News of conditional iPhone Skype access has arrived; see http://gadgetwise.blogs.nytimes.com/2009/01/09/fring-for-the-iphone-all-skype-no-gripe/?pagemode=print. I use the word conditional, because iPhone users can access the service only via a Wi-Fi connection and not via the AT&T network.
This announcement provides both good and bad news. On one hand, Apple the computer manufacturer recognizes the user benefit in constructing a handset that can incorporate many applications, including ones that the wireless carrier may not be thrilled to support. On the other hand, both Apple and AT&T have absolutely no interest in considering the iPhone property owned and controlled by consumers. This means that Apple does not protest when AT&T limits Skype access to Wi-Fi islands of connectivity. Because iPhone users frequently use their phone while moving, AT&T can tolerate the loss of some revenue in the limited instances where non-moving subscribers make Skype calls.
Many iPhone users have undertaken the warranty violating exercise of “jailbreaking” their handsets to add an “illegal” application, i.e., software either Apple or AT&T do not want users to have. Clever users will find ways to make Skype useable over the AT&T networks, but I wonder why handset manufacturers and wireless carriers have the power to condemn such user options as illegal hacking. Surely after paying rates that recoup the handset subsidy don’t iPhone users own their phone?
In a number of different forums and writings I have argued for a wireless Carterfone policy that recognizes the lawfulness of using handsets to access any service, application, software or carrier provided such access causes no technical harm. We expect such attachment freedom when using handsets attached to wired networks, as well as television sets and personal computers. But apparently in our delight with a working wireless connection we accept limitations on handset attachment freedom. Some wireless carriers disable handset Wi-Fi access, so Apple must come across as a consumer advocate of sorts.
Wireless carriers do not have to comply with the wireless Carterfone policy in part because handset manufacturers carriers do not vigorously contest handset limitations imposed by wireless carriers. With only four major carriers controlling most of the market, and locking most subscribers into two year service agreements, in exchange for the privilege to buy a subsidized handset, no handset manufacturer cares to risk its good standing with the carriers. If Nokia had more ways to sell handsets—as occurs in most parts of the world outside the U.S.—it would have far less tolerance for carriers disabling consumer welfare enhancing features like Wi-Fi access.
U.S. wireless carriers have cowed handset manufacturers into submission. With such an unholy alliance limited Wi-Fi-based iPhone access to Skype looks generous.
Tuesday, March 31, 2009
Wednesday, March 18, 2009
Unbundling in Canada
It appears that the incumbent wireline carriers in Canda use the same strategy as incumbent carriers in the U.S., i.e., play the investment disincentive card by threatening to delay or abandon infrastructure investment, coupled with a Constitutional claim of property confiscation. The current economic crisis supports an additional adverse impact to employment gambit. See Telecom TV, Can't share. Won't share. Bell Canada has hissy fit (March 18, 2009); available at: http://web20.telecomtv.com/pages/?newsid=44661&id=e9381817-0593-417a-8639-c4c53e2a2a10.
I marvel at how quickly incumbent carriers play the property confiscation argument even as they got billions of dollars in free rights of way. Do these former public utilities have any public interest obligations--no matter how market countervailing--in light of their free access to public and often private property?
I marvel at how quickly incumbent carriers play the property confiscation argument even as they got billions of dollars in free rights of way. Do these former public utilities have any public interest obligations--no matter how market countervailing--in light of their free access to public and often private property?
Thursday, February 26, 2009
Supreme Court Further Limits Antitrust Remedies for Carrier Pricing Complaints
By a unanimous ruling, the Supreme Court has further reduced the opportunity for a carrier competitor of an incumbent to seek an FCC or judicial remedy to pricing strategies arguably designed to eliminate competition by offering wholesale prices below that charged to competitors for similar services. [1] In 2003 several Internet Service Providers (“ISPs”) filed suit against Pacific Bell Telephone Co., contending that this incumbent carrier attempted to monopolized the market for Digital Subscriber Link (“DSL”) broadband Internet access by creating a price squeeze with ISP competitors obligated to pay a higher wholesale price than what Pacific Bell offered on a retail basis.
Both the District Court and the Ninth Circuit Court of Appeals agreed that the ISPs could present their price squeeze claim, despite the Supreme Court Ruling in Verizon Communications, Inc. v. Law Office of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) that limits antitrust claims against common carrier, telecommunications service providers and further restricts what remedies a court can provide in lieu of what rights the Telecommunications Act of 1996 provides market entrants.
The Court assumed that Pacific Bell had no antitrust duty to deal with any ISPs based on the FCC’s premise that ample facilities-based competition exists. [2] Curiously, Court does not mention that Pacific Bell could avoid a unilateral duty to deal with ISPs based on the FCC’s classification that DSL and presumably its component parts constitute information services and not common carrier-provided telecommunications services.
But for a voluntary concession to secure the FCC’s approval of AT&T’s acquisition of BellSouth the Court noted that Pacific Bell would not even have a duty to provide ISPs with wholesale service. The Court granted certiori to resolve the question whether ISP plaintiffs can bring a price-squeeze claim under Section 2 of the Sherman Act when the defendant carrier has no antitrust-mandated duty to deal with the plaintiffs. The lower courts concluded that the Trinko precedent did not bar such a claim, but the Supreme Court reversed this holding.
On procedural grounds, the Court’s decision chided the ISP plaintiffs for changing the nature of their claim from a price squeeze to one characterizing Pacific Bell’s tactics as predatory pricing. On substantive grounds, the Court noted that a new emphasis on predatory pricing would have require determination whether the retail price was set below cost, [3] a claim the ISPs did not make.
The Court determined that the case did not become moot, because of the change in economic and antitrust arguments. However the decision evidences great skepticism whether the ISPs have any basis for a claim, because in the Court’s reasoning the ISPs failed to make a claim that Pacific Bell’s retail DSL prices were predatory, and the ISPs also failed to refute the Court’s conclusion that Pacific Bell had no duty to deal with the ISPs, i.e., to provide wholesale service. [4]
The Court apparently can ignore the voluntary concession AT&T made that created a duty to deal, because that concession may trigger FCC oversight, but it does not change whether an antitrust duty to deal arises. The Court reads the Trinko case as foreclosing any antitrust claim if no antitrust duty to deal exists. [5]
The Court remanded the case to the District Court to determine whether the ISP plaintiffs have any viable predatory pricing claim. The Court expressed the need for clear antitrust rules and apparently views consumer access to low retail prices—predatory or not—as sufficient reason for courts to refrain from intervening. Remarkably, the Court does not seem troubled even if all ISPs competitors exited the market, an event that surely would the surviving incumbent carrier to raise rates:
For if AT&T can bankrupt the plaintiffs by refusing to deal altogether, the plaintiffs must demonstrate why the law prevents AT&T from putting them out of business by pricing them out of the market. [6]
This case evidences a strong reluctance on the part of the Supreme Court to approve of any sort of judicial review over the pricing strategies of carriers. Presumably the plaintiffs could have petitioned the FCC to review the wholesale prices, but the Commission might just as well have claimed that even the sub-elements of DSL service constitute information services not subject to Title II pricing and nondiscrimination requirements.
[1] Pacific Bell Telephone Co., v. Linkline Communications, Inc., slip op. 555 U.S. ___
(rel. Feb. 25, 1009); available at: http://www.supremecourtus.gov/opinions/08pdf/07-512.pdf.
[2] “DSL now faces robust competition from cable companies and wireless and satellite services.” Id. at 2; see also, id. at 8, n.2.
[3] The Court referenced Brook Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) that supports the inference that a predatory pricing claim can be established only with proof of below cost pricing coupled with evidence that the defendant can subsequently recoup any lost profits. Id. at 4.
[4] “The challenge here focuses on retail prices—where there is no predatory pricing—and terms of dealing where there is no duty to deal.” Id. at 8. “If there is no duty to deal at the wholesale level and no predatory pricing at the retail level, then a firm is certainly not required to price both of these services in a manner that preserves its rivals’ margins.” Id. at 12.
[5] “In this case, as in Trinko, the defendant has no antitrust duty to deal with its rivals at wholesale; any such duty arises only from FCC regulations, not from the Sherman Act.” Id. at 9.
[6] Id. at 16-17.
Both the District Court and the Ninth Circuit Court of Appeals agreed that the ISPs could present their price squeeze claim, despite the Supreme Court Ruling in Verizon Communications, Inc. v. Law Office of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) that limits antitrust claims against common carrier, telecommunications service providers and further restricts what remedies a court can provide in lieu of what rights the Telecommunications Act of 1996 provides market entrants.
The Court assumed that Pacific Bell had no antitrust duty to deal with any ISPs based on the FCC’s premise that ample facilities-based competition exists. [2] Curiously, Court does not mention that Pacific Bell could avoid a unilateral duty to deal with ISPs based on the FCC’s classification that DSL and presumably its component parts constitute information services and not common carrier-provided telecommunications services.
But for a voluntary concession to secure the FCC’s approval of AT&T’s acquisition of BellSouth the Court noted that Pacific Bell would not even have a duty to provide ISPs with wholesale service. The Court granted certiori to resolve the question whether ISP plaintiffs can bring a price-squeeze claim under Section 2 of the Sherman Act when the defendant carrier has no antitrust-mandated duty to deal with the plaintiffs. The lower courts concluded that the Trinko precedent did not bar such a claim, but the Supreme Court reversed this holding.
On procedural grounds, the Court’s decision chided the ISP plaintiffs for changing the nature of their claim from a price squeeze to one characterizing Pacific Bell’s tactics as predatory pricing. On substantive grounds, the Court noted that a new emphasis on predatory pricing would have require determination whether the retail price was set below cost, [3] a claim the ISPs did not make.
The Court determined that the case did not become moot, because of the change in economic and antitrust arguments. However the decision evidences great skepticism whether the ISPs have any basis for a claim, because in the Court’s reasoning the ISPs failed to make a claim that Pacific Bell’s retail DSL prices were predatory, and the ISPs also failed to refute the Court’s conclusion that Pacific Bell had no duty to deal with the ISPs, i.e., to provide wholesale service. [4]
The Court apparently can ignore the voluntary concession AT&T made that created a duty to deal, because that concession may trigger FCC oversight, but it does not change whether an antitrust duty to deal arises. The Court reads the Trinko case as foreclosing any antitrust claim if no antitrust duty to deal exists. [5]
The Court remanded the case to the District Court to determine whether the ISP plaintiffs have any viable predatory pricing claim. The Court expressed the need for clear antitrust rules and apparently views consumer access to low retail prices—predatory or not—as sufficient reason for courts to refrain from intervening. Remarkably, the Court does not seem troubled even if all ISPs competitors exited the market, an event that surely would the surviving incumbent carrier to raise rates:
For if AT&T can bankrupt the plaintiffs by refusing to deal altogether, the plaintiffs must demonstrate why the law prevents AT&T from putting them out of business by pricing them out of the market. [6]
This case evidences a strong reluctance on the part of the Supreme Court to approve of any sort of judicial review over the pricing strategies of carriers. Presumably the plaintiffs could have petitioned the FCC to review the wholesale prices, but the Commission might just as well have claimed that even the sub-elements of DSL service constitute information services not subject to Title II pricing and nondiscrimination requirements.
[1] Pacific Bell Telephone Co., v. Linkline Communications, Inc., slip op. 555 U.S. ___
(rel. Feb. 25, 1009); available at: http://www.supremecourtus.gov/opinions/08pdf/07-512.pdf.
[2] “DSL now faces robust competition from cable companies and wireless and satellite services.” Id. at 2; see also, id. at 8, n.2.
[3] The Court referenced Brook Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) that supports the inference that a predatory pricing claim can be established only with proof of below cost pricing coupled with evidence that the defendant can subsequently recoup any lost profits. Id. at 4.
[4] “The challenge here focuses on retail prices—where there is no predatory pricing—and terms of dealing where there is no duty to deal.” Id. at 8. “If there is no duty to deal at the wholesale level and no predatory pricing at the retail level, then a firm is certainly not required to price both of these services in a manner that preserves its rivals’ margins.” Id. at 12.
[5] “In this case, as in Trinko, the defendant has no antitrust duty to deal with its rivals at wholesale; any such duty arises only from FCC regulations, not from the Sherman Act.” Id. at 9.
[6] Id. at 16-17.
Tuesday, February 17, 2009
Can Common Carrier Regulated Telephone Companies Limit Service Plans to Bundled Subscribers?
Several press outlets have disclosed that Verizon may offer very low cost telephone service options available only to subscribers who already have Verizon-provided Internet access. See http://uk.reuters.com/article/rbssTechMediaTelecomNews/idUKN1735246920090217.
One $5 plan would limit outbound calling to 911 emergency and Verizon customer service, while a $10 plan would include some regular outbound calls.
The last time I checked Verizon remained a common carrier telecommunications service provider obligated to file local telephone service tariffs and subject to non-discrimination requirements contained in Title II of the Communications Act. I do not believe Verizon can lawfully offer a telecommunications service limited to a select group of customers who “qualify” to take this service if and only if they also buy Internet access from Verizon.
Perhaps this low cost Verizon service is not circuit switched telephone service, but Voice over the Internet Protocol (“VoIP”) service instead. Arguably Verizon would have no tariff filing obligation, or nondiscrimination obligation for VoIP if classified as an information service. However if the FCC allows Verizon to offer this sort of pre-qualified customer access to VoIP service, the Commission may in effect validate the view that VoIP is not a telecommunications service, something Comcast recently emphasized in response to an FCC letter inquiring whether the company was favoring its VoIP service by exempting it from network management functions that could throttle VoIP offered by competitors. See Letter from Dana R. Shafer, Chief Wireline Competition Bureau and Matthew Berry, General Counsel to Katheryn A. Zachem, Vice President Regulatory Affairs, Comcast Corp. (Jan. 18, 2009); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-288047A1.pdf;
Comcast’s response is available at: http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6520194593.
Heretofore the FCC has managed to avoid having to make an either/or (telecommunications service vs. information service) classification for retail VoIP. Verizon may not even have anticipated that a marketing tactic to stave off complete wireline customer migration may force the FCC to make an important regulatory call.
One $5 plan would limit outbound calling to 911 emergency and Verizon customer service, while a $10 plan would include some regular outbound calls.
The last time I checked Verizon remained a common carrier telecommunications service provider obligated to file local telephone service tariffs and subject to non-discrimination requirements contained in Title II of the Communications Act. I do not believe Verizon can lawfully offer a telecommunications service limited to a select group of customers who “qualify” to take this service if and only if they also buy Internet access from Verizon.
Perhaps this low cost Verizon service is not circuit switched telephone service, but Voice over the Internet Protocol (“VoIP”) service instead. Arguably Verizon would have no tariff filing obligation, or nondiscrimination obligation for VoIP if classified as an information service. However if the FCC allows Verizon to offer this sort of pre-qualified customer access to VoIP service, the Commission may in effect validate the view that VoIP is not a telecommunications service, something Comcast recently emphasized in response to an FCC letter inquiring whether the company was favoring its VoIP service by exempting it from network management functions that could throttle VoIP offered by competitors. See Letter from Dana R. Shafer, Chief Wireline Competition Bureau and Matthew Berry, General Counsel to Katheryn A. Zachem, Vice President Regulatory Affairs, Comcast Corp. (Jan. 18, 2009); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-288047A1.pdf;
Comcast’s response is available at: http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6520194593.
Heretofore the FCC has managed to avoid having to make an either/or (telecommunications service vs. information service) classification for retail VoIP. Verizon may not even have anticipated that a marketing tactic to stave off complete wireline customer migration may force the FCC to make an important regulatory call.
Wednesday, February 11, 2009
The Non-Lesson From Telecom Frauds
Does anyone remember how Worldcom, Qwest, 360 Communications and other telecommunications carriers overstated revenues by booking capacity swaps as current income? Like their Enron counterparts, telecom managers came to understand that there was more bonus money and stock appreciation in creating esoteric capacity swaps then in stimulating demand through enhanced service.
History repeats itself as though we learned nothing from previous frauds. It appears that little difference exists between a creative financial “instrument” that repackages real estate debt and one that repackages telecommunications capacity swaps. The underlying financial transaction—to fund a telecommunications transmission facility such as an overseas fiber optic cable, or to fund home purchases—becomes a long embedded element to a more recent repackaged or re-sliced financial instrument. With such repackaging ventures can prime their financial pumps and profit statements by recycling and reselling.
To my mind little difference exists between the false stimulus of buying, repackaging and reselling real estate debt and telecommunications transmission capacity debt. With each reprocessing of the properties, processors can expand the debt load based on the artificial increase in apparent demand for the financial instruments, never mind that demand for the underlying property may not have changed, or may have been goosed upward on fraudulent grounds.
The non-lesson: if smart people can artificially inflate demand for telecommunications transmission capacity and debt instruments, the same or similarly smart people can do the same thing for real estate.
History repeats itself as though we learned nothing from previous frauds. It appears that little difference exists between a creative financial “instrument” that repackages real estate debt and one that repackages telecommunications capacity swaps. The underlying financial transaction—to fund a telecommunications transmission facility such as an overseas fiber optic cable, or to fund home purchases—becomes a long embedded element to a more recent repackaged or re-sliced financial instrument. With such repackaging ventures can prime their financial pumps and profit statements by recycling and reselling.
To my mind little difference exists between the false stimulus of buying, repackaging and reselling real estate debt and telecommunications transmission capacity debt. With each reprocessing of the properties, processors can expand the debt load based on the artificial increase in apparent demand for the financial instruments, never mind that demand for the underlying property may not have changed, or may have been goosed upward on fraudulent grounds.
The non-lesson: if smart people can artificially inflate demand for telecommunications transmission capacity and debt instruments, the same or similarly smart people can do the same thing for real estate.
Monday, February 9, 2009
Regulatory Status of Wireless Information Appliances
News of a slimmed down Amazon Kindle electronic book has triggered this question: what regulatory status applies to devices that use wireless capacity purchased by the appliance vendor and bundled into the cost of both the appliance and downloads? In the United States the FCC has exempted bundlers of telecommunications capacity on grounds that they do not retail a telecommunications service.
But in light of the willingness of the FCC and other national regulatory agencies to oversee some times of information services, might network neutrality and other concepts of nondiscrimination apply? Bear in mind that Kindle buyers apparently do not receive a subsidy that reduces the cost of the information appliance in exchange for locking out competing content and applications. Still the FCC has shown no interest in forcing wireless carriers or manufacturers to comply with the so-called Carterfone nondiscrimination requirements applicable to wireline handsets and carriers. Carterfone requires carriers to interconnect with other carriers and to accept subscriber chosen and loaded applications.
Apple makes great self-congratulatory statements about the wide and open applications available for downloading, but note that the FCC does not require at&t to accept any non-Apple approved and marketed applications, nor does the Commission prohibit Apple from blocking and disabling applications that it unilaterally decides subscribers should not use. So if the FCC could not be bothered with wireless common carriers operating in a discriminatory manner then the Commission probably will have no concerns about a "locked down" Kindle. In light of the Supreme Court's deference to the FCC's "expertise" in the Brand X decision, it appears that the FCC could ignore information appliance discrimination entirely.
But in light of the willingness of the FCC and other national regulatory agencies to oversee some times of information services, might network neutrality and other concepts of nondiscrimination apply? Bear in mind that Kindle buyers apparently do not receive a subsidy that reduces the cost of the information appliance in exchange for locking out competing content and applications. Still the FCC has shown no interest in forcing wireless carriers or manufacturers to comply with the so-called Carterfone nondiscrimination requirements applicable to wireline handsets and carriers. Carterfone requires carriers to interconnect with other carriers and to accept subscriber chosen and loaded applications.
Apple makes great self-congratulatory statements about the wide and open applications available for downloading, but note that the FCC does not require at&t to accept any non-Apple approved and marketed applications, nor does the Commission prohibit Apple from blocking and disabling applications that it unilaterally decides subscribers should not use. So if the FCC could not be bothered with wireless common carriers operating in a discriminatory manner then the Commission probably will have no concerns about a "locked down" Kindle. In light of the Supreme Court's deference to the FCC's "expertise" in the Brand X decision, it appears that the FCC could ignore information appliance discrimination entirely.
Wednesday, February 4, 2009
Comcast Letter Hints at the Potential Common Carrier Regulation of VoIP Service
While the FCC has classified cable modem and DSL Internet access an information services, the Commission has not specified whether VoIP similarly qualifies. On one hand software applications, riding along a cable modem or DSL link, create VoIPs services. But on the other hand high level FCC managers recently noted that when an Internet Service Provider markets VoIP as a facilities-based service separate from Internet access the service constitutes a common carrier, regulated telecommunications service. [1]
The FCC managers made this nonbinding and nonenforceable conclusion in a letter to Comcast Corporation primarily inquiring about potential discriminatory treatment of competitors’ VoIP services vis a vis Comcast’s offering and the apparent nonpayment of interconnection fees to other telecommunications service providers. Having noted violations of its 2005 Internet Policy Statement, [2] the Commission had required Comcast to file a document showing how the company would comply with the duty to operate in a nondiscriminatory manner. [3] In its response Comcast reported that a subscriber would experience a noticeable deterioration in service, including VoIP service not provided by Comcast whenever a subscriber uses 70% of his or her “provisioned bandwidth” for 15 minutes or more when such use causes congestion in the vicinity, labeled as the Cable Modem Termination System Node by Comcast, for more than 15 minutes. Because Comcast separately provisions its VoIP service, a congestion causing subscriber of Comcast’s cable modem service, who also subscribers to Comcast’s VoIP service, would not experience any degradation of the Comcast VoIP service.
The letter to Comcast seeks an explanation for the disparate treatment of VoIP services, particularly in light of Comcast’s assertion that its VoIP service is “facilities-based.” The letter appears to infer that facilities-based means that Comcast physically partitions its data bandwidth, thereby creating for its VoIP service stand alone links. The letter infers that when Comcast by provisions its VoIP service, separate and apart from broadband access, Comcast may be offering a regulated, retail telecommunications service and a largely unregulated information service. [4] In The Letter requests that Comcast explain why it should be regulated as a telephone company and bear conventional common carrier responsibilities including the duty to compensate other carriers for terminating Comcast generated VoIP traffic.
Most analysts have concentrated on the potential that Comcast may not have fully remedied all instances of Internet access discrimination and whether the company may use network management features to create incentives for subscribers to use Comcast VoIP services over competitors. But perhaps more important is the interpretation whether and how a largely unregulated information service provider triggers conventional common carrier telecommunications service regulation when offering a VoIP service.
[1] Letter from Dana R. Shafer, Chief Wireline Competition Bureau and Matthew Berry, General Counsel to Katheryn A. Zachem, Vice President Regulatory Affairs, Comcast Corp. (Jan. 18, 2009); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-288047A1.pdf [hereinafter cited as Comcast VoIP Letter].
[2] Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Docket No. 02-33, Policy Statement, 20 FCC Rcd. 14986 (2005).
[3] See Formal Complaint of Free Press and Public Knowledge Against Comcast Corporation for Secretly Degrading Peer-to-Peer Applications, File No. EB-08-IH-1518, Memorandum Opinion and Order, FCC 08-183 (rel. Aug. 20, 2008); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-183A1.doc.
[4] “Given that Comcast apparently is maintaining that its VoIP service is a ‘separate facilities-based’ telephone service that is distinct from its broadband service and differs from the service offered by [competing] ‘VoIP providers that reply on delivering calls over the public Internet’ . . . it would appear that Comcast’s VoIP service is a telecommunications service subject to regulation under Title II of the Communications Act of 1934, as amended.” Comcast VoIP Letter at 2.
The FCC managers made this nonbinding and nonenforceable conclusion in a letter to Comcast Corporation primarily inquiring about potential discriminatory treatment of competitors’ VoIP services vis a vis Comcast’s offering and the apparent nonpayment of interconnection fees to other telecommunications service providers. Having noted violations of its 2005 Internet Policy Statement, [2] the Commission had required Comcast to file a document showing how the company would comply with the duty to operate in a nondiscriminatory manner. [3] In its response Comcast reported that a subscriber would experience a noticeable deterioration in service, including VoIP service not provided by Comcast whenever a subscriber uses 70% of his or her “provisioned bandwidth” for 15 minutes or more when such use causes congestion in the vicinity, labeled as the Cable Modem Termination System Node by Comcast, for more than 15 minutes. Because Comcast separately provisions its VoIP service, a congestion causing subscriber of Comcast’s cable modem service, who also subscribers to Comcast’s VoIP service, would not experience any degradation of the Comcast VoIP service.
The letter to Comcast seeks an explanation for the disparate treatment of VoIP services, particularly in light of Comcast’s assertion that its VoIP service is “facilities-based.” The letter appears to infer that facilities-based means that Comcast physically partitions its data bandwidth, thereby creating for its VoIP service stand alone links. The letter infers that when Comcast by provisions its VoIP service, separate and apart from broadband access, Comcast may be offering a regulated, retail telecommunications service and a largely unregulated information service. [4] In The Letter requests that Comcast explain why it should be regulated as a telephone company and bear conventional common carrier responsibilities including the duty to compensate other carriers for terminating Comcast generated VoIP traffic.
Most analysts have concentrated on the potential that Comcast may not have fully remedied all instances of Internet access discrimination and whether the company may use network management features to create incentives for subscribers to use Comcast VoIP services over competitors. But perhaps more important is the interpretation whether and how a largely unregulated information service provider triggers conventional common carrier telecommunications service regulation when offering a VoIP service.
[1] Letter from Dana R. Shafer, Chief Wireline Competition Bureau and Matthew Berry, General Counsel to Katheryn A. Zachem, Vice President Regulatory Affairs, Comcast Corp. (Jan. 18, 2009); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-288047A1.pdf [hereinafter cited as Comcast VoIP Letter].
[2] Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Docket No. 02-33, Policy Statement, 20 FCC Rcd. 14986 (2005).
[3] See Formal Complaint of Free Press and Public Knowledge Against Comcast Corporation for Secretly Degrading Peer-to-Peer Applications, File No. EB-08-IH-1518, Memorandum Opinion and Order, FCC 08-183 (rel. Aug. 20, 2008); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-183A1.doc.
[4] “Given that Comcast apparently is maintaining that its VoIP service is a ‘separate facilities-based’ telephone service that is distinct from its broadband service and differs from the service offered by [competing] ‘VoIP providers that reply on delivering calls over the public Internet’ . . . it would appear that Comcast’s VoIP service is a telecommunications service subject to regulation under Title II of the Communications Act of 1934, as amended.” Comcast VoIP Letter at 2.
Thursday, January 29, 2009
Top Ten List of FCC Regulatory Reforms—Part Two
4) Fairly Report the State of an Industry When Reporting to Congress
Federal legislation regularly requires the FCC to provide Congress with annual updates on the health and competitiveness of various market sectors. FCC management has assumed the responsibility to provide Congress with the best possible assessment of marketplace conditions as opposed to a realistic one. For example, in the Commission’s assessment of the Commercial Mobile Radio Service, i.e., cellular telephony, the most recent Report to Congress disingenuously identifies a number of spectrum allocations possibly useable by new competitors to the four carriers that control 90+% of the market. Of course the Commission does not acknowledge that such spectrum currently provides no actual competition, nor does the Report notify Congress that incumbents would use litigation, lobbying and other strategies to prevent such possible competition.
The FCC should use Congressional reporting requirements to identify both successes and failures under the currently applicable laws. Arguably Congress should pass legislation more regularly instead of grand, “soup to nuts” reforms that typically need revision soon after enactment.
3) Put an End to Results-Driven Decision Making
Too often an informed observer of the FCC’s machinations can detect exactly where Commission management, or at least the Chairman, wants to go in a notice of inquiry or rulemaking. Under such conditions the Commission simply goes through the motions, ostensibly to promote procedural and substantive due process. The FCC document may contain dozens of questions, but most stakeholders refrain from providing answers (as opposed to assertions) and the Commission’s final policy making document never gets around to examining the questions it previously posed.
Rather than start with an end conclusion firmly in mind, the FCC should start with the humble acknowledgement that maybe—just maybe—it does not know what would serve the public interest. Fair and lawful notice and comment proceedings requires the FCC to create a factual record, by encouraging all interested parties to participate, and to fully and fairly consider that record.
2) Use Peer Review
In the academic world, peer review provides essential quality control by subjecting research and other contributions to close scrutiny by unbiased and unknown outsiders. When I write an academic paper, typically several reviewers consider the rigorousness, legitimacy and significance of my work. Neither author nor reviewer know of the other’s identity.
The FCC rarely uses peer review to subject its work product to outsider review, nor does the Commission use authentic, peer-reviewed research from academics, or consulting firms. The notice and comment pleading process does allow stakeholders to criticize each other’s work, but the material filed with the Commission would never pass muster with peer review in light of financial sponsorship that obligates the creation of a biased document in the first place.
The FCC should finance peer reviewed work to augment its in-house expertise and to provide an unbiased alternative perspective on the biased assertions of stakeholders.
1) Be Skeptical of Stakeholder Assertions of Facts and Findings
Absent peer review, a full opportunity to consider the views of the general public and general open mindedness, the FCC regularly relies on the biased filings of stakeholders. The Commission regularly accepts as the gospel truth nothing more than assertions. If stakeholders make these assertions long enough and finance “rock star” academics to embrace these assertions, then it becomes quite easy for the FCC to accept assertions as fact.
Economists use this process with great success, because they can create unimpeachable “rules” and use math to support them. In telecommunications policy sponsored economics professors have stated with a straight face that regulation constitutes a confiscation of property, that carriers providing interconnection are entitled to retail price compensation including all “opportunity costs,” that just about every telecommunications market sector is robustly competitive and deserving of deregulation and that every merger or acquisition will promote even more competition. In conjunction with results-driven decision making such “research” provides cover and support for the FCC to conclude that the public interest coincides with the assertions of particular stakeholders.
The FCC should have a healthy skepticism that what’s good for a specific stakeholder is also good for the public in general. It might or might not. To determine the truth, the FCC needs to do its homework.
Federal legislation regularly requires the FCC to provide Congress with annual updates on the health and competitiveness of various market sectors. FCC management has assumed the responsibility to provide Congress with the best possible assessment of marketplace conditions as opposed to a realistic one. For example, in the Commission’s assessment of the Commercial Mobile Radio Service, i.e., cellular telephony, the most recent Report to Congress disingenuously identifies a number of spectrum allocations possibly useable by new competitors to the four carriers that control 90+% of the market. Of course the Commission does not acknowledge that such spectrum currently provides no actual competition, nor does the Report notify Congress that incumbents would use litigation, lobbying and other strategies to prevent such possible competition.
The FCC should use Congressional reporting requirements to identify both successes and failures under the currently applicable laws. Arguably Congress should pass legislation more regularly instead of grand, “soup to nuts” reforms that typically need revision soon after enactment.
3) Put an End to Results-Driven Decision Making
Too often an informed observer of the FCC’s machinations can detect exactly where Commission management, or at least the Chairman, wants to go in a notice of inquiry or rulemaking. Under such conditions the Commission simply goes through the motions, ostensibly to promote procedural and substantive due process. The FCC document may contain dozens of questions, but most stakeholders refrain from providing answers (as opposed to assertions) and the Commission’s final policy making document never gets around to examining the questions it previously posed.
Rather than start with an end conclusion firmly in mind, the FCC should start with the humble acknowledgement that maybe—just maybe—it does not know what would serve the public interest. Fair and lawful notice and comment proceedings requires the FCC to create a factual record, by encouraging all interested parties to participate, and to fully and fairly consider that record.
2) Use Peer Review
In the academic world, peer review provides essential quality control by subjecting research and other contributions to close scrutiny by unbiased and unknown outsiders. When I write an academic paper, typically several reviewers consider the rigorousness, legitimacy and significance of my work. Neither author nor reviewer know of the other’s identity.
The FCC rarely uses peer review to subject its work product to outsider review, nor does the Commission use authentic, peer-reviewed research from academics, or consulting firms. The notice and comment pleading process does allow stakeholders to criticize each other’s work, but the material filed with the Commission would never pass muster with peer review in light of financial sponsorship that obligates the creation of a biased document in the first place.
The FCC should finance peer reviewed work to augment its in-house expertise and to provide an unbiased alternative perspective on the biased assertions of stakeholders.
1) Be Skeptical of Stakeholder Assertions of Facts and Findings
Absent peer review, a full opportunity to consider the views of the general public and general open mindedness, the FCC regularly relies on the biased filings of stakeholders. The Commission regularly accepts as the gospel truth nothing more than assertions. If stakeholders make these assertions long enough and finance “rock star” academics to embrace these assertions, then it becomes quite easy for the FCC to accept assertions as fact.
Economists use this process with great success, because they can create unimpeachable “rules” and use math to support them. In telecommunications policy sponsored economics professors have stated with a straight face that regulation constitutes a confiscation of property, that carriers providing interconnection are entitled to retail price compensation including all “opportunity costs,” that just about every telecommunications market sector is robustly competitive and deserving of deregulation and that every merger or acquisition will promote even more competition. In conjunction with results-driven decision making such “research” provides cover and support for the FCC to conclude that the public interest coincides with the assertions of particular stakeholders.
The FCC should have a healthy skepticism that what’s good for a specific stakeholder is also good for the public in general. It might or might not. To determine the truth, the FCC needs to do its homework.
Friday, January 16, 2009
Top Ten List of FCC Regulatory Reforms—Part One
10) Honesty is the best policy.
At the risk of anthromorphizing a regulatory agency, at the very least the FCC has not told the complete truth, or put itself in a position not to know the truth. The FCC has contributed to debates about what constitutes credible facts and statistics, and what this data means. For example, soon-to-be former FCC Chairman Kevin Martin asserted as the gospel truth his factual conclusion that cable television operators collectively have a 70% market share of the total video program distribution business, a trigger point for more regulation. His expert regulatory agency did not reach this conclusion, so Chairman Martin had to resort to the finding of a commercial venture which itself doubted whether such market share remained sustainable.
The FCC should acknowledge that it may not know all the facts.
9) Use the “Notice and Comment” process to augment the fact finding process rather than control it.
While FCC managers have done just about everything they can do to encourage a brain drain, there remain plenty of staff resources capable of finding the truth. Instead FCC management has demonstrated an inordinate reliance on the filings made by stakeholders, and their sponsored researchers, for the formulations of decisions and policies. The FCC assumes as facts what stakeholders present as assertions. Without in-house analysis, and better yet independent peer review, the conclusions of interested parties, are nothing more than unproven assertions.
8) Stop using politics and economic doctrine as a template to manipulate the facts.
Without a doubt, the FCC has engaged in results-driven decision making. Managers reach a conclusion and work back from that conclusion. In other words if the Chairman thinks the Commission should approve a merger, he directs the staff to come up with rationales supporting the merger. Political and economic doctrine rather than facts have driven decisions, rather than empirical data.
7) Stop imposing conditions on mergers that perhaps should apply industry-wide.
Because of the drive to approve any and all mergers and acquisitions, FCC Commissioners use their vote as leverage for the imposition of company-specific conditions, or the solicitation of “voluntary” concessions by the acquiring company. This brokering occurs behind the scenes in manner that violates both procedural due process and expectations of government in the sunshine. The FCC should decide if the conditions, so necessary for an acquiring company, are appropriate industry wide, e.g., AT&T’s “voluntary” agreement for conditional and time limited compliance of network neutrality principles to secure approval of its acquisition of BellSouth.
6) In a deregulatory environment reporting requirements become increasingly important.
The FCC seems to think that it should eliminate reporting requirements in tandem with the onset of deregulatory initiatives. The Commission has a greater need for data when it increasingly relies on anticipated market self-regulation. For example, the FCC should require lightly regulated Internet Service Providers to report on network use, outages, and congestion episodes, with an eye toward seeing whether price and quality of service tiering initiatives end up hurting consumers. Network neutrality opponents claim no need for regulatory intervention, but only with honest reporting requirements can the FCC determine whether certain types of price and service discrimination are not collectively harmful.
5) Determining the public interest requires listening to the public.
I am pretty sure at least half of the current FCC commissioners loathed having to take a road trip to hear the irrational and emotional opinions of the common man and woman. Even with Comcast allegedly paying homeless people to wait in line for seating, the Commissioners got an earful from people who clearly did not see the world in the same way. Maybe the unwashed public collectively has wisdom and insights unavailable from the currently closed process used to make decisions. The Commission should make more road trips, encourage public participation and actually listen to what indirect public stakeholders have to say.
At the risk of anthromorphizing a regulatory agency, at the very least the FCC has not told the complete truth, or put itself in a position not to know the truth. The FCC has contributed to debates about what constitutes credible facts and statistics, and what this data means. For example, soon-to-be former FCC Chairman Kevin Martin asserted as the gospel truth his factual conclusion that cable television operators collectively have a 70% market share of the total video program distribution business, a trigger point for more regulation. His expert regulatory agency did not reach this conclusion, so Chairman Martin had to resort to the finding of a commercial venture which itself doubted whether such market share remained sustainable.
The FCC should acknowledge that it may not know all the facts.
9) Use the “Notice and Comment” process to augment the fact finding process rather than control it.
While FCC managers have done just about everything they can do to encourage a brain drain, there remain plenty of staff resources capable of finding the truth. Instead FCC management has demonstrated an inordinate reliance on the filings made by stakeholders, and their sponsored researchers, for the formulations of decisions and policies. The FCC assumes as facts what stakeholders present as assertions. Without in-house analysis, and better yet independent peer review, the conclusions of interested parties, are nothing more than unproven assertions.
8) Stop using politics and economic doctrine as a template to manipulate the facts.
Without a doubt, the FCC has engaged in results-driven decision making. Managers reach a conclusion and work back from that conclusion. In other words if the Chairman thinks the Commission should approve a merger, he directs the staff to come up with rationales supporting the merger. Political and economic doctrine rather than facts have driven decisions, rather than empirical data.
7) Stop imposing conditions on mergers that perhaps should apply industry-wide.
Because of the drive to approve any and all mergers and acquisitions, FCC Commissioners use their vote as leverage for the imposition of company-specific conditions, or the solicitation of “voluntary” concessions by the acquiring company. This brokering occurs behind the scenes in manner that violates both procedural due process and expectations of government in the sunshine. The FCC should decide if the conditions, so necessary for an acquiring company, are appropriate industry wide, e.g., AT&T’s “voluntary” agreement for conditional and time limited compliance of network neutrality principles to secure approval of its acquisition of BellSouth.
6) In a deregulatory environment reporting requirements become increasingly important.
The FCC seems to think that it should eliminate reporting requirements in tandem with the onset of deregulatory initiatives. The Commission has a greater need for data when it increasingly relies on anticipated market self-regulation. For example, the FCC should require lightly regulated Internet Service Providers to report on network use, outages, and congestion episodes, with an eye toward seeing whether price and quality of service tiering initiatives end up hurting consumers. Network neutrality opponents claim no need for regulatory intervention, but only with honest reporting requirements can the FCC determine whether certain types of price and service discrimination are not collectively harmful.
5) Determining the public interest requires listening to the public.
I am pretty sure at least half of the current FCC commissioners loathed having to take a road trip to hear the irrational and emotional opinions of the common man and woman. Even with Comcast allegedly paying homeless people to wait in line for seating, the Commissioners got an earful from people who clearly did not see the world in the same way. Maybe the unwashed public collectively has wisdom and insights unavailable from the currently closed process used to make decisions. The Commission should make more road trips, encourage public participation and actually listen to what indirect public stakeholders have to say.
Monday, January 12, 2009
Universal Service Reform
An increasing number of players—including the incoming Administration—have expressed interest in reforming the process by which the federal government seeks to promote wider and more affordable access to telecommunications services. Currently wireline, wireless and now many Internet telephone subscribers contribute over $7 billion annually to universal service funding, most of which goes to incumbent wireline carriers. The process is quite flawed and vulnerable to arbitrage. For example, a rural wireline telephone company in Iowa offers “free” teleconferencing (previously “free” calls to European locations) just by calling into their switch. For wireless callers with “unlimited nights and weekends” the additional out of pocket cost is zero, even though the carrier making the inbound call incurs charges of several cents per minute instead of the thousands of one cent typically charged by so-called “terminating carriers.”
I have written extensively on the subject of universal service reform and suggest the following “best practices”:
• True technology neutrality coupled with a willingness to fund well articulated and community-supported projects rather than limit support to a fixed list of existing carrier services;
• Capping government project funding to a percentage of total cost, thereby requiring project advocates to seek financial support from other grantors, or from bank loans;
• Emphasizing one-time project funding rather than recurring discounts;
• Creating incentives for demand aggregation among government and private users, particularly for broadband and data services;
• Promoting innovation and creativity in projects, including technologies that provide greater efficiency and lower recurring costs;
• Encouraging competition among universal service providers by auctioning off subsidy access; and
• Blending government stewardship and vision with incentives for private stakeholders to pursue infrastructure investments.
I have written extensively on the subject of universal service reform and suggest the following “best practices”:
• True technology neutrality coupled with a willingness to fund well articulated and community-supported projects rather than limit support to a fixed list of existing carrier services;
• Capping government project funding to a percentage of total cost, thereby requiring project advocates to seek financial support from other grantors, or from bank loans;
• Emphasizing one-time project funding rather than recurring discounts;
• Creating incentives for demand aggregation among government and private users, particularly for broadband and data services;
• Promoting innovation and creativity in projects, including technologies that provide greater efficiency and lower recurring costs;
• Encouraging competition among universal service providers by auctioning off subsidy access; and
• Blending government stewardship and vision with incentives for private stakeholders to pursue infrastructure investments.
Friday, January 9, 2009
Analog Videophiles
Just as some audiophiles swear by the virtues of analog audio, I think we soon will have millions of analog videophiles. Despite all the preparation for the compulsory migration to digital broadcast television, it appears only now has someone in authority—or soon to have authority—recognized a technological characteristic of digital video transmissions: there is no gradual signal attenuation. Either you receive a digital signal, or you do not.
In the analog world, a significant portion of the 20 or so million broadcast television viewers, received signals in or beyond the so-called B-contour. In other words, a lot of exurban and rural broadcast television viewers received a somewhat snowy, somewhat inferior signal, but a viewable signal nonetheless. These satisfied or tolerant viewers will likely receive nothing in February and the folks in Washington have begun to consider the political consequences.
One of the earliest commercial slogans for the music video network MTV was simply: “I want my MTV.” Absent a delay and some quick promotion of multiple broadcast transmitters and repeaters, throughout places like Pennsylvania, we soon will hear lots of folks saying: “I want my old tv!”
In the analog world, a significant portion of the 20 or so million broadcast television viewers, received signals in or beyond the so-called B-contour. In other words, a lot of exurban and rural broadcast television viewers received a somewhat snowy, somewhat inferior signal, but a viewable signal nonetheless. These satisfied or tolerant viewers will likely receive nothing in February and the folks in Washington have begun to consider the political consequences.
One of the earliest commercial slogans for the music video network MTV was simply: “I want my MTV.” Absent a delay and some quick promotion of multiple broadcast transmitters and repeaters, throughout places like Pennsylvania, we soon will hear lots of folks saying: “I want my old tv!”
Thursday, January 1, 2009
Wireless Economies of Scale at the Price of Diminished Competition
In 2001 the FCC eliminated a cap on the amount of bandwidth a single wireless carrier could control. With nothing coming close to quantifiable or empirical evidence, the Commission simply bought the assertion of incumbent carriers that the public interest would benefit when incumbent carriers can achieve better scale economies to serve a growing subscriber base. The FCC made no credible assessment whether larger scale would preempt market entry and reduce the potential for more facilities-based competition.
Since 2001 incumbent carriers have dominated the wireless marketplace in the United States, building on the FCC’s decision in the early 1980s to award incumbent wireline carriers the first of two licenses. Currently four national carriers control 90% of the market and their primary advertising message emphasizes how well their networks work. In other words price competition rarely appears while the carriers engage in what antitrust lawyers and economists term “conscious parallelism” conduct. If one carrier raises text messaging rates from ten to twenty cents, then the other three matches the increase. Once in a while the weakest carrier Sprint, comes up with a pricing initiative matched by the other three, but all four carriers offer few differentiating price options, e.g., a discount to subscribers with used handsets that the carrier does not have to subsidize.
What if the FCC had retained a 45 MHz or 55 MHz spectrum cap? The possibility exists that a fifth or sixth national carrier might have evolved as well as several more regional carriers. If the number of carriers increases beyond four, the potential increases for one of the carriers to conclude that a pricing initiative will capture more subscribers and revenues than sticking to parallel pricing. As well it would not take a venture with incredibly deep pockets to enter the market.
In the latest auction of spectrum, the choice 700 MHz band, Verizon, AT&T, Sprint and T-Mobile dominated and even Google opted eventually not to challenge the incumbents. The incumbent carriers now so dominate that absent affirmative legislative or regulatory efforts, the market appears likely to remain static.
How can creative destruction and competition thrive when precious little spectrum remains available? The national treasury perhaps received more money from incumbents keen on warehousing spectrum and preempting market entry. But these carriers get to amortize their spectrum investment which reduces future tax liability. As well the public probably has fewer choices and a profitable surplus accrues to carriers able to avoid sleepless afternoons competing.
Since 2001 incumbent carriers have dominated the wireless marketplace in the United States, building on the FCC’s decision in the early 1980s to award incumbent wireline carriers the first of two licenses. Currently four national carriers control 90% of the market and their primary advertising message emphasizes how well their networks work. In other words price competition rarely appears while the carriers engage in what antitrust lawyers and economists term “conscious parallelism” conduct. If one carrier raises text messaging rates from ten to twenty cents, then the other three matches the increase. Once in a while the weakest carrier Sprint, comes up with a pricing initiative matched by the other three, but all four carriers offer few differentiating price options, e.g., a discount to subscribers with used handsets that the carrier does not have to subsidize.
What if the FCC had retained a 45 MHz or 55 MHz spectrum cap? The possibility exists that a fifth or sixth national carrier might have evolved as well as several more regional carriers. If the number of carriers increases beyond four, the potential increases for one of the carriers to conclude that a pricing initiative will capture more subscribers and revenues than sticking to parallel pricing. As well it would not take a venture with incredibly deep pockets to enter the market.
In the latest auction of spectrum, the choice 700 MHz band, Verizon, AT&T, Sprint and T-Mobile dominated and even Google opted eventually not to challenge the incumbents. The incumbent carriers now so dominate that absent affirmative legislative or regulatory efforts, the market appears likely to remain static.
How can creative destruction and competition thrive when precious little spectrum remains available? The national treasury perhaps received more money from incumbents keen on warehousing spectrum and preempting market entry. But these carriers get to amortize their spectrum investment which reduces future tax liability. As well the public probably has fewer choices and a profitable surplus accrues to carriers able to avoid sleepless afternoons competing.
Monday, December 29, 2008
Fuzzy Math in Calculating the Cost and Profit in Wireless Text Messaging
The New York Times recently addressed the issue of wireless texting cost and strongly implied that carriers make a lot of money from this service that costs them little to provide. See http://www.nytimes.com/2008/12/28/business/28digi.html?_r=2&partner=rss&emc=rss. Of course wireless carriers quickly will respond that consumers (can) get an incredible bargain by subscribing to an all you can eat (“AYCE”) rate plan. If you apply the typical non-rate plan of twenty cents per text message, you can conclude the carriers are gouging, but if you use a $10.00 per month rate, coupled with lots of usage, the per message cost drops substantially.
Texting provides a helpful case study for assessing the competitiveness of the wireless marketplace and the value proposition presented. First, we should appreciate that the wireless infrastructure has substantial upfront, sunk costs, e.g., the need for carriers to competitively bid for spectrum, construct towers and install other facilities before accruing the first dollar in revenues. However, once having sunk this substantial investment, the incremental cost of providing an additional minute of service approaches zero absent network congestion. For text messaging, the additional or “marginal” cost of providing service surely approaches zero, because carriers can load text traffic onto control channels already installed for a different purpose, to set up calls. See http://www.privateline.com/mt_cellbasics/2006/01/channel_names_and_functions.html.
One could argue that charging twenty cents for something that costs next to nothing constitutes a major rip off. However, you do have to keep in mind the substantial start up costs the carriers incurred and the need to recoup that investment from any and all services. On the other hand, even when offering texting at AYCE rates the carriers can generate ample profits.
So if texting is so popular and profitable why don’t wireless carriers compete on price? Good question. In a robustly competitive market price becomes a major factor, yet for wireless the carriers’ advertisements almost exclusively tout reliability and they match each other’s texting prices. Additionally carriers, their trade associations, and the FCC regularly emphasize the rate plan per text message or per minute talk time rate to show how competitive the wireless marketplace is and what great consumer surpluses subscribers accrue.
In reality not all wireless subscribers enroll in a text messaging plan, nor do all subscribers come close to using all their monthly allotments of use. For the high volume user, rate plans help reduce per minute costs, just as buffet restaurants reduce patrons costs per once of consumption. A big gap exists between metered and AYCE per minute costs, but to make the best claim of marketplace competitiveness one has to work with AYCE plans, or ones offering large buckets of minutes.
U.S. wireless carriers currently offer some of the most expensive and cheapest rates for texting and telephoning. Of course it makes sense for subcribers to enroll in rate plans, but only if they accept the reality that low cost results only from large usage.
Texting provides a helpful case study for assessing the competitiveness of the wireless marketplace and the value proposition presented. First, we should appreciate that the wireless infrastructure has substantial upfront, sunk costs, e.g., the need for carriers to competitively bid for spectrum, construct towers and install other facilities before accruing the first dollar in revenues. However, once having sunk this substantial investment, the incremental cost of providing an additional minute of service approaches zero absent network congestion. For text messaging, the additional or “marginal” cost of providing service surely approaches zero, because carriers can load text traffic onto control channels already installed for a different purpose, to set up calls. See http://www.privateline.com/mt_cellbasics/2006/01/channel_names_and_functions.html.
One could argue that charging twenty cents for something that costs next to nothing constitutes a major rip off. However, you do have to keep in mind the substantial start up costs the carriers incurred and the need to recoup that investment from any and all services. On the other hand, even when offering texting at AYCE rates the carriers can generate ample profits.
So if texting is so popular and profitable why don’t wireless carriers compete on price? Good question. In a robustly competitive market price becomes a major factor, yet for wireless the carriers’ advertisements almost exclusively tout reliability and they match each other’s texting prices. Additionally carriers, their trade associations, and the FCC regularly emphasize the rate plan per text message or per minute talk time rate to show how competitive the wireless marketplace is and what great consumer surpluses subscribers accrue.
In reality not all wireless subscribers enroll in a text messaging plan, nor do all subscribers come close to using all their monthly allotments of use. For the high volume user, rate plans help reduce per minute costs, just as buffet restaurants reduce patrons costs per once of consumption. A big gap exists between metered and AYCE per minute costs, but to make the best claim of marketplace competitiveness one has to work with AYCE plans, or ones offering large buckets of minutes.
U.S. wireless carriers currently offer some of the most expensive and cheapest rates for texting and telephoning. Of course it makes sense for subcribers to enroll in rate plans, but only if they accept the reality that low cost results only from large usage.
Deconstructing AT&T’s Claims About the iPhone
Unlike the other wireless carriers, which primarily use advertisements to claim how well their networks work, AT&T pitches both reliability and speed. AT&T claims to operate the nation’s fastest 3G network. See http://www.wireless.att.com/cell-phone-service/specials/iPhone.jsp?WT.srch=1. The carrier claims the following bit rate delivery speeds: “typical download speeds of 700 Kbps—1.7 Mbps;” and “typical upload speeds of 500 Kbps—1.2 Mbps.” See http://www.wireless.att.com/learn/why/technology/3g-umts.jsp.
AT&T’s claims about transmission speeds remind me of the claimed distance coverage of Family Radio Service transceivers, the next generation of Citizens Band radios. Uniden claims my transceivers will provide service for “up to twelve miles.” Yeah, right. I am lucky to get one and one-half miles.
So what bitrates do AT&T 3G subscribers actually get? Wall Street Journal columnist Wall Mossberg measured the 3G iPhone bitrates at not terribly blazing 200-500 kbps.
See http://ptech.allthingsd.com/20080708/newer-faster-cheaper-iphone-3g/.
The good news about AT&T’s suspect bitrates claim lies in the apparent strategy to pitch something more than service reliability. The bad news lies in the overstatement and the reality that U.S. wireless carriers comparatively lag carriers in many other nations. But of course that would require consumers, regulators and legislatures to question the claims of carriers, something "obviously" best left to the marketplace.
AT&T’s claims about transmission speeds remind me of the claimed distance coverage of Family Radio Service transceivers, the next generation of Citizens Band radios. Uniden claims my transceivers will provide service for “up to twelve miles.” Yeah, right. I am lucky to get one and one-half miles.
So what bitrates do AT&T 3G subscribers actually get? Wall Street Journal columnist Wall Mossberg measured the 3G iPhone bitrates at not terribly blazing 200-500 kbps.
See http://ptech.allthingsd.com/20080708/newer-faster-cheaper-iphone-3g/.
The good news about AT&T’s suspect bitrates claim lies in the apparent strategy to pitch something more than service reliability. The bad news lies in the overstatement and the reality that U.S. wireless carriers comparatively lag carriers in many other nations. But of course that would require consumers, regulators and legislatures to question the claims of carriers, something "obviously" best left to the marketplace.
Wednesday, December 24, 2008
Do Transparency and Non-Discrimination Requirements Impose De facto Common Carriage Duties?
Birtelcom has asked whether a Network Neutrality requirement of transparency and nondiscrimination in effect imposes a common carrier responsibility on ISPs serving Goggle to provide edge caching. Fair question.
As Information Service providers, not subject to Title II telecommunications service regulation of the Communications Act, ISPs do not have to provide any service they do not care to offer. This means that any ISP can elect not to offer edge caching, or any form of premium, better than best efforts routing. An ISP serving Goggle can decline to offer Google what it wants—as ill-advised as that would appear.
A Title I (ancillary jurisdiction) requirement of transparency and nondiscrimination would require any ISP, voluntarily electing to provide edge caching service, to do so in such as a way as to provide any similarly situated client the option of taking the premium service. This requirement does not impose common carriage and tariff filing duties. It only would prohibit ISPs from cutting exclusive, “most favored customer” arrangements that no other client would know about and have an opportunity to take.
ISPs should have the opportunity to offer tiered services that offer different levels of service. But in doing so, ISPs should not have the option of making exclusive deals, obscured by nondisclosure agreements.
Quality of service and price differentiation can provide legitimate and lawful discrimination, subject to conditions and sanctions. ISPs would trigger sanctions for engaging in unfair trade practices by degrading service, e.g., dropping packets, to non-premium customers in the absence of severe congestion, and by deliberately partitioning their networks so that best efforts routing options are guaranteed to achieve unacceptably inferior service.
As Information Service providers, not subject to Title II telecommunications service regulation of the Communications Act, ISPs do not have to provide any service they do not care to offer. This means that any ISP can elect not to offer edge caching, or any form of premium, better than best efforts routing. An ISP serving Goggle can decline to offer Google what it wants—as ill-advised as that would appear.
A Title I (ancillary jurisdiction) requirement of transparency and nondiscrimination would require any ISP, voluntarily electing to provide edge caching service, to do so in such as a way as to provide any similarly situated client the option of taking the premium service. This requirement does not impose common carriage and tariff filing duties. It only would prohibit ISPs from cutting exclusive, “most favored customer” arrangements that no other client would know about and have an opportunity to take.
ISPs should have the opportunity to offer tiered services that offer different levels of service. But in doing so, ISPs should not have the option of making exclusive deals, obscured by nondisclosure agreements.
Quality of service and price differentiation can provide legitimate and lawful discrimination, subject to conditions and sanctions. ISPs would trigger sanctions for engaging in unfair trade practices by degrading service, e.g., dropping packets, to non-premium customers in the absence of severe congestion, and by deliberately partitioning their networks so that best efforts routing options are guaranteed to achieve unacceptably inferior service.
Tuesday, December 23, 2008
Wall Street Journal 100% Record Sustained—Deliberately Getting it Wrong on Network Neutrality
Month after month the Wall Street Journal (“WSJ”) pursues what appears to be a deliberate strategy of misinformation on the issue of Network Neutrality. The latest installment appears in Dec. 23rd editorial written by Gordon Crovitz who attempts to equate Google’s enhanced use of edge caching as evidence that the entire matter of Network Neutrality has been much ado about nothing. See http://online.wsj.com/article/SB122990349014725127.html.
Mr. Crovitz starts by referring to a widely discredited WSJ article that reported on Google’s edge caching strategy and implied that such a strategy would violate Network Neutrality principles and evidences Google’s abandonment of advocacy for such principles. I would think the WSJ would applaud Google’s apparent change of heart from free rider of Internet resources to conscientious underwriter of the links that take content from the Googleplex to various servers closer to people making Internet searches. Instead Mr. Crovitz reiterates the red herring that companies like Goggle, Yahoo and Microsoft (key Network Neutrality advocates) “don’t want to have to pay tolls to the companies that provide the Web infrastructure.”
Does anyone see the irony in this statement? Goggle intends on paying more than it previously has paid for what I call “better than best efforts” routing of traffic. The existing traffic routing (“peering”) arrangements of the Internet Service Providers (“ISPs”) that carry Google’s traffic on a plain vanilla, “best efforts” basis do not include premium service. So Google will have to pay for superior distribution of the most commonly searched for results, just as CBS pays for ISPs to deliver “mission critical” bits corresponding to webcasts of March Madness college tournament basketball games.
Previously Google was pilloried for allegedly not paying for any access to consumers, a falsity that many believed despite the fact that Goggle does pay its ISPs and apparently has expressed a willingness to pay more. By the way, the downstream ISPs that also handle Google traffic also have received payment, directly from subscribers and also through barter agreements where ISPs offer access to their networks in lieu of direct payments.
As I have written in my blog, (see http://telefrieden.blogspot.com/2008/12/edge-caching-and-better-than-best.html) premium routing of content does not violate my sense of Network Neutrality, provided ISPs offer such service in a transparent and nondiscriminatory manner. My sense of Network Neutrality would only require ISPs not to drop packets deliberately as a ruse to force either end users or content providers to trade up in service, or to so partition their networks to all but guarantee that plain vanilla, regular service (best efforts routing ) becomes inadequate.
No fair minded advocate for Network Neutrality has rejected reasonable efforts by ISPs to manage their networks, nor does Network Neutrality somehow convert ISPs from information service providers into common carrier, public utilities as Mr. Crovitz alleges. He also makes the bold assertion that the United States’ poor standing in terms of broadband access directly results from Network Neutrality advocacy that creates disincentives for ISPs to invest in infrastructure.
Surely Mr. Crovitz knows that the FCC does not treat ISPs as telephone companies. Likewise neither the FCC nor any reasonable interpretation of its Internet policies foreclose ISPs from providing tiered services, or from accruing triple digit rates of return for Internet access, a reality some of the WSJ’s buy side stock analysts could confirm.
Perhaps Mr. Crovitz sees common carrier regulation in the manner in which the FCC responded to complaints about how Comcast throttled peer-to-peer traffic. Of course the FCC did not mandate common carrier nondiscrimination. The Commission did state that an ISP cannot use software that deliberately drops packets and thwarts delivery of traffic all the time without regard to whether actual network congestion exists. It strains credulity to characterize Comcast’s tactics as nothing more than ensuring that non peer-to-peer traffic “could move more smoothly,” unless Mr. Crovitz has some new evidence to prove that if Comcast did not resort to traffic throttling its network would perform in an inferior manner.
Lastly Mr. Crovitz appears to dismiss the Network Neutrality as nothing more than a tactical strategy by major content providers to avoid having to pay their fair share of the costs ISPs incur to provide Internet access. Like other opponents of Network Neutrality he ignores the major investments Google and other content providers have made to create compelling content which provide reasons for consumers to pay sizeable rates for Internet access. He conveniently ignores that the ISPs providing content delivery offer reciprocal access in lieu of cash payment, or perhaps he has bought into the notion that somehow Goggle and other content providers have managed to cheat ISPs of the right to charge both end user subscribers and upstream content providers.
Unlike telephone networks, the Internet seamlessly combines telecommunications bit delivery with access to content. Monthly Internet access subscriptions amply compensate ISPs and one would think Mr. Crovitz and the WSJ would use their bully pulpit to praise Google and others for providing new revenue streams for incumbent telephone and cable companies.
Mr. Crovitz starts by referring to a widely discredited WSJ article that reported on Google’s edge caching strategy and implied that such a strategy would violate Network Neutrality principles and evidences Google’s abandonment of advocacy for such principles. I would think the WSJ would applaud Google’s apparent change of heart from free rider of Internet resources to conscientious underwriter of the links that take content from the Googleplex to various servers closer to people making Internet searches. Instead Mr. Crovitz reiterates the red herring that companies like Goggle, Yahoo and Microsoft (key Network Neutrality advocates) “don’t want to have to pay tolls to the companies that provide the Web infrastructure.”
Does anyone see the irony in this statement? Goggle intends on paying more than it previously has paid for what I call “better than best efforts” routing of traffic. The existing traffic routing (“peering”) arrangements of the Internet Service Providers (“ISPs”) that carry Google’s traffic on a plain vanilla, “best efforts” basis do not include premium service. So Google will have to pay for superior distribution of the most commonly searched for results, just as CBS pays for ISPs to deliver “mission critical” bits corresponding to webcasts of March Madness college tournament basketball games.
Previously Google was pilloried for allegedly not paying for any access to consumers, a falsity that many believed despite the fact that Goggle does pay its ISPs and apparently has expressed a willingness to pay more. By the way, the downstream ISPs that also handle Google traffic also have received payment, directly from subscribers and also through barter agreements where ISPs offer access to their networks in lieu of direct payments.
As I have written in my blog, (see http://telefrieden.blogspot.com/2008/12/edge-caching-and-better-than-best.html) premium routing of content does not violate my sense of Network Neutrality, provided ISPs offer such service in a transparent and nondiscriminatory manner. My sense of Network Neutrality would only require ISPs not to drop packets deliberately as a ruse to force either end users or content providers to trade up in service, or to so partition their networks to all but guarantee that plain vanilla, regular service (best efforts routing ) becomes inadequate.
No fair minded advocate for Network Neutrality has rejected reasonable efforts by ISPs to manage their networks, nor does Network Neutrality somehow convert ISPs from information service providers into common carrier, public utilities as Mr. Crovitz alleges. He also makes the bold assertion that the United States’ poor standing in terms of broadband access directly results from Network Neutrality advocacy that creates disincentives for ISPs to invest in infrastructure.
Surely Mr. Crovitz knows that the FCC does not treat ISPs as telephone companies. Likewise neither the FCC nor any reasonable interpretation of its Internet policies foreclose ISPs from providing tiered services, or from accruing triple digit rates of return for Internet access, a reality some of the WSJ’s buy side stock analysts could confirm.
Perhaps Mr. Crovitz sees common carrier regulation in the manner in which the FCC responded to complaints about how Comcast throttled peer-to-peer traffic. Of course the FCC did not mandate common carrier nondiscrimination. The Commission did state that an ISP cannot use software that deliberately drops packets and thwarts delivery of traffic all the time without regard to whether actual network congestion exists. It strains credulity to characterize Comcast’s tactics as nothing more than ensuring that non peer-to-peer traffic “could move more smoothly,” unless Mr. Crovitz has some new evidence to prove that if Comcast did not resort to traffic throttling its network would perform in an inferior manner.
Lastly Mr. Crovitz appears to dismiss the Network Neutrality as nothing more than a tactical strategy by major content providers to avoid having to pay their fair share of the costs ISPs incur to provide Internet access. Like other opponents of Network Neutrality he ignores the major investments Google and other content providers have made to create compelling content which provide reasons for consumers to pay sizeable rates for Internet access. He conveniently ignores that the ISPs providing content delivery offer reciprocal access in lieu of cash payment, or perhaps he has bought into the notion that somehow Goggle and other content providers have managed to cheat ISPs of the right to charge both end user subscribers and upstream content providers.
Unlike telephone networks, the Internet seamlessly combines telecommunications bit delivery with access to content. Monthly Internet access subscriptions amply compensate ISPs and one would think Mr. Crovitz and the WSJ would use their bully pulpit to praise Google and others for providing new revenue streams for incumbent telephone and cable companies.
Sunday, December 21, 2008
No Way to Put the Public Back in Public Utilities?
Several years ago many state legislatures embraced the concept that technological innovations would stimulate robust competition in previously monopolized industries such as electricity, gas and telecommunications. The legislatures so bought into the certainty of competition that laws created a glide path to deregulation and the near complete elimination of consumer safeguards. The legislature accepted the premise of lobbyists and sponsored academic researchers that public utilities should qualify for treatment as competitive businesses surely entitled to cut off services to nonpaying customers, an outcome that has contributed to 81 deaths in Pennsylvania. See http://www.centredaily.com/329/story/1026815.html.
With the passage of time, it has become quite clear that infrastructure industries with substantial investment needs do not typically have many facilities-based competitors, especially for the last mile of service to residential and small business consumers. Yet most state legislatures have not revise their laws, even after the Enron debacle showed how crafty public utility employees could exploit their less regulated status to create expensive, but artificial bottlenecks, congestion and shortages of power.
Having cut a deal based on the certain expectation of competition, state legislatures did not think to condition deregulation on confirmation that the competition arrived and flourished. Without such a safeguard, deregulated public utilities surely will claim that they relied on the promise of deregulation and any revision would unfairly and unlawfully confiscate their financial resources. So public utility consumers in many states have the worst of all worlds: deregulation based on competition that did not arrive and apparently no remedy for resumption of consumer safeguards in the absence of a self-regulating marketplace.
With the passage of time, it has become quite clear that infrastructure industries with substantial investment needs do not typically have many facilities-based competitors, especially for the last mile of service to residential and small business consumers. Yet most state legislatures have not revise their laws, even after the Enron debacle showed how crafty public utility employees could exploit their less regulated status to create expensive, but artificial bottlenecks, congestion and shortages of power.
Having cut a deal based on the certain expectation of competition, state legislatures did not think to condition deregulation on confirmation that the competition arrived and flourished. Without such a safeguard, deregulated public utilities surely will claim that they relied on the promise of deregulation and any revision would unfairly and unlawfully confiscate their financial resources. So public utility consumers in many states have the worst of all worlds: deregulation based on competition that did not arrive and apparently no remedy for resumption of consumer safeguards in the absence of a self-regulating marketplace.
Thursday, December 18, 2008
Apple iPhone Apps Store—Refreshing Openness or Walled Garden?
Apple Computer has received high praise for the diversity of applications available for the iPhone. The company shows great willingness to accept third party software innovations. But Apple also solely decides whether to accept and make available any application. Rejected software vendors for the most part do not exist if they do not have shelf space at the Apple store. The possibility exists that iPhone users can download and install non-Apple endorsed software, but more likely Apple could reject any third party application when users download next generation Apple operating system software.
Apple serves as a bellwether for openness and innovation even as it appears to treats users’ screens as Apple property for a “walled garden” of its choosing. Consider this scenario: Apple cuts an exclusive deal with Exxon-Mobil for a GPS-based locator for nearby Exxon-Mobile gas stations. A new startup venture Cheapgas, Inc. has devised a GPS-based locators for all nearby gas stations, coupled with user reports on the per gallon rates for most of the listed stations. Exxon-Mobile invokes the exclusivity clause in its contract with Apple forcing Apple to reject the Cheapgas proposal for inclusion in the IPhone Apps Store. Cheapgas may try to find ways for iPhone owners to download the software, but even if this alternative is possible, far fewer downloads likely will result as users do not risk “bricking” their phone, or they simply take the path of least resistance and stick with the easy app download process offered by Apple.
Does Apple’s walled garden strategy violate a fair-minded concept of network neutrality? Does Apple rightly control what can appear on iPhone screens? Do exclusivity contracts, like that negotiated between DirecTV and Dish Network satellite operators, promote diversity and innovation?
Apple serves as a bellwether for openness and innovation even as it appears to treats users’ screens as Apple property for a “walled garden” of its choosing. Consider this scenario: Apple cuts an exclusive deal with Exxon-Mobil for a GPS-based locator for nearby Exxon-Mobile gas stations. A new startup venture Cheapgas, Inc. has devised a GPS-based locators for all nearby gas stations, coupled with user reports on the per gallon rates for most of the listed stations. Exxon-Mobile invokes the exclusivity clause in its contract with Apple forcing Apple to reject the Cheapgas proposal for inclusion in the IPhone Apps Store. Cheapgas may try to find ways for iPhone owners to download the software, but even if this alternative is possible, far fewer downloads likely will result as users do not risk “bricking” their phone, or they simply take the path of least resistance and stick with the easy app download process offered by Apple.
Does Apple’s walled garden strategy violate a fair-minded concept of network neutrality? Does Apple rightly control what can appear on iPhone screens? Do exclusivity contracts, like that negotiated between DirecTV and Dish Network satellite operators, promote diversity and innovation?
Tuesday, December 16, 2008
Edge Caching and Better Than Best Efforts Routing
A recent WSJ article has caused a tempest in a teapot over the possibility that standard bearers for network neutrality, such as Google, have gone over to the dark side in favor of something akin to “better than best efforts” routing. See http://online.wsj.com/article/SB122929270127905065.html; Others dispute this; see http://www.circleid.com/posts/google_seeking_preferential_treatment_isps/. In reality, Google seeks to pay a premium for distributing most likely to be requested search answers to proxy servers closer to the search initiator.
I do not see how this violates network neutrality, because Google seeks only the very same sort of expedited delivery of “mission critical” packets as CBS would for its coverage of March Madness basketball and Victoria’s Secret for its webcasted fashion shows. Better than best efforts routing, like that offered by Akamai, reduces the number of routers and the potential for lost packets and latency. Both subscribers downstream from content and upstream content providers should have the opportunity to pay for better than best efforts, plain vanilla packet routing. But network neutrality concerns weigh in when and if ISPs deliberately drop packets as a ruse to force either end users or content providers to trade up in service, or when ISPs so partition their networks to all but guarantee that best efforts routing will result in inadequate service.
I do not see how this violates network neutrality, because Google seeks only the very same sort of expedited delivery of “mission critical” packets as CBS would for its coverage of March Madness basketball and Victoria’s Secret for its webcasted fashion shows. Better than best efforts routing, like that offered by Akamai, reduces the number of routers and the potential for lost packets and latency. Both subscribers downstream from content and upstream content providers should have the opportunity to pay for better than best efforts, plain vanilla packet routing. But network neutrality concerns weigh in when and if ISPs deliberately drop packets as a ruse to force either end users or content providers to trade up in service, or when ISPs so partition their networks to all but guarantee that best efforts routing will result in inadequate service.
Friday, December 12, 2008
The Downsides in Maximizing Spectrum Auction Proceeds
My classical economics training suggests that when governments maximize spectrum auctions—or the award of any franchise—the nation “wins” by awarding a public resource to the party most willing and able to maximize the value reflected by the asset. Surely a venture willing to part with the most money has maximum motivation to operate efficiently and to offer consumers what they want.
But might there exist long term downsides when the process extracts maximum value for the treasury? I think so, particularly in light of recent suggestions from economists that any condition on spectrum use, or any restriction on who qualifies to bid, simply reduces what the government will reap without any public benefit.
Most recently some economists grew apoplectic at the FCC’s small endorsement of wireless Carterfone principles and somewhat more open spectrum access to the C Block of the 700 MHz spectrum auction. True enough somewhat greater access translates into somewhat less revenue to the treasury, but might long standing public benefits compensate for this shortfall? I believe so, in light of how greater accessibility typically triggers greater competition, more robust and diverse applications and uses for spectrum and opportunities for spectrum users to customize their services. The wired Carterfone policy triggered competition in the market for handsets as well as uses for basic telecommunications line transport.
I will go one step farther and suggest that had the FCC maintained a cap on the amount of aggregate spectrum any single venture could control, the ensuring competition generated by market entrants would have forced incumbent carriers, such as Verizon and AT&T to compete more aggressively on price and perhaps even on network accessibility. One cannot readily quantify the downstream financial benefits when a nation establishes policies that in the short term lower auction proceeds, but surely enhances spectrum consumer welfare in the long term.
There certainly is one financial impact no one seems to consider when national treasuries reap billions in auction proceeds: the treasury probably will not receive much in the way of future tax proceeds from ventures able to spread its auction bid amount as an offset against current revenues.
But might there exist long term downsides when the process extracts maximum value for the treasury? I think so, particularly in light of recent suggestions from economists that any condition on spectrum use, or any restriction on who qualifies to bid, simply reduces what the government will reap without any public benefit.
Most recently some economists grew apoplectic at the FCC’s small endorsement of wireless Carterfone principles and somewhat more open spectrum access to the C Block of the 700 MHz spectrum auction. True enough somewhat greater access translates into somewhat less revenue to the treasury, but might long standing public benefits compensate for this shortfall? I believe so, in light of how greater accessibility typically triggers greater competition, more robust and diverse applications and uses for spectrum and opportunities for spectrum users to customize their services. The wired Carterfone policy triggered competition in the market for handsets as well as uses for basic telecommunications line transport.
I will go one step farther and suggest that had the FCC maintained a cap on the amount of aggregate spectrum any single venture could control, the ensuring competition generated by market entrants would have forced incumbent carriers, such as Verizon and AT&T to compete more aggressively on price and perhaps even on network accessibility. One cannot readily quantify the downstream financial benefits when a nation establishes policies that in the short term lower auction proceeds, but surely enhances spectrum consumer welfare in the long term.
There certainly is one financial impact no one seems to consider when national treasuries reap billions in auction proceeds: the treasury probably will not receive much in the way of future tax proceeds from ventures able to spread its auction bid amount as an offset against current revenues.
Tuesday, December 2, 2008
Lessons From the Hawaii Telcom Bankruptcy
Hawaii Telcom, the incumbent local exchange telephone company, has filed for bankruptcy protection. Press accounts attribute this outcome to increased competition, the company’s struggle to finance capital spending while making debt payments, a significant downturn in the economy, as well as the difficulties in the transition following the leveraged buyout of the company from Verizon Communications Inc. See http://www.starbulletin.com/news/bulletin/35318244.html.
I have a few other bogus and credible explanations that may offer greater insights. When something like this happens, it seems too easy for the culprits to evade responsibility by invoking the “perfect storm” explanation as appeared in the press account above. No person or group bears any specific responsibility. Bad things happen like the breaching of flood gates and levees in New Orleans. The perfect storm defense does not just shift the blame, it deflects the responsibility and accountability issue by claiming something akin to force majeure, an unavoidable event, or series of unfortunate events.
Another bogus defense invokes the “destructive” aspect of capitalism and competition. Joseph Schumpeter, an Austrian economist coined the phrase “creative destruction” in the early 1900s to refer to the long run creative and production benefits accruing when new firms replace failing firms. Some economists consider competition destructive if after a short period of low prices, competitors exit the market and consumers end up worse off by having fewer choices as surviving firms raise prices to recoup previous losses.
In HawTel’s case the firm’s troubles have not resulted primarily from macro-level assaults on its bottom line by the business cycle, VoIP and the cost of capital. As to destructive competition, few if any informed industry observers would declare local exchange telephony a natural monopoly, entitled to insulation from competition presumably in exchange for rigorous rate of return, public utility regulation.
The massive fees extracted from the leveraged buyout of HawTel, coupled with a vastly greater debt burden, sank the firm. Time after time state and federal regulators accept the pitch that a merger or acquisition will serve the public interest by “promoting competition” and “enhancing productivity and efficiency.” In reality some leveraged buyouts make the deal makers rich and the public worse off. A firm saddled with far greater debt may not have the wherewithal to handle its vastly higher debt load. The so called efficiency gains result by firing workers and cutting corners on customer service, maintenance and infrastructure upgrades. In HawTel’s case the house of cards fell down, and it may appear that the Carlyle Group, the private equity firm buyer of HawTel, ends up with a losing investment. I suspect that with close forensic scrutiny of the deal, the Carlyle Group, was able to extract ample upfront fees to abate if not eliminate the financial harm resulting from HawTel’s bankruptcy. Hawaiian wireline telephone subscribers probably will not end up harm free.
I have a few other bogus and credible explanations that may offer greater insights. When something like this happens, it seems too easy for the culprits to evade responsibility by invoking the “perfect storm” explanation as appeared in the press account above. No person or group bears any specific responsibility. Bad things happen like the breaching of flood gates and levees in New Orleans. The perfect storm defense does not just shift the blame, it deflects the responsibility and accountability issue by claiming something akin to force majeure, an unavoidable event, or series of unfortunate events.
Another bogus defense invokes the “destructive” aspect of capitalism and competition. Joseph Schumpeter, an Austrian economist coined the phrase “creative destruction” in the early 1900s to refer to the long run creative and production benefits accruing when new firms replace failing firms. Some economists consider competition destructive if after a short period of low prices, competitors exit the market and consumers end up worse off by having fewer choices as surviving firms raise prices to recoup previous losses.
In HawTel’s case the firm’s troubles have not resulted primarily from macro-level assaults on its bottom line by the business cycle, VoIP and the cost of capital. As to destructive competition, few if any informed industry observers would declare local exchange telephony a natural monopoly, entitled to insulation from competition presumably in exchange for rigorous rate of return, public utility regulation.
The massive fees extracted from the leveraged buyout of HawTel, coupled with a vastly greater debt burden, sank the firm. Time after time state and federal regulators accept the pitch that a merger or acquisition will serve the public interest by “promoting competition” and “enhancing productivity and efficiency.” In reality some leveraged buyouts make the deal makers rich and the public worse off. A firm saddled with far greater debt may not have the wherewithal to handle its vastly higher debt load. The so called efficiency gains result by firing workers and cutting corners on customer service, maintenance and infrastructure upgrades. In HawTel’s case the house of cards fell down, and it may appear that the Carlyle Group, the private equity firm buyer of HawTel, ends up with a losing investment. I suspect that with close forensic scrutiny of the deal, the Carlyle Group, was able to extract ample upfront fees to abate if not eliminate the financial harm resulting from HawTel’s bankruptcy. Hawaiian wireline telephone subscribers probably will not end up harm free.
Friday, November 21, 2008
Demand Elasticity for ICE Services
The Wall Street Journal today reported that many electricity utilities in the United States have experienced an unexpected decline in demand, particularly from residential users. It comes as no surprise to me that even essential public utility services have some demand elasticity, i.e., consumption declines when consumers feel financially strapped. When one worries about job stability, or in my case coming up with a Cornell tuition, electricity consumption becomes one of many costs subject to greater scrutiny and conservation.
Does heightened scrutiny extend to information, communications and entertainment expenses particularly as companies providing these services experiment with new ways to extract greater compensation from high volume users? I think so, particularly for consumers being weaned off “all you can eat” unmetered service which has served as the predominant pricing model for Internet access.
In economics a concept called the “fallacy of consumption” warns that if many consumers start to reduce consumption service providers and consumers can become worse off. Internet service providers, keen on extracting surcharges from power users, have to consider the consequences that heavy volume users decide to throttle down on their consumption rather than pay more.
Similarly, it may come to pass that even recession resistant industries such as cable television and mobile telephony, may have to confront the possibility that they cannot raise rates without a reduction in subscribership or shift in service tiers. That said, this week I received a bill from my wireline local exchange carrier that noted a minor rate increase. One would think that wireline telephone companies, facing the triple threat of competition from cable operators, churn to wireless options and the poor economy would not opt to raise rates. Perhaps this telephone company banks on plenty of users displaying inelastic demand for such a traditional service.
Does heightened scrutiny extend to information, communications and entertainment expenses particularly as companies providing these services experiment with new ways to extract greater compensation from high volume users? I think so, particularly for consumers being weaned off “all you can eat” unmetered service which has served as the predominant pricing model for Internet access.
In economics a concept called the “fallacy of consumption” warns that if many consumers start to reduce consumption service providers and consumers can become worse off. Internet service providers, keen on extracting surcharges from power users, have to consider the consequences that heavy volume users decide to throttle down on their consumption rather than pay more.
Similarly, it may come to pass that even recession resistant industries such as cable television and mobile telephony, may have to confront the possibility that they cannot raise rates without a reduction in subscribership or shift in service tiers. That said, this week I received a bill from my wireline local exchange carrier that noted a minor rate increase. One would think that wireline telephone companies, facing the triple threat of competition from cable operators, churn to wireless options and the poor economy would not opt to raise rates. Perhaps this telephone company banks on plenty of users displaying inelastic demand for such a traditional service.
Monday, November 17, 2008
Voodoo Economic Modeling and Telecom Policy
In my capacity as a university professor, one of the ways I serve “the academy” involves blind peer review of journal manuscripts. I also have the opportunity to read the academic literature. I marvel at the number of instances where someone—typically holding a PhD in economics—uses a model to rationalize a regulatory agency decision, or to quantify the harm resulting from an ill-advised initiative. The use of complex equations, complete with Greek symbols, attempts to legitimize any sort of bogus conclusion. Worse yet, far too many of these models did not arise out of an academic’s intellectually curious mind, but instead provides some scientific basis for a public policy outcome sought by a specific stakeholder who has financially sponsored the research.
This constitutes a corruption of academic research. The sponsored researcher does not disclose the direct sponsorship, e.g. payment, or the indirect process where a foundation, institute, or think tank receives funding that flows through to the researcher. In far too many instances notwithstanding some impressive math, the sponsored researcher concludes that a merger or acquisition will serve the public interest by “promoting competition.” Other researchers quantify the financial harm to the public or national treasury should the FCC do something or refrain from doing something.
Recently I have reviewed work that purports to quantify how much wireless subscribers benefit from access to subsidized handsets. I also have read a study that purports to quantify how much application of the wireless Carterfone policy would reduce carrier revenues, create disincentives for investment in new wireless infrastructure, promote further industry consolidation and reduce carrier profitability. Wow! Such big numbers all from a policy that I enthusiastically endorse, because it promotes competition among wireless carriers who cannot easily lock subscribers into a two year service commitment, and who cannot block subscribers from accessing content and software that competes with offerings of the carrier or a favored affiliate.
Both studies conveniently ignore counter arguments to their sponsor’s objective. In the case of subsidized handsets, seeing that wireless carriers do not operate as charities, might the carriers fully recoup the subsidy through the two year service commitment and the ability to charge rates in excess of what they would be if customers could more readily change carriers? In terms of the harm to the national treasury, carriers, and “innovation” the research conveniently ignores the public interest and individual consumer benefit in having access to more and different content, not just what the carrier’s “walled garden” offers. Might a substantial consumer welfare gain accrue when wireless consumers can buy cheaper and even used handsets and possibly force wireless carriers to offer cheaper service options for subscribers who trigger no handset subsidy obligation?
It has become painfully clear to me that if you see though the math equations, the sponsored researcher know what buttons to push a public policy initiative. These include:
Quantification of how many jobs a sought after initiative will create;
Estimates of how much money a change in regulatory policy will cost consumers;
Quantified claims that a change in policy will create disincentives for investment in $x billions; extra points for using the non-word incentivize; and
Estimates of how much money regulation will cost the sponsor, with no offsetting estimate of what consumer savings will accrue from more competition.
Let’s hope a new FCC will rely less on bogus, sponsored research to legitimize an preordained policy outcome.
This constitutes a corruption of academic research. The sponsored researcher does not disclose the direct sponsorship, e.g. payment, or the indirect process where a foundation, institute, or think tank receives funding that flows through to the researcher. In far too many instances notwithstanding some impressive math, the sponsored researcher concludes that a merger or acquisition will serve the public interest by “promoting competition.” Other researchers quantify the financial harm to the public or national treasury should the FCC do something or refrain from doing something.
Recently I have reviewed work that purports to quantify how much wireless subscribers benefit from access to subsidized handsets. I also have read a study that purports to quantify how much application of the wireless Carterfone policy would reduce carrier revenues, create disincentives for investment in new wireless infrastructure, promote further industry consolidation and reduce carrier profitability. Wow! Such big numbers all from a policy that I enthusiastically endorse, because it promotes competition among wireless carriers who cannot easily lock subscribers into a two year service commitment, and who cannot block subscribers from accessing content and software that competes with offerings of the carrier or a favored affiliate.
Both studies conveniently ignore counter arguments to their sponsor’s objective. In the case of subsidized handsets, seeing that wireless carriers do not operate as charities, might the carriers fully recoup the subsidy through the two year service commitment and the ability to charge rates in excess of what they would be if customers could more readily change carriers? In terms of the harm to the national treasury, carriers, and “innovation” the research conveniently ignores the public interest and individual consumer benefit in having access to more and different content, not just what the carrier’s “walled garden” offers. Might a substantial consumer welfare gain accrue when wireless consumers can buy cheaper and even used handsets and possibly force wireless carriers to offer cheaper service options for subscribers who trigger no handset subsidy obligation?
It has become painfully clear to me that if you see though the math equations, the sponsored researcher know what buttons to push a public policy initiative. These include:
Quantification of how many jobs a sought after initiative will create;
Estimates of how much money a change in regulatory policy will cost consumers;
Quantified claims that a change in policy will create disincentives for investment in $x billions; extra points for using the non-word incentivize; and
Estimates of how much money regulation will cost the sponsor, with no offsetting estimate of what consumer savings will accrue from more competition.
Let’s hope a new FCC will rely less on bogus, sponsored research to legitimize an preordained policy outcome.
Friday, October 3, 2008
Unlicensed White Space Use as an Airwave “Freeze”
Professors Tom Hazlett and Vernon Smith have an op ed piece in the Oct. 3rd edition of the Wall Street Journal entitled “Don’t Let Google Freeze the Airwaves.” Apparently advocacy by Google, Microsoft, the New America Foundation and others in favor of unlicensed access to unused broadcast television channels freezes out even better reallocation of spectrum that could eventually be auctioned off for highly efficient private use.
Professors Hazlett and Smith appear to think private, unlicensed use could not possibly be as efficient as the command and control provided by a single owner keen on recouping its investments. Using the Professors’ rationale, would unlicensed Wi-Fi home network operators be better off if a single venture secured the 2.4 GHz band and packaged innovative home networking “solutions”? Not for me. I’m doing just fine managing spectrum quite efficiently using a device whose manufacturer bore no great burden proving to the FCC that the device would not cause harmful interference. Millions of Wi-Fi network operators do not have to pay a dime for the privilege of using spectrum and they surely do not need a spectrum owner to restrict their freedom and charge them for the privilege of using public spectrum.
The same principle applies to the millions of cordless telephone users. Should we have to pay a fee to the telephone company, or whoever acquired the cordless telephone frequencies for the privilege of using cordless handsets? Of course not. There are plenty of instances where spectrum use does not have to be coordinated, managed and priced by a single licensee.
Consider all the innovations and consumer friendly applications that entrepreneurs have developed for unlicensed spectrum. One upcoming application, using low powered “femtocells” makes it possible to extend licensed cellular telephone service and signal penetration into homes and offices. Some femtocells use the unlicensed Wi-Fi frequency band while others transmit on licensed cellular radio frequencies. In either case, consumers benefit equally. However, if the Wi-Fi spectrum became inventory held by a venture other than a cellular company, we could expect the Wi-Fi spectrum owner to demand gatekeeper or bottleneck compensation, or at least to delay and complicate the beneficial extension of cellular telephone service inside buildings.
I share with Professors Hazlett and Smith antipathy toward maintaining status quo spectrum allocations that favor incumbent users and ignore technological innovations. However I part company with them in their apparently absolute dismissal of the spectrum sharing between incumbents and new users. The Professors’ model replaces one incumbent with superior, but unjustified, access rights for another who paid for the right. In both instances incumbency works against free, shared use by unlicensed operators who surely can exploit technological innovations that provide innovative and entrepreneurial ways to satisfy telecommunications and information processing requirements.
Professors Hazlett and Smith appear to think private, unlicensed use could not possibly be as efficient as the command and control provided by a single owner keen on recouping its investments. Using the Professors’ rationale, would unlicensed Wi-Fi home network operators be better off if a single venture secured the 2.4 GHz band and packaged innovative home networking “solutions”? Not for me. I’m doing just fine managing spectrum quite efficiently using a device whose manufacturer bore no great burden proving to the FCC that the device would not cause harmful interference. Millions of Wi-Fi network operators do not have to pay a dime for the privilege of using spectrum and they surely do not need a spectrum owner to restrict their freedom and charge them for the privilege of using public spectrum.
The same principle applies to the millions of cordless telephone users. Should we have to pay a fee to the telephone company, or whoever acquired the cordless telephone frequencies for the privilege of using cordless handsets? Of course not. There are plenty of instances where spectrum use does not have to be coordinated, managed and priced by a single licensee.
Consider all the innovations and consumer friendly applications that entrepreneurs have developed for unlicensed spectrum. One upcoming application, using low powered “femtocells” makes it possible to extend licensed cellular telephone service and signal penetration into homes and offices. Some femtocells use the unlicensed Wi-Fi frequency band while others transmit on licensed cellular radio frequencies. In either case, consumers benefit equally. However, if the Wi-Fi spectrum became inventory held by a venture other than a cellular company, we could expect the Wi-Fi spectrum owner to demand gatekeeper or bottleneck compensation, or at least to delay and complicate the beneficial extension of cellular telephone service inside buildings.
I share with Professors Hazlett and Smith antipathy toward maintaining status quo spectrum allocations that favor incumbent users and ignore technological innovations. However I part company with them in their apparently absolute dismissal of the spectrum sharing between incumbents and new users. The Professors’ model replaces one incumbent with superior, but unjustified, access rights for another who paid for the right. In both instances incumbency works against free, shared use by unlicensed operators who surely can exploit technological innovations that provide innovative and entrepreneurial ways to satisfy telecommunications and information processing requirements.
Wednesday, September 24, 2008
Such a Deal: Wireless Service Without a 2 Year Commitment
Today’s Wall Street Journal (at B5B) reports that Verizon Wireless will now allow subscribers to buy unsubsidized handsets in exchange for which subscribers can avoid a two year service commitment. Before you consider this a major concession to consumer sovereignty recognize that Verizon has not announced a discounted service rate to reflect the elimination of a handset subsidy obligation.
The WSJ article notes that Verizon will sell a Blackberry handset for $430 in lieu of the subsidized price of $100. Because Verizon surely does not operate as a charity, the two year service commitment required of subscribers acquiring a subsidized handset, has at least a value of $330 to both Verizon and subscribers. Verizon must build in its monthly service rate sufficient revenue to recoup the $330 over two years. Subscribers slowly pay back the $330 handset subsidy through higher service rates.
When someone becomes a Verizon subscriber using an unsubsidized handset, these subscribers in effect pay a surcharged rate of at least $165 annually by foregoing a handset subsidy yet paying the same rate as handset subsidized subscribers.
Such a deal.
The WSJ article notes that Verizon will sell a Blackberry handset for $430 in lieu of the subsidized price of $100. Because Verizon surely does not operate as a charity, the two year service commitment required of subscribers acquiring a subsidized handset, has at least a value of $330 to both Verizon and subscribers. Verizon must build in its monthly service rate sufficient revenue to recoup the $330 over two years. Subscribers slowly pay back the $330 handset subsidy through higher service rates.
When someone becomes a Verizon subscriber using an unsubsidized handset, these subscribers in effect pay a surcharged rate of at least $165 annually by foregoing a handset subsidy yet paying the same rate as handset subsidized subscribers.
Such a deal.
Tuesday, September 16, 2008
Broadband Statistics and the Lack of Transparency
Above is a prepresentative page constituting the sum total of the FCC's broadband statistics compilation. Might the FCC have both the incentive and the ability to overstate penetration? I'll answer that question with a big yes! The FCC currently uses a 200 kilobits per second threshold and counts an entire zip code as served should one e-rate or other subscriber exist. Even with a 768 kbps thershold and greater geographical granularity the overstate remains. First the FCC does not use actual, measured throughput, but instead relies on carrier reports. Carriers sharing the FCC's incentive to overstate success can claim to meet the 200 or 768 kbps threshold based on a theoretical possibility. So the FCC can reach double digits even in rural areas based on the bogus assumption that 2G terrestrial wireless and satellite broadband exceed a theoretical throughput floor.
Additionally the FCC makes no price comparison, so a triple digit monthly subscription rate offers no disincentive at least for counting options.
The FCC proves the adage that there are lies, damn lies and statistics designed to prove a mission accomplished.
Wednesday, August 20, 2008
Summary of the FCC's Comcast Network Management Order
By a 3-2 vote, the FCC concluded that Comcast violated the Commission’s 2005 Policy Statement on the Internet and broadband service [1] in using software applications to block or delay subscriber peer-to-peer (“P2P”) file transfers. [2] Using quite strong, disapporinvg language, the Commission determined that Comcast unduly interfered with Internet users’ right to access the lawful Internet content and to use the applications of their choice:
Although Comcast asserts that its conduct is necessary to ease network congestion, we conclude that the company’s discriminatory and arbitrary practice unduly squelches the dynamic benefits of an open and accessible Internet and does not constitute reasonable network management. Moreover, Comcast’s failure to disclose the company’s practice to its customers has compounded the harm. [3]
Specifically, the Commission found that Comcast had deployed deep packet inspection equipment throughout its network to monitor the content of its customers’ Internet connections and to block specific types of P2P connections such as that facilitated by the use of BitTorrent software. [4]
Comcast used software to enable the company to masquerade as the recipient of a P2P file transfer sessions and to issue a command to reset, i.e., to stop sending traffic and start again. Comcast forged so-called TCP reset packets [5]even though it appears that the company could have handled the actually occurring traffic volume without having to degrade anyone’s traffic. [6] The Commission noted that while Comcast initially disclaimed any responsibility for its customers’ problems, tests conducted by the Associated Press and Electronic Frontier Foundation suggested that the company selectively interfered with attempts by customers to share files online using P2P applications, a practice that did not violate FCC rules, or Comcast’s service terms and conditions. Comcast later acknowledged that it did target its subscribers’ P2P traffic for interference and that such interference was not limited to times of network congestion.
The FCC concluded that Comcast’s practices did not constitute legitimate network management, because the practices discriminated against specific applications without regard to whether they actually caused congestion by depleting the Comcast network of sufficient bandwidth:
On its face, Comcast’s interference with peer-to-peer protocols appears to contravene the federal policy of “promot[ing] the continued development of the Internet” because that interference impedes consumers from “run[ning] applications . . . of their choice,” rather than those favored by Comcast, and that interference limits consumers’ ability “to access the lawful Internet content of their choice,” including the video programming made available by vendors like Vuze. Comcast’s selective interference also appears to discourage the “development of technologies” — such as peer-to-peer technologies — that “maximize user control over what information is received by individuals . . . who use the Internet” because that interference (again) impedes consumers from “run[ning] applications . . . of their choice,” rather than those favored by Comcast. [7]
The Commission noted that Comcast had an anticompetitive motive to interfere with customers’ use of peer-to-peer applications, because such software provides Internet users with a high-quality video access alternative to cable television services. Such video distribution poses a potential competitive threat to Comcast’s video-on-demand (“VOD”) service. The Commission also concluded that Comcast’s practices were not minimally intrusive, as the company claimed, but rather were invasive in that the company substantially impeded subscribers’ ability to access the content and to use the applications of their choice.
The Commission also concluded that Comcast exacerbated the situation by failing to disclose its practices to consumers. Because Comcast did not provide its customers with notice of the fact that it interfered with customers’ use of P2P applications, customers had no way of knowing when Comcast would interfere with their connections. As a result, the Commission found that many consumers experiencing difficulty using only certain applications would not place blame on Comcast, where it belonged, but rather on the applications themselves, thus further disadvantaging those applications in the competitive marketplace.
Perhaps mindful of the likelihood that Comcast will appeal the FCC’s Order the Commission extensively outlined its statutory authority for having substantive jurisdiction over Comcast’s Internet-based practices and for reaching an administrative decision without a formal rulemaking before adjudication. The Commission claims to have jurisdiction to resolve disputes regarding discriminatory network management practices based primarily on two statutory mandates: 1) Section 230(b) of the Communications Act of 1934, as amended, where Congress stated that it is the policy of the United States “to preserve the vibrant and competitive free market that presently exists for the Internet” as well as “to promote the continued development of the Internet;” and 2) Section 706(a) of the Act, where Congress directs the Commission to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.” [8] Comcast and other parties considered these broad statutory mandates an insufficiently specific in light of the requirements the FCC decided to impose on Comcast.
The FCC also stated that in establishing its 2005 Internet Policy Statement the Commission intended to incorporate the Policy Statement’s principles “into its ongoing policymaking activities.” [9] The FCC noted that contemporaneous with the issuance of its Internet Policy Statement, the Commission released its Wireline Broadband Order that largely eschewed regulation, but specifically warned that “[s]hould we see evidence that providers of telecommunications for Internet access or IP-enabled services are violating these principles, we will not hesitate to take action to address that conduct.” [10]
The FCC opted to exercise jurisdiction over peer-to-peer Internet connections based on the fact that such connections use “communication by wire.” [11] With that direct link to the general jurisdictional grant conferred under Title I of the Communications Act, the Commission exercised its ancillary jurisdiction on the premise that Comcast’s practices adversely impacted national Internet policy.
The Commission rejected Comcast’s argument that any regulation of network access and management violates the Commission 27 year old policy of leaving information services unregulated:
the Commission previously indicated that it would not hesitate to take action in the event that providers violated the principles set forth in the Internet Policy Statement. Moreover, the Commission repeatedly has stated its willingness to exercise the full range of its statutory authority to ensure that providers of cable modem service meet the public interest in a vibrant, competitive market for Internet-related services. For instance, in the Wireline Broadband Order, the Commission found that it had jurisdiction over providers of broadband Internet access services and stated that “we will not hesitate to adopt any non-economic regulatory obligations that are necessary to ensure consumer protection and network security and reliability in this dynamically changing broadband era.” Specifically with regard to cable modem service, in the 2002 Cable Modem Declaratory Ruling sustained by the Supreme Court in Brand X, the Commission sought comment on a wide range of statutory bases for exercising ancillary jurisdiction over cable modem service, including section 230(b) of the Act. The Commission also explicitly mentioned the blocking or impairing of subscriber access by a cable modem service provider as possible triggers for Commission “intervention.” [12]
While deciding that it should act on a case-by-case basis, the Commission held that it did not have to conduct a rulemaking or hearing to investigate and remedy Comcast’s practices:
And to the extent that Comcast implies that our ancillary authority does not extend to adjudications but rather must first be exercised in a rulemaking proceeding, it is simply wrong. The question of whether the Commission has jurisdiction to decide an issue is entirely separate from the question of how the Commission chooses to address that issue. Perhaps more to the point, the D.C. Circuit has affirmed the Commission’s exercise of ancillary authority in an adjudicatory proceeding and in the absence of regulations before. [13]
The FCC concluded that “Comcast has several available options it could use to manage network traffic without discriminating as it does” [14] including imposing caps on average users’ capacity and then charging overage fees, throttle back the connection speeds of high-capacity users (rather than any user who relies on peer-to-peer technology, no matter how infrequently) and working with the application vendors themselves. Notwithstanding the fact that Comcast and other Internet Service Providers have pursued each of these options, the Commission determined that Comcast had to change its network management practices on a timely basis and to act with greater transparency. [15] Within 30 days of release of the Commission’s Order Comcast must:
· Disclose the details of its discriminatory network management practices to the Commission;
· Submit a compliance plan describing how it intends to stop these discriminatory management practices by the end of the year; and
· Disclose to customers and the Commission the network management practices that will replace current practices. [16]
The FCC warned Comcast that if it fails to comply with the steps set forth in the Order, the Commission will impose immediate interim injunctive relief requiring the company to suspend its discriminatory network management practices pending a hearing. [17]
[1] Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Docket No. 02-33, Policy Statement, 20 FCC Rcd. 14986 (2005).
[2] Formal Complaint of Free Press and Public Knowledge Against Comcast Corporation for Secretly Degrading Peer-to-Peer Applications, File No. EB-08-IH-1518, Memorandum Opinion and Order, FCC 08-183 (rel. Aug. 20, 2008); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-183A1.doc [hereinafter cited as Comcast Internet Order].
[3] Id. at ¶1.
[4] “When Comcast judges that there are too many peer-to-peer uploads in a given area, Comcast’s equipment terminates some of those connections by sending RST packets. In other words, Comcast determines how it will route some connections based not on their destinations but on their contents; in laymen’s terms, Comcast opens its customers’ mail because it wants to deliver mail not based on the address or type of stamp on the envelope but on the type of letter contained therein. Furthermore, Comcast’s interruption of customers’ uploads by definition interferes with Internet users’ downloads since ‘any end-point that is uploading has a corresponding end-point that is downloading.’ Also, because Comcast’s method, sending RST packets to both sides of a TCP connection, is the same method computers connected via TCP use to communicate with each other, a customer has no way of knowing when Comcast (rather than its peer) terminates a connection.
This practice is not ‘minimally intrusive’ but invasive and outright discriminatory.” Id. at ¶¶41-42(citations omitted).
[5] “When an Internet user opens a webpage, sends an email, or shares a document with a colleague, the user’s computer usually establishes a connection with another computer (such as a server or another end user’s computer) using, for example, the Transmission Control Protocol (TCP). For certain applications to work properly, that connection must be continuous and reliable. Computers linked via a TCP connection monitor that connection to ensure that packets of data sent from one user to the other over the connection ‘arrive in sequence and without error,’ at least from the perspective of the receiving computer. If either computer detects that “something seriously wrong has happened within the network,” it sends a ‘reset packet’ or ‘RST packet’ to the other, signaling that the current connection should be terminated and a new connection established “if reliable communication is to continue.” Id. at ¶39 (citations omitted).
[6] “Comcast’s practice is overinclusive for at least three independent reasons. First, it can affect customers who are using little bandwidth simply because they are using a disfavored application. Second, it is not employed only during times of the day when congestion is prevalent . . .. And third, its equipment does not appear to target only those neighborhoods that have congested nodes — evidence suggests that Comcast has deployed some of its network management equipment several routers (or hops) upstream from its customers, encompassing a broader geographic and system area. With some equipment deployed over a wider geographic or system area, Comcast’s technique may impact numerous nodes within its network simultaneously, regardless of whether any particular node is experiencing congestion.” Id. at ¶48 (citations omitted).
[7] Id. at ¶43 (citations omitted).
[8] The Commission also invoked the following statutory provisions as further justification for its decision to assume jurisdiction and to order a remedy: Section 1 of the Communications Act, 47 U.S.C. §151, Section 201, 47 U.S.C. §201, Section 256, 47 U.S.C. §256, Section 257, 47 U.S.C. §257 and Section 601(4), 47 U.S.C. §601(4).
[9] Id. at ¶13 quoting 2005 Internet Policy Statement, 20 FCC Rcd. 14988, ¶5.
[10] Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities; Universal Service Obligations of Broadband Providers; Review of Regulatory Requirements for Incumbent LEC Broadband Telecommunications Services; Computer III Further Remand Proceedings: Bell Operating Company Provision of Enhanced Services; 1998 Biennial Regulatory Review — Review of Computer III and ONA Safeguards and Requirements; Conditional Petition of the Verizon Telephone Companies for Forbearance Under 47 U.S.C. § 160(c) with regard to Broadband Services Provided via Fiber to the Premises; Petition of the Verizon Telephone Companies for Declaratory Ruling or, Alternatively, for Interim Waiver with Regard to Broadband Services Provided via Fiber to the Premises; Consumer Protection in the Broadband Era, WC Docket No. 04-242, 05-271, CC Docket Nos. 95-20, 98-10, 01-337, 02-33, Report and Order and Notice of Proposed Rulemaking, 20 FCC Rcd 14853, 14853, ¶96 (2005), petitions for review denied, Time Warner Telecom, Inc. v. FCC, 507 F.3d 205 (3d Cir. 2007).
[11] 47 U.S.C. § 152(a).
[12] Comcast Internet Order at ¶39 (citations omitted).
[13] Comcast Internet Order at ¶38, citing CBS, Inc. v. FCC, 629 F.2d 1, 26–27 (1980) (reasoning that the Commission had, in the context of an adjudication, reasonably construed its ancillary authority to encompass television networks), aff’d, 453 U.S. 367 (1981); Complaint of Carter-Mondale Presidential Committee, Inc. against The ABC, CBS and NBC Television Networks, Memorandum Opinion and Order, 74 FCC 2d 631, para. 25 n.9 (1979) (“Our power to adjudicate complaints involving requests for access to the networks is surely ‘reasonably ancillary to the effective performance of the Commission’s various responsibilities.’” (quoting Southwestern Cable Co., 392 U.S. at 178)); see also New York State Comm’n on Cable Television v. FCC, 749 F.2d 804, 815 (D.C. Cir. 1984) (upholding adjudicatory decision that preempted certain state and local satellite television regulations under Commission’s ancillary authority); Negrete-Rodriguez v. Mukasey, 518 F.3d 497, 504 (7th Cir. 2008) (“An agency is not precluded from announcing new principles in an adjudicative proceeding rather than through notice-and-comment rule-making.”).
[14] Comcast Internet Order at ¶49.
[15] “Comcast’s claim that it has always disclosed its network management practices to its customers is simply untrue. Although Comcast’s Terms of Use statement may have specified that its broadband Internet access service was subject to ‘speed and upstream and downstream rate limitations,’ such vague terms are of no practical utility to the average customer.” Id. at ¶53. “Our overriding aim here is to end Comcast’s use of unreasonable network management practices, and our remedy sends the unmistakable message that Comcast’s conduct must stop.” Id. at ¶54.
[16] Id. at ¶54.
[17] Id. at ¶55.
Although Comcast asserts that its conduct is necessary to ease network congestion, we conclude that the company’s discriminatory and arbitrary practice unduly squelches the dynamic benefits of an open and accessible Internet and does not constitute reasonable network management. Moreover, Comcast’s failure to disclose the company’s practice to its customers has compounded the harm. [3]
Specifically, the Commission found that Comcast had deployed deep packet inspection equipment throughout its network to monitor the content of its customers’ Internet connections and to block specific types of P2P connections such as that facilitated by the use of BitTorrent software. [4]
Comcast used software to enable the company to masquerade as the recipient of a P2P file transfer sessions and to issue a command to reset, i.e., to stop sending traffic and start again. Comcast forged so-called TCP reset packets [5]even though it appears that the company could have handled the actually occurring traffic volume without having to degrade anyone’s traffic. [6] The Commission noted that while Comcast initially disclaimed any responsibility for its customers’ problems, tests conducted by the Associated Press and Electronic Frontier Foundation suggested that the company selectively interfered with attempts by customers to share files online using P2P applications, a practice that did not violate FCC rules, or Comcast’s service terms and conditions. Comcast later acknowledged that it did target its subscribers’ P2P traffic for interference and that such interference was not limited to times of network congestion.
The FCC concluded that Comcast’s practices did not constitute legitimate network management, because the practices discriminated against specific applications without regard to whether they actually caused congestion by depleting the Comcast network of sufficient bandwidth:
On its face, Comcast’s interference with peer-to-peer protocols appears to contravene the federal policy of “promot[ing] the continued development of the Internet” because that interference impedes consumers from “run[ning] applications . . . of their choice,” rather than those favored by Comcast, and that interference limits consumers’ ability “to access the lawful Internet content of their choice,” including the video programming made available by vendors like Vuze. Comcast’s selective interference also appears to discourage the “development of technologies” — such as peer-to-peer technologies — that “maximize user control over what information is received by individuals . . . who use the Internet” because that interference (again) impedes consumers from “run[ning] applications . . . of their choice,” rather than those favored by Comcast. [7]
The Commission noted that Comcast had an anticompetitive motive to interfere with customers’ use of peer-to-peer applications, because such software provides Internet users with a high-quality video access alternative to cable television services. Such video distribution poses a potential competitive threat to Comcast’s video-on-demand (“VOD”) service. The Commission also concluded that Comcast’s practices were not minimally intrusive, as the company claimed, but rather were invasive in that the company substantially impeded subscribers’ ability to access the content and to use the applications of their choice.
The Commission also concluded that Comcast exacerbated the situation by failing to disclose its practices to consumers. Because Comcast did not provide its customers with notice of the fact that it interfered with customers’ use of P2P applications, customers had no way of knowing when Comcast would interfere with their connections. As a result, the Commission found that many consumers experiencing difficulty using only certain applications would not place blame on Comcast, where it belonged, but rather on the applications themselves, thus further disadvantaging those applications in the competitive marketplace.
Perhaps mindful of the likelihood that Comcast will appeal the FCC’s Order the Commission extensively outlined its statutory authority for having substantive jurisdiction over Comcast’s Internet-based practices and for reaching an administrative decision without a formal rulemaking before adjudication. The Commission claims to have jurisdiction to resolve disputes regarding discriminatory network management practices based primarily on two statutory mandates: 1) Section 230(b) of the Communications Act of 1934, as amended, where Congress stated that it is the policy of the United States “to preserve the vibrant and competitive free market that presently exists for the Internet” as well as “to promote the continued development of the Internet;” and 2) Section 706(a) of the Act, where Congress directs the Commission to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.” [8] Comcast and other parties considered these broad statutory mandates an insufficiently specific in light of the requirements the FCC decided to impose on Comcast.
The FCC also stated that in establishing its 2005 Internet Policy Statement the Commission intended to incorporate the Policy Statement’s principles “into its ongoing policymaking activities.” [9] The FCC noted that contemporaneous with the issuance of its Internet Policy Statement, the Commission released its Wireline Broadband Order that largely eschewed regulation, but specifically warned that “[s]hould we see evidence that providers of telecommunications for Internet access or IP-enabled services are violating these principles, we will not hesitate to take action to address that conduct.” [10]
The FCC opted to exercise jurisdiction over peer-to-peer Internet connections based on the fact that such connections use “communication by wire.” [11] With that direct link to the general jurisdictional grant conferred under Title I of the Communications Act, the Commission exercised its ancillary jurisdiction on the premise that Comcast’s practices adversely impacted national Internet policy.
The Commission rejected Comcast’s argument that any regulation of network access and management violates the Commission 27 year old policy of leaving information services unregulated:
the Commission previously indicated that it would not hesitate to take action in the event that providers violated the principles set forth in the Internet Policy Statement. Moreover, the Commission repeatedly has stated its willingness to exercise the full range of its statutory authority to ensure that providers of cable modem service meet the public interest in a vibrant, competitive market for Internet-related services. For instance, in the Wireline Broadband Order, the Commission found that it had jurisdiction over providers of broadband Internet access services and stated that “we will not hesitate to adopt any non-economic regulatory obligations that are necessary to ensure consumer protection and network security and reliability in this dynamically changing broadband era.” Specifically with regard to cable modem service, in the 2002 Cable Modem Declaratory Ruling sustained by the Supreme Court in Brand X, the Commission sought comment on a wide range of statutory bases for exercising ancillary jurisdiction over cable modem service, including section 230(b) of the Act. The Commission also explicitly mentioned the blocking or impairing of subscriber access by a cable modem service provider as possible triggers for Commission “intervention.” [12]
While deciding that it should act on a case-by-case basis, the Commission held that it did not have to conduct a rulemaking or hearing to investigate and remedy Comcast’s practices:
And to the extent that Comcast implies that our ancillary authority does not extend to adjudications but rather must first be exercised in a rulemaking proceeding, it is simply wrong. The question of whether the Commission has jurisdiction to decide an issue is entirely separate from the question of how the Commission chooses to address that issue. Perhaps more to the point, the D.C. Circuit has affirmed the Commission’s exercise of ancillary authority in an adjudicatory proceeding and in the absence of regulations before. [13]
The FCC concluded that “Comcast has several available options it could use to manage network traffic without discriminating as it does” [14] including imposing caps on average users’ capacity and then charging overage fees, throttle back the connection speeds of high-capacity users (rather than any user who relies on peer-to-peer technology, no matter how infrequently) and working with the application vendors themselves. Notwithstanding the fact that Comcast and other Internet Service Providers have pursued each of these options, the Commission determined that Comcast had to change its network management practices on a timely basis and to act with greater transparency. [15] Within 30 days of release of the Commission’s Order Comcast must:
· Disclose the details of its discriminatory network management practices to the Commission;
· Submit a compliance plan describing how it intends to stop these discriminatory management practices by the end of the year; and
· Disclose to customers and the Commission the network management practices that will replace current practices. [16]
The FCC warned Comcast that if it fails to comply with the steps set forth in the Order, the Commission will impose immediate interim injunctive relief requiring the company to suspend its discriminatory network management practices pending a hearing. [17]
[1] Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Docket No. 02-33, Policy Statement, 20 FCC Rcd. 14986 (2005).
[2] Formal Complaint of Free Press and Public Knowledge Against Comcast Corporation for Secretly Degrading Peer-to-Peer Applications, File No. EB-08-IH-1518, Memorandum Opinion and Order, FCC 08-183 (rel. Aug. 20, 2008); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-183A1.doc [hereinafter cited as Comcast Internet Order].
[3] Id. at ¶1.
[4] “When Comcast judges that there are too many peer-to-peer uploads in a given area, Comcast’s equipment terminates some of those connections by sending RST packets. In other words, Comcast determines how it will route some connections based not on their destinations but on their contents; in laymen’s terms, Comcast opens its customers’ mail because it wants to deliver mail not based on the address or type of stamp on the envelope but on the type of letter contained therein. Furthermore, Comcast’s interruption of customers’ uploads by definition interferes with Internet users’ downloads since ‘any end-point that is uploading has a corresponding end-point that is downloading.’ Also, because Comcast’s method, sending RST packets to both sides of a TCP connection, is the same method computers connected via TCP use to communicate with each other, a customer has no way of knowing when Comcast (rather than its peer) terminates a connection.
This practice is not ‘minimally intrusive’ but invasive and outright discriminatory.” Id. at ¶¶41-42(citations omitted).
[5] “When an Internet user opens a webpage, sends an email, or shares a document with a colleague, the user’s computer usually establishes a connection with another computer (such as a server or another end user’s computer) using, for example, the Transmission Control Protocol (TCP). For certain applications to work properly, that connection must be continuous and reliable. Computers linked via a TCP connection monitor that connection to ensure that packets of data sent from one user to the other over the connection ‘arrive in sequence and without error,’ at least from the perspective of the receiving computer. If either computer detects that “something seriously wrong has happened within the network,” it sends a ‘reset packet’ or ‘RST packet’ to the other, signaling that the current connection should be terminated and a new connection established “if reliable communication is to continue.” Id. at ¶39 (citations omitted).
[6] “Comcast’s practice is overinclusive for at least three independent reasons. First, it can affect customers who are using little bandwidth simply because they are using a disfavored application. Second, it is not employed only during times of the day when congestion is prevalent . . .. And third, its equipment does not appear to target only those neighborhoods that have congested nodes — evidence suggests that Comcast has deployed some of its network management equipment several routers (or hops) upstream from its customers, encompassing a broader geographic and system area. With some equipment deployed over a wider geographic or system area, Comcast’s technique may impact numerous nodes within its network simultaneously, regardless of whether any particular node is experiencing congestion.” Id. at ¶48 (citations omitted).
[7] Id. at ¶43 (citations omitted).
[8] The Commission also invoked the following statutory provisions as further justification for its decision to assume jurisdiction and to order a remedy: Section 1 of the Communications Act, 47 U.S.C. §151, Section 201, 47 U.S.C. §201, Section 256, 47 U.S.C. §256, Section 257, 47 U.S.C. §257 and Section 601(4), 47 U.S.C. §601(4).
[9] Id. at ¶13 quoting 2005 Internet Policy Statement, 20 FCC Rcd. 14988, ¶5.
[10] Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities; Universal Service Obligations of Broadband Providers; Review of Regulatory Requirements for Incumbent LEC Broadband Telecommunications Services; Computer III Further Remand Proceedings: Bell Operating Company Provision of Enhanced Services; 1998 Biennial Regulatory Review — Review of Computer III and ONA Safeguards and Requirements; Conditional Petition of the Verizon Telephone Companies for Forbearance Under 47 U.S.C. § 160(c) with regard to Broadband Services Provided via Fiber to the Premises; Petition of the Verizon Telephone Companies for Declaratory Ruling or, Alternatively, for Interim Waiver with Regard to Broadband Services Provided via Fiber to the Premises; Consumer Protection in the Broadband Era, WC Docket No. 04-242, 05-271, CC Docket Nos. 95-20, 98-10, 01-337, 02-33, Report and Order and Notice of Proposed Rulemaking, 20 FCC Rcd 14853, 14853, ¶96 (2005), petitions for review denied, Time Warner Telecom, Inc. v. FCC, 507 F.3d 205 (3d Cir. 2007).
[11] 47 U.S.C. § 152(a).
[12] Comcast Internet Order at ¶39 (citations omitted).
[13] Comcast Internet Order at ¶38, citing CBS, Inc. v. FCC, 629 F.2d 1, 26–27 (1980) (reasoning that the Commission had, in the context of an adjudication, reasonably construed its ancillary authority to encompass television networks), aff’d, 453 U.S. 367 (1981); Complaint of Carter-Mondale Presidential Committee, Inc. against The ABC, CBS and NBC Television Networks, Memorandum Opinion and Order, 74 FCC 2d 631, para. 25 n.9 (1979) (“Our power to adjudicate complaints involving requests for access to the networks is surely ‘reasonably ancillary to the effective performance of the Commission’s various responsibilities.’” (quoting Southwestern Cable Co., 392 U.S. at 178)); see also New York State Comm’n on Cable Television v. FCC, 749 F.2d 804, 815 (D.C. Cir. 1984) (upholding adjudicatory decision that preempted certain state and local satellite television regulations under Commission’s ancillary authority); Negrete-Rodriguez v. Mukasey, 518 F.3d 497, 504 (7th Cir. 2008) (“An agency is not precluded from announcing new principles in an adjudicative proceeding rather than through notice-and-comment rule-making.”).
[14] Comcast Internet Order at ¶49.
[15] “Comcast’s claim that it has always disclosed its network management practices to its customers is simply untrue. Although Comcast’s Terms of Use statement may have specified that its broadband Internet access service was subject to ‘speed and upstream and downstream rate limitations,’ such vague terms are of no practical utility to the average customer.” Id. at ¶53. “Our overriding aim here is to end Comcast’s use of unreasonable network management practices, and our remedy sends the unmistakable message that Comcast’s conduct must stop.” Id. at ¶54.
[16] Id. at ¶54.
[17] Id. at ¶55.
Thursday, July 31, 2008
Another Wrong-headed WSJ Editorial
Those wacky editorial writers at the Wall Street Journal just cannot seem to get the facts straight about network neutrality and what the FCC has done or can do on this matter. In the July 30, 2008 edition (Review and Outlook A14), the Journal vilifies FCC Chairman Kevin Martin for starting along the slippery slope of regulating Internet content.
The Journal writers just seem to love hyperbole, and are not beyond ignoring the facts when they do not support a party line. Here are a few examples from the editorial.
The editorial states that Chairman Martin wants to use a “set of principles” to punish Comcast for engaging in legitimate network management. Chairman Martin’s predecessor Republican Michael Powell drafted a Policy Statement and a Republican majority FCC approved them. See http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-260435A1.pdf.
The network management undertaken by Comcast involved masquerading as the recipient of a peer-to-peer (“P2P”) file transfer and issuing a command to reset, i.e., to stop sending traffic and start again. Comcast forged so-called TCP reset packets even though it appears that the company could have handled the actually occurring traffic volume without having to degrade anyone’s traffic.
The Journal editorial characterizes Comcast’s action as a technical dispute over network management apparently resolved when Comcast discussed P2P traffic management issues with BitTorrent one of many firms that create software used to send and receive P2P traffic. In a world of non-disclosure agreements, we have no sense of what the parties agreed to, and more importantly if Comcast will extend to other software providers and Comcast subscribers fairer network management terms and conditions.
One infers from the editorial that the FCC’s action amounts to overkill, but the FCC has not yet issued an order, much less announced a fine or other sort of punishment. Nevertheless, the upcoming decision apparently will start a regulatory regime ruining the Internet, because the FCC allegedly has leveraged a Policy Statement into the apparent resurrection of common carrier regulation resulting in “unprecedented control over how consumers use the web.”
The editorial claims that network neutrality advocates want the FCC to “prohibit Internet service providers from using price” to address “ever-growing” bandwidth demand and network management functions. I do not know of any network neutrality proponent who thinks the FCC should outlaw the practices of Akamai and other providers of “better than best efforts” traffic routing at premium prices. I did not hear of any network neutrality advocate argue against proposals by Time Warner and other Internet Service Providers (“ISPs”) to offer subscribers various tiers of service instead of a one size fits all, unmetered service.
What does trigger concern are undisclosed practices, unavailable to subscribers and content providers alike, that create artificial bottlenecks and congestion. If smart Enron traders could extract incredible wealth by manipulating the flow of electrons along a grid, what prevent Comcast and others from manipulating packets for similar gain?
I am at a lost to understand how the Wall Street Journal regularly attempts to pillory FCC Chairman Martin as itching to impose heavy-handed regulation. Despite the Journal’s penchant for alarmism, Chairman Martin has not abdicated his general free market advocacy. The Chairman realizes that ISPs cannot operate completely free of a rule enforcing referee. Nondisclosure agreements, and the lack any effective means to monitor performance creates conditions where ISPs have unprecedented opportunities to engage in practices that are characterized as necessary network management, but in reality serve a specific agenda, e.g., to punish heavy network users whether they be highly popular content sources, or consumers of P2P file transfers.
Rather than surreptitiously drop packets to degrade service, ISPs need to find ways to enhance heavy users’ Internet experience as Akamai does. The FCC has to act when an ISP decides to punish a heavy volume user that might cause congestion even though the ISP has yet to offer the heavy user premium service options.
The Journal writers just seem to love hyperbole, and are not beyond ignoring the facts when they do not support a party line. Here are a few examples from the editorial.
The editorial states that Chairman Martin wants to use a “set of principles” to punish Comcast for engaging in legitimate network management. Chairman Martin’s predecessor Republican Michael Powell drafted a Policy Statement and a Republican majority FCC approved them. See http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-260435A1.pdf.
The network management undertaken by Comcast involved masquerading as the recipient of a peer-to-peer (“P2P”) file transfer and issuing a command to reset, i.e., to stop sending traffic and start again. Comcast forged so-called TCP reset packets even though it appears that the company could have handled the actually occurring traffic volume without having to degrade anyone’s traffic.
The Journal editorial characterizes Comcast’s action as a technical dispute over network management apparently resolved when Comcast discussed P2P traffic management issues with BitTorrent one of many firms that create software used to send and receive P2P traffic. In a world of non-disclosure agreements, we have no sense of what the parties agreed to, and more importantly if Comcast will extend to other software providers and Comcast subscribers fairer network management terms and conditions.
One infers from the editorial that the FCC’s action amounts to overkill, but the FCC has not yet issued an order, much less announced a fine or other sort of punishment. Nevertheless, the upcoming decision apparently will start a regulatory regime ruining the Internet, because the FCC allegedly has leveraged a Policy Statement into the apparent resurrection of common carrier regulation resulting in “unprecedented control over how consumers use the web.”
The editorial claims that network neutrality advocates want the FCC to “prohibit Internet service providers from using price” to address “ever-growing” bandwidth demand and network management functions. I do not know of any network neutrality proponent who thinks the FCC should outlaw the practices of Akamai and other providers of “better than best efforts” traffic routing at premium prices. I did not hear of any network neutrality advocate argue against proposals by Time Warner and other Internet Service Providers (“ISPs”) to offer subscribers various tiers of service instead of a one size fits all, unmetered service.
What does trigger concern are undisclosed practices, unavailable to subscribers and content providers alike, that create artificial bottlenecks and congestion. If smart Enron traders could extract incredible wealth by manipulating the flow of electrons along a grid, what prevent Comcast and others from manipulating packets for similar gain?
I am at a lost to understand how the Wall Street Journal regularly attempts to pillory FCC Chairman Martin as itching to impose heavy-handed regulation. Despite the Journal’s penchant for alarmism, Chairman Martin has not abdicated his general free market advocacy. The Chairman realizes that ISPs cannot operate completely free of a rule enforcing referee. Nondisclosure agreements, and the lack any effective means to monitor performance creates conditions where ISPs have unprecedented opportunities to engage in practices that are characterized as necessary network management, but in reality serve a specific agenda, e.g., to punish heavy network users whether they be highly popular content sources, or consumers of P2P file transfers.
Rather than surreptitiously drop packets to degrade service, ISPs need to find ways to enhance heavy users’ Internet experience as Akamai does. The FCC has to act when an ISP decides to punish a heavy volume user that might cause congestion even though the ISP has yet to offer the heavy user premium service options.
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