Tuesday, September 13, 2011

A Fair Estimate of Network Neutrality Costs and Benefits

           Opponents of network Neutrality allege that imposing such regulation will result in lost jobs and value.  An example of losses is evidenced by the fact that when the FCC imposed open access requirements for reallocated, choice 700 MHz spectrum this segment generated less than half the proceeds (measured on a per capita, per MegaHertz) basis than other blocs lacking the open access requirement.  See Gerald R. Faulhaber and David J. Farber's 2010 paper The Open Internet: A Customer-Centric Framework and Randolph J. May and Seth L. Cooper, New FCC Regulations Reduce Investment and Hinder Job Creation, available at: http://freestatefoundation.org/images/New_FCC_Regulations_Reduce_Investment_and_Hinder_Job_Creation_091311.pdf.

            The authors of the above material imply that the open access requirement by itself triggered the loss, apparently not offset by any gain.  The analysis provides a quantifiable cost, easily inferred as a result of the FCC’s regulatory intervention. 

            Surely a more nuanced and less results-driven analysis is necessary here. 

            While not easily quantifiable, might there be some upside social gain in requiring an Internet Service Provider (“ISP”) not to discriminate?  Pro network neutrality advocates believe that the Internet has generated massive social benefits, at least some of which accrues from the ability of new ventures—many with limited financial resources—to secure access through the Internet cloud without upfront payments to any and all ISPs for last mile delivery to consumers.  Attributing zero social gain from open access comes across as both wrong and a deliberate attempt to overstate the net loss from open access rules.

            Additionally the analysis assumes absolute equal value in the 700 MHz A, B and C blocs, absent different regulatory requirements.  However, there is no such absolute parity between these three blocs of spectrum.  The blocs have different numbers of assigned licenses based on the geographical size of the service area covered per license.  Also the C block assigns a larger amount of spectrum 34 MHz versus 14 MHz for the A and B block.  See http://wireless.fcc.gov/auctions/data/bandplans/700MHzBandPlan.pdf.  It seems quite plausible that the cost per MegaHertz, per capita (“per pop” in the vernacular) should be lower if the auction bid is spread over a larger bandwidth.

            In this fractious and mean spirited time, it has become all too easy to provide “irrefutable” quantitative evidence how government rules burden operators and harm the national economy.  Numbers don’t lie, right?  Of course they do when the calculation forces a false return.

Monday, September 12, 2011

Are Resellers Competitive Saviors, or Lower Than Pond Scum?

            The conventional wisdom of most facilities-based carriers is that resellers wrongly extract revenues, particularly if government mandates the transaction.  Incumbent carriers complained long and hard about having to unbundle their network and lease capacity to Competitive Local Exchange Carriers (“CLECs”).  Incumbents convinced courts and the FCC that CLECs would never wean themselves off the easy money available in resale, and that resale was a wrongful taking.

            My, how times have changed.  AT&T now rhapsodizes about how wireless resellers promote competition.  There even is a nifty new acronym for wireless resale that adds gravitas: Mobile Virtual Network Operators (“NVNO”).

            Unlike their wired counterparts wireless resellers apparently serve a useful purpose, including apparently providing support for a massive $39 billion horizontal merger.  How can this be?

            First, it is important to note that wireline resale was mandated by the Telecommunications of 1996 and not something incumbent, facilities-based carriers did on their own.  Such compulsory network sharing can come across as government mandated cooperation with a rival.  But please understand that this obligation comes with the territory: telecommunications service providers, as common carriers, do have to interconnect their facilities even with competitors.  In exchange for this concession, these very same operators get public utility rights and privileges that in the wireless arena included free spectrum and a first mover, first to market opportunity.   As well all facilities-based wireless carriers benefit from below market access to rights of way and tower sites.  On balance having to facilitate a resale marketplace strikes me as a minor burden. 

            Voluntary resale shows that at least in the case of wireless facilitating this market does not harm facilities-based carriers and does not result in cannibalism.  No facilities-based carrier would permit a resale margin to exist if it did not contribute to the bottom line.  The fact that resale exists also calls into question whether facilities-based carriers face a spectrum squeeze: why provide spectrum access to a competitor if you need all of the spectrum you have and then some?

            On the matter of contributing to competition it is important to note that voluntary resale remains solely at the discretion of the facilities-based carrier. The FCC no longer mandates resale for incumbent wireless carriers, even though they nominally remain common carriers.  If resale suddenly would result in cannibalism, or create a spectrum crunch, this competition-enhancing option would evaporate overnight.