Consumer Impacts of a Net Biased Ecosystem

            Consumers ought to understand what opportunities and threats arise from an even more non-neutral Internet.  Expect existing trends to become entrenched with new impacts.

Extended Trends

            Better Than Best Efforts Routing Options

            The “good old days” of absolute best efforts neutrality in the Internet cloud have long since passed for better and for worse.  I haven’t heard any opposition to the use of proxy servers and “better than best efforts” service options provided by companies such as Akamai.  When consumers want access to “mission critical” bits, e.g., a weekend mainlining on the entire second season of House of Cards, they might even pay for higher quality of service when the possibility of congestion and degraded service exists.

            Expect retail Internet Service Providers, operating the first and last mile broadband link, to offer enhanced quality of service options for a price.

            Squeezing Even Higher Broadband Profit Margins

            ISPs, affiliated with incumbent ventures such as cable television companies, have come to recognize that they are “first among equals” in the bundling of telephone, home security, video and broadband.  Cable operators may want to offer lower margin video services to forestall cord cutting, but the triple digit margins accrue from broadband.

            Expect ISPs to press for even higher broadband service rates through general rate increases and additional tiering on the basis of transmission bit rate and download allotments.  Also expect a substantial narrowing in the gap of download caps between wireline and wireless broadband options.  Currently wireline options have soft caps in the 200-300 Gigabyte range while wireless carriers have hard caps from 250 megabytes to 10 Gigabytes.  Wireline ISPs can squeeze out higher margins simply by forcing “bandwidth hogs” onto more expensive tiers.

            Options for Avoiding Download Debits

            Less generous download allotments reduce the broadband subscription value proposition, but I don’t see consumers pushing back.  What competitive alternative do they have?  Yes 4G makes it possible for wireless to compete, but their per-megabyte download cost well exceeds the wireline rate even if the latter rates rise significantly. Satellite options offer slower speeds at higher download costs, coupled with some latency (signal delay) issues.

            Expect ISPs to “soften the blow” of stingy download caps with expanded opportunities for content and service providers to pay in lieu of metering the download.  This might come across as “pay to play,” but heightened consumers sensitivity to a download cap means they are even less likely to respond to additional commercial pitches that debit their download allotment.

Developing Trends

            New trends will develop slowly, largely because of Comcast’s ambiguous concession commitment to neutrality as a sweetener for securing approval of its NBC-Universal acquisition.

I don’t see extortion plays and deliberate dropping of packets as a ploy to force migration by upstream content providers and downstream end users to higher quality of service tiers.  However there will be instances where an ISP simply can’t contain its instinct to push the envelope and squeeze that last dollar.

ISPs Demand More Incentives to Upgrade

            Expect ISPs to leverage network upgrades in exchange for better interconnection terms with content providers and their downstream Content Distribution Networks.  Netflix might even secure the opportunity to install servers on ISP premises, but at a price. 

I expect Netflix and consumers to lose the argument that ISPs are entitled only to retail broadband subscriber monthly subscriptions and surcharge payments from upstream CDNs.  If Netflix wants to reduce its CDN payments, then it will have to pay ISPs directly.

More Interconnection Compensation Disputes

One might consider increases in peering/transit disputes as an extension of an existing trend.  However, the frequency of disputes and the complexity make this a developing trend.  A recent and probably temporary surge in broadband demand points to the potential for consumers to experience degraded service.  Depending on who frames the issue, congestion recently occurred thanks to Netflix, the weather and a holiday: the House of Cards second season in its entirety, home cocooning due to extraordinary cold and snowy weather and Valentine’s Day.  So much for network robustness capable of handling peak demand.  But of course consumers don’t know whom to blame.  Expect lots of finger pointing.

I hope carriers and content suppliers won’t make excuses for reducing the value proposition of Internet access, but it would not surprise me.

FCC Chairman Wheeler’s Open Internet Strategy Post Verizon v. FCC

            FCC Chairman Wheeler has released a statement outlining his thoughts on how the FCC lawfully can press on for open and neutral Internet access; see http://fcc.us/1c2RBzv.

             I appreciate what Chairman Wheeler has attempted to do: avoid any unlawful mission creep in light of the strong language in the Verizon decision, but also run as far as possible with Sec. 706 authority.  I do think the Commission can move forward with muscular transparency/disclosure requirements.  Just now Netflix subscribers don't know the cause of any service degradation so perhaps ISP disclosure requirements might provide some light on how frozen images came about even for subscribers to FIOS service operating at multi-megabit per second speeds.

    I do think the Chairman and the Commission will find a less than receptive D.C. Circuit should any order ignore the clear prohibition on the imposition of Title II common carrier requirements on ISPs.  I don't see much wiggle room in the no blocking, no discrimination area, nor am I as sanguine as the Chairman in terms of what deference the data roaming decision affords the FCC.  That decision emphasized the use of commercial negotiations and the limited role of the FCC and its ability to intervene. 

    One could draw a parallel between the duty to negotiate, commercially driven data roaming terms and conditions and the similar duty to negotiate retransmission consent between cable operators and local television broadcasters.  In both instances the FCC cannot act proactively and has limited powers even to resolve a protracted dispute. Unfortunately for broadband subscribers there won't be a specific "must see" television program that forces one side to capitulate, so degraded service and not so subtle abuses of last mile access may occur.

 

Post Network Neutrality Feud Number 1: The Netflix (Traffic) Jam

            As you know, the D.C. Circuit Court of Appeals has invalidated network neutrality requirements that impose common carrier requirements.  In this blog and elsewhere I predicted an uptick in disputes between content providers and distributors in the absence of unquestionable authority for the FCC to intervene if necessary. 

To be clear I favor commercial negotiations that typically resolve interconnection compensation disputes.  However, I also suggest that the FCC have authority to resolve intractable disputes as a referee and mediator.

So along comes another dispute between Netflix and retail ISPs such as Verizon and Comcast.  See Drew FitzGerald & tzGerald   BiograShalini Ramachandran, Netflix-Traffic Feud Leads to Video Slowdown, The Wall Street Journal (Feb. 19, 2014); available at: http://online.wsj.com/news/articles/SB10001424052702304899704579391223249896550?mod=WSJ_hp_LEFTTopStories.

This really should not come as a surprise, even as retail ISPs already receive compensation on both sides of their two-sided market: 1) 3 digit margin monthly broadband retail subscriptions; and 2) transit payments from ISPs, particularly Content Distribution Networks for Netflix such as Level 3.

Retail ISPs want a third revenue stream on some notion that content sources, such as Netflix, are “bandwidth hogs” who should be throttled, or alternatively hit up for direct payments.  In particular it must tick off senior management at ISPs, owned by cable television companies, to see Netflix offer a $7.99 value proposition when cable content bundles are 10-15 times as expensive.

I agree that a direct payment should flow from Netflix if and only if it directly interconnects with a retail ISP.  If Netflix were to stop using CDNs and seek to interconnect directly with ISPs providing the last mile delivery Netflix surely should pay including the significant electricity used to power onsite proxy servers. 

But are retail ISPs right to demand payment from both the directly interconnecting upstream ISP/CDN and even farther upstream from the content source?

I don’t think so, but there’s nothing stopping retail ISPs from trying.  Apparently Verizon and others can degrade Netflix traffic delivery—intentionally or not—without much consumer pushback.  When consumers don’t get high resolution Netflix content, they do not even know whom to blame.  Has Netflix done something wrong, or has the last mile carrier?  Who operates the weakest and inferior link when multiple ISPs participate in the complete end-to-end routing of traffic?

Until retail ISPs lose customers or the debate in the court of public opinion expect more interconnection compensation disputes to arise and possibly mess with your Internet access experience.

A Free Pass for Comcast to Acquire Time Warner, Because They Don't Compete With Each Other?

            Two rationales supporting the Comcast acquisition of Time Warner don’t make sense to me. 

First Comcast touts the existence of Netflix, Hulu and Google as ample evidence that content competition exists.  Of course the two sources of content mentioned reach end users primarily via last mile broadband providers like Comcast.  Goggle Fiber serves three metropolitan areas and is nothing more than a test and demonstration project that Gigabit fiber is commercially and technically viable. 

Would Comcast meddle with Netflix traffic, say to tilt the competitive playing field in favor of Comcast’s pay per view options?   Why would it, particularly if in a two-sided market total revenues might decline if Comcast were to retard broadband demand?  So Comcast would have no incentive to throttle traffic and otherwise mess with the traffic of content competitors who need its network to reach end users.

Does this rationale pass the smell test?  Was Comcast merely “experimenting” with network management techniques when it previously meddled with peer-to-peer traffic?  Why are retail broadband carriers demanding surcharge payments from Netflix on top of the transit payments they receive from Content Distribution Networks like Level 3, plus the end user subscriptions that have three digit margins? 

Absent a four year network neutrality commitment as part of its acquisition of NBC, profit maximizing Comcast surely would try to squeeze every last dollar, particularly from competitors who need its downstream delivery.  Remember what Ann and Gordon told us: “Greed is good.”

Second, Comcast asserts that because it does not compete with Time Warner, no one should worry about lost competition and consumer welfare.  Would not a more concentrated cable television market have even less likelihood that some operator somewhere would experiment with new pricing models, e.g., offering ala carte channel access in lieu of bloated channel bundles? Isn’t it easier for Comcast to reduce the broadband value proposition by capping download allotments and upselling higher amounts, or agreeing not to debit the now single digit Gigabyte allotment in exchange for a surcharge paid by content sources?  Note that AT&T Wireless announced such a "toll free data” option just a few weeks ago.

Bottom line: Comcast may not compete with Time Warner, but a bigger Comcast makes it more likely that the company can claw back consumer welfare gains and reduce the value proposition of both cable television and broadband subscriptions without significant customer churn.

Comcast-TWC: Why Compete and Innovate When You Can Buy Market Share?

            Expect a charm offensive as Comcast and scores of sponsored researchers explain how acquiring Time Warner Cable will promote competition and enhance consumer welfare.  You might not hear too much about two traditional concerns remedied by actual facilities-based competition: incentives to innovate and reduce prices.

            Comcast will frame its acquisition as necessary to achieve even greater scale to compete with other sources of video content and maybe to compete with the limited other sources of broadband access.  Granted cable television operators have to provide consumers with a compelling value proposition particularly given the pricing model they use that runs up the bill—often to three digits—with a large bundle of channels for which few consumers have any significant preference.

            But Comcast is not acquiring TWC as a defense strategy to shore up the viability of cable television.  Comcast is exploiting the apparent inability of government—even one with a Democratic President and Senate majority—to enforce viable competition policy.  A concentrated market used to trigger concern about whether one or more survivors would continue to compete, or simply agree not to devote sleepless hours innovating.

            Just what happens when markets concentrate?  How can one doubt that the incentive to innovate and compete recedes?  Consider commercial aviation: when a single airline controls an airport, rates to and from that market skyrocket.  Consider wireless service: when AT&T could not acquire TMobile, TMobile got serious about innovating and competing.  Reluctantly Verizon and AT&T have had to respond to TMobile’s initiatives like lower rates for subscribers using their own handsets, lower roaming charges abroad and refunds of early termination penalties.  Would AT&T, Verizon and even Sprint have introduced these enhancements if TMobile did not exist?

            The balance of power has shifted from consumers to providers in the telecommunications marketplace.  Companies like Comcast can invoke scale and efficiency arguments that obscure the fact that consumers will have to pay more for less. So-called competitors can “close ranks” and implicitly agree not to compete.   

            Consider access to Olympics content.  Comcast-NBC wants to make it certain that consumers access this content only via prescribed means, firewalled so that they control access via new technological options like the Internet.  If Comcast did not have the goal of maintaining the status quo, why would it care whether viewers watched commercials on a computer monitor, smartphone screen, or tablet in lieu of the television set?

            Reduced to its simplest terms Comcast’s acquisition of TWC enhances shareholder value at consumers’ expense.   The only silver lining might be FCC-imposed conditions that impose otherwise unlawful requirements,  Of course the Commission would have to enforce them in the face of relentless claims that the requirements are “job killing,” unnecessary and unconstitutional.  What politically savvy civil servant would want to take on a “too big to fail” venture like Comcast?

The Network Neutrality Debate in “Extra Innings”

     Since release of the D.C. Circuit Court decision on the FCC’s Open Internet Order, I have read and reread the decision along with many interpretations.  I have seen some opponents to network neutrality try to convince themselves and others that the two courts decisions have little impact or finality, so the campaign (and the need for financial support) must continue. 

     On the other hand, some advocates for network neutrality appear intent on finding a glimmer of hope that the decisions do not prevent the FCC from yet again trying to carve out a regulatory regime for Internet access.  Even as the court devoted much space in explaining what the FCC cannot do, many advocates on both sides invoke the validation of FCC statutory authority (under Section 706 of the Telecommunications Act, 47 U.S.C. §1302) as evidence that the FCC can still do harm, or remedy likely problems.

     Both sides appear to overstate what the court considers lawful going forward.  Bear in mind that Section 706 only authorizes the FCC to promote access to, and investment in the Internet.  The legislative history appears to emphasize deregulatory initiatives, rather than new regulatory ones to achieve the specified twin goals.  Both court decisions devote many pages on what the FCC has done unlawfully with fairly clear admonitions on what the Commission cannot do going forward.  Put simply, the FCC has a limited wingspan for invoking Sec. 706 to create regulations directly impacting how Internet Service Providers (“ISP”) deal with upstream sources of content and downstream subscribers.

     The Commission can impose transparency requirements such as the duty to disclose when network management factors warrant throttling (slowing down) certain traffic streams, or when an ISP offers premium, “better than best efforts” quality of service and traffic routing options.  Likewise the Commission should retain authority to respond to complaints from subscribers, upstream ISPs and content sources.

     However, the language in Sec. 706 and the clear prohibition on imposing common carriage responsibilities significantly constrain the FCC.  Perhaps more importantly and ignored from the analyses I’ve read is the insight provided by cable television case precedent and the court’s reading of these cases.  These cases did not endorse the FCC’s imposition of anything coming close to common carriage responsibilities on cable operators. 

     The high water market of a duty to deal occurred when the FCC created a dichotomy of carriage options pertaining only to significantly viewed broadcast television stations.  When unable to extract payment from cable operators for their “retransmission consent” broadcasters can demand carriage, a process known as “must carry.”  Note that the FCC limited this carriage obligation to a select beneficiary, broadcast television stations, not to any and all sources of content.

     The D.C. Circuit court in Verizon v. FCC, http://www.cadc.uscourts.gov/internet/opinions.nsf/3AF8B4D938CDEEA685257C6000532062/$file/11-1355-1474943.pdf, emphasized that the FCC could apply its expertise to determine that the public would benefit from a limited cable television carriage regime.  The FCC rules provided for a marketplace-driven, commercial negotiation process by the stakeholders, with the prospect of mandatory carriage coupled with denial of monetary compensation flowing to the source of content electing compulsory carriage. Note that currently most broadcaster-cable operator negotiations opt for retransmission consent and not must carry.  Additionally the FCC limited the carriage requirement to a percentage of overall channel capacity.  Also the Commission never put itself in the position of ordering cable operators to carry a specific station, or content.

     The court in Verizon v. FCC devoted several pages to explaining that when the FCC decided to mandate the reservation of channels by cable operators for access by a larger group of qualifying candidates, (public, educational, local governmental, and leased-access users), the Commission exceeded its statutory authority by imposing the functional equivalent of common carriage.  See FCC v. Midwest Video Corp. - 440 U.S. 689 (1979)(Midwest Video II).

     It appears to me that the D.C. Circuit has provided the FCC and others rather clear guidance on the way forward.  The Commission cannot impose common carriage requirements and not even quasi-common carrier duties to deal that extend to a large subset of the public.  The court used a little snarkiness to admonish the FCC not to push the envelope as it had done with previous interpretations of its ancillary jurisdiction.  Noting that even regulatory agencies take pride in authorship, the court recited the history of network neutrality litigation where the Commission’s work product failed to pass muster, but it soldiered on only to receive the same rejection.

     Perhaps history will not repeat itself.  However the FCC has a long history of false pride, or at least the inability to take no for an answer. Some of the judges in the D.C. Circuit court appear to know this and to infer from this the need to provide clear instructions. 

    Is anyone listening?

Short Netflix, Go Long Verizon?

            Reduced to its least common denominator, the network neutrality/open Internet debate involves money: who pays and who receives in the delivery of traffic.  After the Internet’s government incubation phase, where taxpayers underwrote traffic delivery, the payment issue has focused on the balance of traffic streams between two directly interconnecting Internet Service Providers.  If traffic balances roughly match, the ISPs barter equivalent access to their networks without a cash settlement.  For unequal traffic flows, the ISP generating more traffic than it receives has to pay transit fees to compensate the ISP handling more traffic.

            When we focus on the first and last mile link to and from the Internet cloud, the “retail ISP” currently has two sources of revenue: 1) Internet access subscriptions from end users and 2) transit payments from ISPs with more traffic for retail ISP delivery than for the upstream ISP to deliver farther into the Internet cloud.

            Not satisfied with this doubled-sided market and two sources of revenues, some retail ISPs want a third source: content creators and distributors farther upstream with which the retail ISP does not directly interconnect.  Ventures like Netflix and Youtube have pushed back, because they already pay to have their considerable traffic enter into the Internet cloud.   Arguably a portion of the payments made by companies like Netflix already reach retail ISPs when upstream ISPs, such as Level 3,  have to pay “surcharges” in light of the disproportionately higher downstream traffic volumes.

            So are retail ISPs such as Verizon greedy?  The marketplace will decide, but it would help consumers to know a few inconvenient truths.  First, the Internet access business already has extraordinary margins often exceeding 100%.  Two, at least some consumers consider their $30-75 monthly Internet access payments ample compensation for the retail ISP to deliver traffic without whining.  Three, ISPs will further slice and dice the broadband access market with an eye toward extracting high average revenue per subscriber.  With significant upward pressure on  retail Internet access rates,  “toll-free” data plans paid by content providers and distributors look increasingly attractive, if not essential.

The D.C. Circuit Court Decision on the FCC’s Open Access Order

            The D.C. Circuit Court of Appeals has affirmed the FCC’s reading of Section 706 in the Communications Act, but also determined that the FCC could not extrapolate from that Section statutory authority to prohibit Internet Service Providers from engaging in discriminatory practices, including blocking access to specific content. See http://www.cadc.uscourts.gov/internet/opinions.nsf/3AF8B4D938CDEEA685257C6000532062/$file/11-1355-1474943.pdf.

            This is “damning with faint praise” at its finest, so much so that the author of the decision condescendingly notes that “even a federal agency is entitled to a little pride” (p. 20) when after losing the first case on network neutrality (Comcast v. FCC, 600 F.3d 642 (D.C. Cir. 2010) the Commission struggled onward to find lawful authority.  This decision offers the FCC a generally worthless victory that the Commission can lawfully find some statutory basis for jurisdiction over Internet Service Providers so long as the responsibilities imposed do not constitute common carriage. 

            The court again reminded the FCC that having classified Internet access as an information service, the Commission has no foundation whatsoever to impose common carrier duties:

even though the Commission has general authority to regulate in this arena, it may not impose requirements that contravene express statutory mandates. Given that the Commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the Commission from nonetheless regulating them as such. Because the Commission has failed to establish that the anti-discrimination and anti-blocking rules do not impose per se common carrier obligations, we vacate those portions of the Open Internet Order. (p.4)

            Some network neutrality advocates had expressed hope that the court would have considered nondiscrimination and anti-blocking rules as permissible in light of a recent case that approved as non-common carriage specific interconnection requirements on wireless carriers. In Cellco Partnership v. FCC, 700 F.3d 534, 541 (D.C. Cir. 2012) the court approved the FCC requirement that wireless carriers negotiate commercial terms and conditions for data roaming, Internet access via smartphones located outside the customer’s home service territory.  The FCC treats all forms of Internet access as non-common carriage by classifying the offering as an information service.  The court affirmed the FCC, because the imposition of some duties to deal, e.g., providing data roaming, does not rise to the level of compulsory carriage, particularly because the FCC only required commercial negotiations and recognized that the duty is not mandatory if technologically infeasible, or that the terms and conditions be uniform across all instances of interconnection.

            Even with a quasi-common carrier option, the FCC cannot expressly impose non-discrimination and anti-blocking duties.  Section 706(a) of the Communications Act requires  the FCC to “encourage the deployment on a reasonable and timely basis of advanced

telecommunications capability to all Americans . . ..” Section 706(b) requires the Commission to conduct a regular inquiry “concerning the availability of advanced telecommunications capability” and if it determines that access is not available on “a reasonable and timely fashion” “to take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.”

            The court determined that the FCC could reasonably interpret Sec. 706 as providing statutory authority for some degree of private carrier oversight, despite the FCC having previously determined that this Section provided no such foundation when the Commission previously sought to classify ISPs as information service providers entitled to a largely deregulated status.  The court defers to the FCC and its later in time decision to consider Sec. 706(a) as providing a statutory basis for regulatory oversight: “Does the Commission’s current understanding of section 706(a) as a grant of regulatory authority represent a reasonable interpretation of an ambiguous statute? We believe it does.” (p.22)

            The court accepts the ability of the FCC to change course and even change factual determinations, as when the Commission determined that the Internet access market lacked sufficient competition having previously determined that it did. The court also does not dispute the FCC’s finding that ISPs have the ability to engage in discriminatory practices: “there appears little dispute that broadband providers have the technological ability to distinguish between and discriminate against certain types of Internet traffic,” p. 38 nor does the court dispute that the Internet access subscribers cannot or will not quickly change providers if potentially harmful discrimination actually occurs:  
For example, a broadband provider like Comcast would be unable to threaten Netflix that it would slow Netflix traffic if all Comcast subscribers would then immediately switch to a competing broadband provider. But we see no basis for questioning the Commission’s conclusion that end user are unlikely to react in this fashion. (p.39)

            However, the ability to discriminate does not automatically translate into illegal discrimination particularly when the FCC has determined that discrimination is something only common carriers cannot pursue.

            The FCC may seize upon the approval of its reliance on Sec. 706 to assert statutory authority to regulate ISPs.  However, the Commission will have little latitude and even less deference to craft quasi-common carrier duties on ISPs.  One permissible duty would require transparency and full disclosure of non-neutral service arrangements.  The Commission lawfully can require "truth in billing" by private carriers.  Perhaps the potential for consumer pushback in response to disclosed sweetheart deals with corporate affiliates and favored ventures might create a disincentive for ISPs not to go overboard. 

Thoughts on AT&T's "Toll Free" Data Delivery Service

            AT&T wireless has announced a campaign offering content providers the opportunity to pay for access to end users so that the downloading does not debit customers’ data plans.  Some think this constitutes double or triple dipping, because AT&T already receives compensation from end user broadband subscriptions and ISPs with which the last mile provider has a peering or transit agreement.

            What’s “fair” and “unfair” in this discussion highlights the complexity when a transaction combines content and conduit.  Efforts to separate the two and price them out can raise fairness concerns.

            Consider a transaction where the separation occurs more readily: paying for an item, e.g., book content from Amazon, and paying for shipping, e.g., postal delivery of a hard copy book, or download from Amazon to an e-reader.  Vendors often bundle “free shipping.”  For its part Amazon wants customers to use “free” wi-fi for the download, but the company does pay for wireless carrier delivery when necessary to cellular equipped e-readers.

            A content distributor, like Netflix, wants to avoid having to pay the U.S. Postal Service for physical delivery of DVDs and similarly the company wants to avoid having to pay last mile retail ISPs. For Netflix Internet delivery can save the company money, because end user retail Internet access subscriptions can include the book delivery within the “free delivery” monthly data allotment.  Bear in mind that until now Netflix consumers didn’t have to think about downloading costs thanks to unmetered data delivery.

            With monthly data caps, the delivery aspect becomes more visible and potentially costly to both the content provider and the consumer.  Cost recover gets murky, because even before companies like AT&T want to hit up Netflix for “toll free” downloading there already are two sources for offsetting carrier download costs.

            Offering Netflix the opportunity for not causing a downloading debit adds a potential third revenue stream. Is this an extension of the double-market economic construct like that envisioned by Chairman Wheeler?  Bear in mind that even now Internet compensation arrangements are negotiated between directly interconnecting parties that barter access or secure payment.

Comcast Logic: A New Broadcast TV Fee

       Comcast’s most recent rate increase adds a new line item to the bill: a Broadcast TV Fee.  In the company’s typical doublespeak, this charge works to “identify some of the rising costs of retransmitting broadcast television signals.” 

        Some, but apparently not much.  Comcast magnanimously pulls out the initial $1.50 Broadcast TV Fee from its Limited Basic service fee, reducing the figure to $15.75.  The majority of the channels on Limited Basic represent broadcast channels, so the Broadcast TV Fee is not really reflecting much of the total costs.

        Could it be Comcast thinks consumers are so stupid that they cannot add the new Broadcast TV Fee with increases in other service tiers to calculate actual cost increases?  Given the lack of interest and aptitude in math maybe the company can fool consumers into thinking the company hasn’t just raised rates by about 10% what with 4% or so allocable to those greedy broadcasters like Comcast's NBC.

Rent Seeking Across Party Lines

            Over many years, telecommunications and Internet policymaking have become politicized often with clear cut Democratic and Republican viewpoints.  Votes by the FCC Commissioners increasingly split 3-2 along party lines.   How can this be?

             Perhaps the politicization stems from higher stakes in FCC votes which in turn have stimulated greater interest in the outcome.  But politicization stands as a cause if and only if a specific political party clearly holds one perspective largely opposite that of the other party.  Don’t both parties support competition? They do, but a dichotomy might arise if the Democrats readily welcome government initiatives to promote competition and the Republicans consider competition most potent when government opts out.

           
            At first blush the role of government can support a Democratic/Republican dichotomy, but it does not always play out.  Teddy Roosevelt made it his mission to bust up monopolies and this Republican “tradition” extended into the early 1970s when the Nixon Administration filed suit against the AT&T monopoly.  Democratic FCC Commissioners regularly vote in favor of market concentrating, competition reducing horizontal mergers

 

             So maybe the blame lies with unprincipled and apolitical rent-seeking.  Stakeholders keen on working less hard and earning greater returns will resort to any political, legal and economic ideology and philosophy to support the desired outcome.  It is quite fine when the FCC granted incumbent wireline telephone free spectrum for mobile services, but now denying these carriers the opportunity to bid for any and all spectrum is an abomination.
 

             Let’s not underestimate the power of sponsored research where esteemed scholars grab lots of dollars for embracing a specific ideology and explaining how it serves the public interest.  In a matter of days the very same economist might rail against the Herfindahl Hirschman Index (“HHI”) of market concentration as flawed and not predictive of anything.  But when presented with an assignment and a generous retainer to show how robustly competitive a market is, that economist might quickly invoke the HHI to “prove” how competition can exist in a concentrated marketplace.
 

            Rents seeking crosses all party lines.

Tracking New Models and Conflicts in Web Interconnection and Delivery

            You might have an interest in my work to understand the diversification of web interconnection and content delivery models, largely driven by the substantial increase in streaming video and the proliferation of Content Delivery Networks.  ISPs have devised many new deviations from the traditional peering/transiting dichotomy including: use of Internet Exchange Points by Tier-2 ISPs, paid peering, CDN surcharges, equipment co-location, e.g., Netflix Open Connect Network; “specialized networks” and Intranets/ Multiprotocol Label Switching and non-carriers like Google securing Autonomous System identifiers.

            Some retail ISPs also want to increase to three the number of payers for last mile content delivery.  Currently end users pay monthly Internet access subscriptions and directly interconnecting, upstream carriers pay when traffic for delivery well exceeds what the retail ISP can or will hand off for upstream carriage.  The targeted third revenue source does not directly interconnect, but constitutes a major source of content, e.g., Netflix.

            I’m working on a paper that examine existing and likely future interconnection disputes with an eye toward identifying where conflicts will arise and whether commercial negotiations can reach closure on a timely basis.  Here’s a link to slide pack summarizing the paper:
http://www.personal.psu.edu/rmf5/New%20Models%20and%20Conflicts%20in%20the%20Interconnection%20and%20Delivery%20of%20Internet-mediated%20Content.ppt.

Mission Critical Bits and Pay to Play Net Bias

             The proliferation of video content options via the Internet raises questions about what ISPs can and should do to offer “better than best efforts” to enhance quality of service.  Is this an opportunity for “pay to play” extortion, or welcomed quality of service discrimination?  One might assert the lack of a need for service prioritization in light of the absence of network congestion, but as bandwidth intensive, video demand increases does this conclusion make sense?

            Video content often qualifies as “mission critical bits” whose delivery must arrive on time, or the streaming content freezes and evaporates.  For example, Netflix and its subscribers expect each and every link to work with sufficient switching, routing and transmission capacity to deliver packets on a timely basis.  Few Netflix subscribers would stick with the company if suddenly full motion video streams became slide shows of random frames. 

            Increasingly ISPs want to secure surcharge payments from companies like Netflix to guarantee timely packet delivery.  So on top of the double-sided market where ISPs already receive payments from end users and upstream carriers, such as Content Distribution Networks, a third revenue stream should flow further upstream from content providers like Netflix.  Is this being greedy, particularly in light of what ISPs markets to subscribers?  Bear in mind that traditionally both peering and transit agreements involved directly interconnecting carriers, not ones further upstream or downstream.

            Broadband end users expect their $50-75 monthly subscriptions to cover the cost of access without a surcharge to them and others for the privilege of accessing full motion video sites.  ISPs already have the option of charging more for high volume users.  ISPs: send “broadband hogs” fruit packets and a higher bill, not throttled service.  ISPs also tier service based on bit transmission speed.  Are they entitled to more compensation from the sources of content that motivate broadband subscriptions in the first place?

News Flash: Airlines Discover Wireless Profit Center; Forget About Harm to Cockpit Communications

After years of claims that in-cabin wireless use would risk calamity, the airlines now want the public to believe any wireless access regulation--and the failure to make timely deregulation-- results from government inflexibility and inertia.  Why the change of strategy? 

The airlines want to "monetize" wireless access making it another profit center along with checked baggage and snacks.  But to fully do so they need to undo several decades of claims that wireless handset use would cause--or at least risk--harmful interference with air traffic control communications and other essential avionics.

    The restrictive FAA/FCC regulations resulted from active airline participation with a different rent seeking strategy.  The airlines' motivation did not solely stem from concern about consumer welfare.  Instead they wanted to protect their Airfone monopoly deal with GTE and later BellAtlantic/Verizon.
 

    Over time wireless has migrated from voice/text only to a vast array of data and applications.  The airlines now need to refute the avionics harm rationale they vigorously advocated in the first place.  True to form, sponsored engineers and now economists are retained to claim the need for immediate deregulation of "job killing" regulations.  These researchers join with more clearly defined stakeholders to vilify regulatory inertia, etc. 
 

    So now the avionics harm risk does not exist, if it ever did.  Smartphones always have had the ability to reduce transmission power to the lowest wattage needed making it highly unlikely that in cabin interference could result.  Also the airlines now have a transmission routing scheme, albeit overly costly, that eliminates the avionics risk by locating the necessary higher wattage link to an outside the cabin antenna for ground tower, or satellite access.

    My takeaway from this case study: it's easy to blame government regulators as inflexible.  But the political process forces these regulators to accommodate well-financed stakeholders like the airlines.  Belatedly the airlines have come to understand that wireless can become a lucrative, new revenue center.  So they launch a "public interest" campaign to persuade the FAA/FCC to remove now unnecessary, inefficient and costly regulations they helped create.  Sadly the true public interest has suffered for the decades of unnecessary handset restrictions.
 

    Also consider this irony: back on earth the wireless carriers have spent billions convincing Congress and the FCC that subscribers should not have certain access freedoms, including the "right" to unblock a fully paid for handset.  The wireless carriers claim that subscribers have no legal right to use a handset to access a competitor even if the subscriber no longer is bound  by a service agreement and even after the carrier has recouped any handset subsidy it offered the subscriber.  Some subscribers have resorted to "illegal" self-help strategies instead of asserting their right of ownership.

    I marvel at how wireless carriers can regulate and constrict individual economic freedoms, including the right to control fully owned property like handsets, including ones bought on an installment basis during a two year subscription term.  The FCC has a longstanding Carterfone policy that would prohibit such consumer restraints on corded handsets.  Sadly the FCC has bought bogus concerns about radio spectrum harm raised by the wireless carriers who benefit from the restrictions they impose in subscription agreements.

Some Brief Comments on Terminating the PSTN

NPR's All Things Considered covered the PSTN termination story including some words from me: http://www.npr.org/blogs/alltechconsidered/2013/11/18/246001725/have-we-reached-the-end-of-the-landline.

Netflix and the Future of NGN Interconnection

            Recent press accounts report that Netflix and cable television companies have collaborated on carriage agreements.  What results from these negotiations may provide a model on next generation network (“NGN”) interconnection and compensation arrangements.

            Currently telecommunications, cable television and Internet arrangements have problems for video-heavy traffic flows.  Traditional telephone carrier settlements have too much granularity when the meter counts minutes of use.  Cable television retransmission consent agreements primarily cover copyright licensing, because the content typically arrives at the cable head end via satellite (paid by the content provider) leaving the cable operator with the last mile distribution it already performs for all other channels.  Current Internet arrangements focus on directly interconnecting carriers and customers making it difficult to extend a compensation demand farther upstream to sources or distributors of content.

            Retail ISPs in particular have objected to providing last mile carriage of Netflix traffic “without compensation,” a false allegation, but one gaining some traction.  ISPs want Netflix to pay them directly, in addition to the significant retail subscriptions paid by their end users and the transit, paid peering and other compensation arrangements paid to them by Content Delivery Networks and even other ISPs with comparatively more traffic needing downstream delivery.

            Netflix and cable operators appear to work on a mutually beneficial interconnection and compensation regime where compensation flows directly to the cable operator, but the length of carriage—and presumably the cost—drops with the installation of a proxy server directly at the headend.  Netflix benefits by securing higher quality of service and some future assurance that the cable broadband plant can and will handle even more traffic as Netflix’s subscribership grows and when content formats increase in bandwidth requirements, e.g., 3D and ultra high definition. 

            Cable operators benefit, by securing financial compensation for their retransmission consent.  While the interconnection arrangement may differ from other satellite-delivered cable networks, or the retransmission of broadcast channels, cable operators will receive direct compensation for providing a subscriber-friendly platform using the existing set top box.

            Consumers may end up having to pay more for their Netflix subscription to cover higher delivery costs as well as higher copyright licenses, but the convenience in access enhances the value proposition.  Rather than trying to engineer and “sling” Netflix content from the computer to the television set wirelessly, the content arrives directly to the television set, a winning proposition.

Self-serving Self-regulation

            In most transactions, my instincts favor market-driven outcomes.  Typically fair outcomes result when stakeholders act on competition-induced incentives.  But when and how do apparently competitive playing fields clearly tilted in favor of sellers?  Put another way, under what circumstances can and will competitors collude and agree not to spend sleepless afternoons competing?

            I often examine the wireless marketplace for lessons.  I part company with the party line that the U.S. marketplace is “vigorously competitive.”  Yes there are aspects of competition, but on closer examination virtually all of the pricing and service initiatives come from Sprint and T-Mobile when they decide not to join a single, consensus party line on service terms and conditions established by Verizon and AT&T.  For years all 4 of the top 4 national carriers offered pretty much the same rates and enforced the same rules.  Some of these rules imposed more significant restrictions on subscribers than anything the FCC would consider imposing.     Sure some of these restrictions might have technological justifications, e.g., spectrum scarcity and congestion concerns.  But most of them worked to lock in subscribers, raise the cost of service and restrain consumer sovereignty.  I cannot think of any legitimate reason a wireless carrier would have in prohibiting any of the so-called Carterfone freedoms available to wireline service subscribers including the right to use any FCC-certified handset, for any available service. 

            Restrictions on handset use and pricing decisions—embraced and enforced by all four national carriers—collectively accrued benefits.  For a single carrier to deviate from the deliberately shared consensus it would have to calculate what market share and revenues it might acquire offset by the likelihood that a relaxation would reduce revenues.  Consider a recent initiative by TMobile to offer a flat 20 cent per minute foreign roaming charge instead of country specific rates that can exceed $1.00 a minute.  One can see the sweet deal so-called competitors can achieve by implicitly agreeing not to deviate from extortionate roaming rates.  But if a market is “robustly competitive” how can obviously rip off rates persist in the marketplace?  Even after factoring the cost of date base interrogations and backhaul no one can justify as cost-based foreign roaming charges that exceed conventional domestic rates by 1000s of percentage points.

            So there exist instances where competitive, self-regulating ventures can agree not to compete.  TMobile becomes the maverick, party pooper, perhaps now that it realizes that the big payday of a merger will not happen.  But so many sponsored researchers swore that the merger would “enhance competition” and “serve consumers” no doubt enhanced by trip digit roaming margins.

The Dubious Rule of Three

            Some economists have asserted that markets can remain competitive even when mergers and consolidation reduces the number of major players to three.  Advocates for DOJ and FCC approval of the AT&T-TMobile merger invoked this “Rule.” I have expressed misgivings about economists establishing rules and treating them as unimpeachable.  Is three the optimal number that balances efficiency and scale on one hand and the potential for noncompetitiveness and consumer harm on the other hand?

            Perhaps three ventures can continue to compete robustly, particularly if one of the three refrains from the clear incentives to match prices and go easy on innovation.  AT&T and Verizon may compete on advertising, yet they seem to refrain from aggressive pricing.  Have you ever seen a wireless service sale?  From my perspective if AT&T had acquired TMobile consumers would suffer as the remaining Big Three would control about 90% of the market and have even less incentives to deviate from the profit maximizing consensus on rates, terms, and conditions for both handset and service.

            Now that TMobile has to stay in the marketplace the company has embraced the role of maverick and refused to go along with the consensus, a practice antitrust economists term “conscious parallelism.”  TMobile actually competes with the Big Two by offering lower prices, particularly for consumers who bring their own device (“BYOD”) thereby eliminating the need for a carrier subsidy.  The company offers lower rates—not just month-to-month service for BYOD subscribers.  In doing so TMobile has generated some clarity on the actual cost of those “free” handsets. 

            Consumers now have a choice between paying higher monthly rates for a two year term to pay handsomely for a subsidized handset, or to buy/lease the handset so that the monthly service rate drops, because it only covers wireless service.  That’s what I call competition, something that would not have occurred if the Rule of Three had applied.

Insights on How Many Economists Operate

In the last few months I’ve participated in two debates with economists and have been dressed down by one of the rock stars in the academy.  While I know many cordial economists I have met far too many that lack basic civility and tact.  Perhaps they respond to incentives that favor aggressiveness over compromise and rich financial sponsorship over unbiased search for the truth.

            While I am painting with a broad brush I see far too many economists with the following characteristics:

1)         They receive ample financial sponsorship that supports results-driven research and advocacy.

2)         They may not disclose their sponsorship.  If they do, they still will insist that outcomes supportive of their sponsor are incidental.

3)         They make up their own rules.  As a lawyer I have to work within case precedent and the rule of law.  Economists can create rules that become legitimate by use and the aforementioned financial sponsorship, e.g., the Efficient Components Pricing Rule.

4)         They place a premium of aggressiveness and snarkiness.

5)         They personalize and attack when the merits do not favor their position.  In one debate an economist did not address the merits of my arguments, but instead emphasized that “Professor Frieden and his ilk” are bad for America, etc.

6)         They revile laws that don’t make economic sense, but freely engage in the practice of law without a license.

7)         They are better at math than most people and consider this as confirmation of their superior intelligence.

8)         They consider themselves the smartest people in the room and let you know it.

9)         They often create papers that recite the obvious, or advocate something counter-intuitive that they can "prove" with math; and

10)       They have freedom to assume anything to provide any solution.  How does an economist get out of a hole?  He or she assumes a ladder.

A Senior Economist Calls My Comments “Stupid”

            I’m just back from a conference in Perth Australia where a major economics professor from a northeastern university headlined.  After his presentation he stuck around perhaps allocating a small portion of his considerable intelligence to following a later discussion.  A colleague of mine presented a paper comparing wireless policies and market performance of carriers in the U.S. and E.U.  He noted that U.S. carriers have some of the highest average return per user, but also some of the lowest rates on a per unit basis.  He also noted that the U.S. market has less concentration than many other E.U. markets using the Herfindahl Hirschman Index (“HHI”).

            Using the traditional peer review process I mentioned that the HHI score used in the paper was low compared to more recent measures that include additional acquisitions by Verizon and AT&T.  I also noted that high volume, plan-based consumers can benefit from world class low rates, but low volume users do not.  I made an analogy to the pricy breakfast buffet at my hotel.  People like me with a healthy appetite enjoy low cost per gram, but my wife incurs a high unit cost as she consumes less.

            Professor x chimed in with the stupid criticism based on his view that the HHI is not worthy of use and the availability of prepaid plans that do not lock in subscribers.  I didn’t know what a touchy, third rail topic the HHI is, particularly to researchers sponsored by incumbents keen of making acquisitions while also insisting on how competitive the wireless marketplace is.  The Professor noted that 17% of wireless consumers in the U.S. don’t have a plan, but he never got around to acknowledging that these per call and per text users pay far higher rates than the world class levels incurred by consumers who make thousands of text messages monthly.

            So the smartest guy in the room offers a clear snapshot of how to act like an ugly American bully in nation adverse to tall poppies.  30+ years as a scholar in both academic and applied telecommunications issues and Dr. Big Shot dismisses my contrary evidence as stupidity.  Not smart.

Jane Heller Frieden Eulogy July 11, 2013

   My mother recently died of complications from Alzheimer's disease.  She played a huge role in helping to shape who I am.  I would like to share with you my eulogy.

Jane Heller Frieden Eulogy July 11, 2013

          Thanks to all of you for coming today.  My sister, Nancy, brother Andy and I have many people to thank including our cousin Debbie Kaplan for hosting us today, the many care givers at Beth Shalom and Eldercare, especially Sabrina Williams, the “family” law firm of Faggert and Frieden and our friends who have offered humor and support, especially Mary Ann Wegstrom who alerted us to my Mother’s illness.  I also want to acknowledge Nancy’s work in helping to manage my Mother’s care and finances over many years.  Last but not least, I want to express my gratitude to my wife Katie for her kindness and generous spirit. 

          Given the pernicious nature of Alzheimer’s disease, which increasingly burdened my Mother for almost ten years, I have had the opportunity to observe and reflect on the many phases of her life.  This offers rare perspective, because one can easily typecast and frame a parent’s role in just one category: Mom, or Dad.  Looking at the span of my Mother’s life, there were episodes as student, apprentice teacher, wife and partner, accomplished Professor, dedicated community volunteer, late blooming pilot, genealogist and victim of dementia.  One can easily overemphasize that last phase, but the ones that preceded it offer a better measure of her life.

          My Mother embraced life and the many tasks expected of her and others she gladly embraced. She was a wonderful match to my gregarious Dad.  My Father exemplified the word raconteur, the Man about town, but alongside him—keeping stride—was Mom.  The two of them traveled the world and danced throughout the years.  I have a fond memory of the two of them taking to the dance floor after a weekend hairdressing clinic my Father organized.  In the late sixties he offered hair cutting workshops to his beauty and barber shop customers, each ending with a meal and dancing.  In these days of Internet-mediated, “social networking” one can hardly envision such personal, high touch events, but they were cutting a rug.

          I distinctly recall how my parents blended traditional and almost revolutionary elements in their relationship.  My Father had the gift of gab, but my Mother could put him in his place if he overstepped.  She started her flight training at the tender age of 52, when my Father and I traveled to Australia to find opals.  She had no intentions of passively awaiting his return.

          My Mother pursued lifelong learning and became an accomplished art educator.  I recall with pride the number of times she would acquire an impromptu tour group as she explained the nature and history of art objects at several museums.  Like my Father, she tried to establish a personal relationship with everyone, especially her students, some of whom achieved a greater appreciation not just for art, but for learning and living a purposeful life.

          My Mother gladly would have continued an active and vigorous life in retirement had she not contracted Alzheimer’s disease.  Step by step, she declined, giving up the computer and the Internet which had brought so much joy and tasteless jokes.  In time she had to retire from a variety of community service responsibilities including the Chrysler Museum, the battleship Wisconsin, Meals on Wheels and Make a Wish Foundation to name a few.  Her frequent phone calls to me stopped.

          This unrelenting disease robbed her of so much, but remarkably it also provided us a perhaps a clearer picture of her core self—unvarnished and uncensored.  Until near the end, she expressed so much joy with uncontrollable laughter.  Chocolate, Katie’s and my Corgi Noo-Noo, and music from the 40’s brought unmistakable pleasure.  Even as she lost her shortterm memory, she could remember the lyrics to War-time songs.  She couldn’t remember Noo-Noo’s breed, or my name, but she could recite the lyrics and perform the dance moves to Al Dexter’s 1943 hit “Pistol Packing Mama.”

          Today we grieve the loss of a truly renaissance person, who delivered on the goals of “giving back to the community” and living a purposeful life.  Both Jane and Joe Frieden remind us to “seize the day”: carpe diem, because we simply do not know when and how our days fade to black.

           

Content Provider Wireless Subsidies

            Wireless subscribers face the cross-currents of access to an ever increasing inventory of full motion video content at the same time as wireless carriers have forced them to subscribe to a metered service with a monthly cap on downloads, including streaming video.  Content providers, such as ESPN, are exploring the prospect of subsidizing wireless carrier transmission charges to abate the prospect of overages, or throttled service. 

            Smart move on ESPN’s part to enhance the value proposition of its increasingly expensive product.  ESPN may have read the tea leaves and become convinced that it better do something to stem the tide of cord cutters disinclined to pay for dozens of channels, including its expanding bundle of channels, combined by cable companies into a content tier nearing or exceeding $100 a month.  Additionally ESPN understands that if it expects cable subscribers to pay at least $5.00 a month for its content, then it better respond to their expectation of having access anytime, anywhere, via any device and in multiple formats.  Today’s video consumer has no tolerance for the old school “appointment television” model where the content provider and its distributor established the terms and conditions for one time access on a particular channel at a particular time.

            ESPN also understands that the small bandwidth delivery payments it may opt to make will pale in comparison to the additional revenue stream generated by mobile advertising.  Multiple access platforms to ESPN content means that subscribers will have more opportunities to see ESPN content—including repeat or repurposed content—and also ESPN-carried advertising.  Also the bulk capacity ESPN may buy will not cost anything near what individual subscribers pay on a megabyte or gigabyte basis.

            So far so good, but might there be a network neutrality/open Internet regulatory problem?  An article in the Wall Street Journal  today correctly reported that the FCC has created different and less burdensome rules for wireless broadband carriers than their wireline counterparts.  One might not object to pricing experimentation with wireless carriers increasingly deviating from the same price points and service classifications.  However, the ESPN subsidy scenario does raise questions.

            Will wireless and wireline broadband carriers use the ESPN subsidy model as the basis for demanding surcharges from heavy volume content providers such as Google and Youtube?  Would the ESPN subsidy model morph into a “pay to play” shakedown targeting new ventures seeking to make a splash?  Or is this model nothing more than an extension of what Amazon currently does when you want to download a book purchase wirelessly?  Amazon looks for a zero cost wi-fi option, but failing that the company will bear, without a surcharge, the cost of cellular radio carriage to Kindles equipped to receive such signals.

            When Comcast offered not to debit downloads of its video on demand service to Xbox360 users, the company insisted that it was not discriminating against viewers via conventional computers.  Comcast asserted it routed movies to XBoxs via a specialized network somehow different than the Internet cloud it uses to deliver the very same content to personal computers and tablets.  Under the existing rules wireless carriers would not have to claim that they routed ESPN subsidized traffic over something specialized.  But what would happen if the ESPN payment guaranteed “better than best efforts” traffic routing possibility leading to a measurable and identifiable difference between the subscriber viewing experience for ESPN content versus Fox and other sources of competing content?

            Stay tuned.

Maximizing the Benefits of Future Spectrum Auctions

            Sponsored researchers already have entered the conversation about spectrum policy with a new objective of thwarting any effort to promote access by non-incumbents, or at least any carrier other than AT&T and Verizon.  These researchers will prove that denying incumbents the opportunity to acquire even more spectrum will reduce the government’s take.  I agree and empirical evidence supports this.  When the FCC imposed requirements of open access or sharing with first responders on a spectrum block, the amount bid was lower than unencumbered spectrum.

            But of course sponsored researchers want to extrapolate from this truth to many conjectures including the premise that any spectrum set aside would prevent the most efficient providers from doing more with more.  Somehow if AT&T and Verizon do not capture the lion’s share of any and all available spectrum, then both taxpayers and wireless consumers suffer.

            This premise does not pass a basic smell test.  We should appreciate that what the government takes now in spectrum auction proceeds, it loses in future tax revenues, because carriers can use their spectrum investments as offsets against income.  

            Perhaps more importantly we should consider what the two incumbents with over 70% market share can do with additional spectrum.  In the best case scenario they will put the spectrum to immediate use and abate any real scarcity.  In the worst case access to more spectrum eliminates incentives to more efficient use including the possibility of buying simply to deprive competitors of access and to preempt market entry.  Additionally incumbents possibly can “warehouse” the spectrum by not using it, but preventing other carriers from putting it to efficient and immediate use.

            Consider a commercial aviation analogy.  Let’s assume a highly congested airport can offer additional landing and takeoff slots, a result when an additional runway gets constructed, or when regulators relax a cap, or allow late night operations.  In this particular aviation market one carrier has a dominant market share, something that regularly occurs when that market represents a carrier’s hub, e.g.,  Washington Dulles for United; Philadelphia for U.S. Airways, Detroit for Delta and Dallas Fort Worth for American.  Dominant carriers have market power in their hub markets as evidenced by their ability to charge higher fares than cities with competitive commercial aviation markets. 

            These carriers will do anything to maintain their dominance including acquiring as many new landing and takeoff slots as possible.  Of course they will frame their acquisitions as serving the public interest and consumers, even if they have to use smaller aircraft—with less seat capacity—to ensure that every slot gets used.  With more available slots incumbent air carriers might determine that they will oversupply seating capacity with large planes.  But rather than pass on the opportunity to control even more access to the market, these carriers will acquire new slots at any price simply to prevent existing or prospective competition from flourishing. 

            In the short run everything looks grand: the government accrues higher auction revenues than contemplated, because of the market preemption benefits reflected in a dominant carrier’s win at all costs bids.  But in the immediate term consumers suffer from higher rates available to the fortress hub carrier.  Recently even corporate flyers have complained about the consequences of hub dominance and the reduction of competition and flight options in non-hubs.  In the longer term the tax benefits to incumbents and the elimination of most competitive benefits weigh in.

            Bottom line: if the FCC seeks to maximize short term spectrum auction proceeds it will guarantee that incumbents acquire most newly available spectrum further concentrating the market and reducing the benefits of facilities-based competition.