable service terms severely tilted in favor of the carrier that writes the contract.  Even a brief scan of these agreements would show terms that reduce, regulate, limit, minimize and dilute consumer bargaining power.  Subscribers cannot simple churn out from one carrier to another one offering better terms, because these so-called robust competitors have nearly identical terms and conditions.

            So who’s the regulatory beast these days?