What to Do With Heavy Internet Users?

Comcast’s heavy handed treatment of its peer-to-peer networking customers made me wonder if these customers deserve to expulsion or a fruit basket. In other words do heavy users present an opportunity or a threat to network managers?

ISPs, like airlines, only make money when customers use their services. Airlines and many other businesses typically reward heavy users with rewards. Other ventures can use data mining to determine the profitability of any particular heavy user. So I readily agree that that not all heavy users are desirable.

The problem with Comcast’s approach appears to be that the company assumed any peer-to-peer user is a problem customer deserving degraded service, rather than a candidate for upselling. Comcast should offer more expensive service to the power user who needs better than best efforts traffic routing. I do not consider this a violation of network neutrality. My beef with Comcast or any ISP lies in instances where the carrier without disclosure or reasonable explanation drops packets and otherwise degrades service, or vice versa.

For me network neutrality is primarily about transparency in a transaction that increasingly presents opportunities for mischief. At the WIK conference I recently attended on the European approach to Network Neutrality, there was much discussion on how parties frame the issue. The most common U.S. frame involves a referendum on the virtues of marketplace competition, assumed to exist, versus marketplace failure assumed to exist.

Other alternative frame considers technical standardization of the Internet and whether TCP/IP promotes or retards innovation, i.e., a variation on the dumb versus smart pipe argument. Others in Europe involve consumer protection, contract law and ex ante versus ex post facto regulation.

European Assessment of Network Neutrality

I had the good fortune to participate in a conference on Network Neutrality from a European perspective organized by WIK-Consult GmbH in Bonn Germany; see http://www.wik.org/content/netneutrality_main.htm. I got the distinct impression that European stakeholders and regulators take the matter quite seriously and refrain from what one participant deemed “policy entrepreneurship,” i.e., the bombast, hyperbole, partisanship and mean spiritedness that permeates the policy making process. I also sensed that for better or worse the European approach creates both the ability and incentive for regulators to act in ways the FCC would never consider, e.g., determining that wireless call terminations are too expensive and setting lower rates. On the other hand carriers would never consider engaging in the kind of stealth traffic “management” and “shaping” designed to discipline heavy users.

The thoughtfulness of European viewpoints juxtaposes with what has become a food fight in the U.S. Advocates all too readily assume that it would be “curtains for the free world” should their policy prescriptions get ignored.

Consider Verizon Wireless’s 180 degree turnabout. While one can applaud a now sensible pronouncement, how can one ignore the most vituperative and down right arrogant positions taken by Verizon’s sponsored advocates and the slightly more civilized statements made by Verizon executives? Verizon Wireless gets great public relations dividends for its enlightened new stance, but it suffered no disgrace for supporting “curtains for the free world” advocacy if any wireless Carterfone initiative took root.

Are we to conclude that the marketplace, or the court of public opinion has persuaded Verizon Wireless to rethink its policies? Or is there less than meets the eye here?

Who's Behind That Blog?

An assignment in a Media and Democracy course I teach at Penn State invites students to select a telecommunications advocacy web site for analysis. I want my students to decode the message and attempt to identify whether a bias exists and who financially supports the site. The exercise typically fails miserably.

Too many students accept at face value a web site's pledge or representation of independent analysis. Most students cannot infer that a site that advertises books by Ann Coulter trends to the right and one that talks about social justice trends to the left.

However, I cannot blame my students entirely. How are they to know that a noble sounding site seeking truth, justice and the American way is an "astroturf" (fake grass roots) organization fronting for a particular set of stakeholders? As a researcher in the network neutrality debate I risk personal attack, misrepresentation of my work, and assorted snarky debating tactics befitting a food fight. It would be an understatement to say it chills my desire to engage in the dialogue. Indeed it's not always a dialogue, or debate as the conference session or blog discussion gets nasty.

I should reiterate that I receive no funding from stakeholders in the network neutrality debate and that my view expressed in this blog are entirely my own.

No wonder telecommunications and information policy accrues suboptimal results in the United States. The process has become so partisan, political and doctrinal. There may come a time--not too distant--where people will recognize that the U.S. lost its best practices leadership in telecommunications infrastruture, because the stakeholders spent more time funding web sites and blogs as well as foolish litigation in lieu of doing what's needed to install and operate next generation networks.

FCC Chairman Martin A Tireless Consumer Advocate--Who Knew?

In a counter-intuitive move for a Republican free marketeer, FCC Chairman Kevin Martin has sought to impose substantial additional regulations on cable television. Chairman Martin ostensibly can retain his credentials by claiming that a 1984 law requires the FCC to act when cable television systems serve 70% or more of the U.S. population and 70% who can subscribe do so.

A dispute about whether the cable has reached the so-called 70/70 benchmark temporarily has preempted the Chairman's campaign. However the notion of adding regulation to help the consumer intrigues me, particularly in light of countless instances where Chairman Martin all too willingly relies on assumptions about the market and/or questionable statistics to refrain from regulation.

So what is it about cable television that triggers the Chairman's regulatory urges? If cable has such a lock on markets where was the FCC all these many years, particularly now that true facilities-based competition from satellites and telephone companies will help solve the problems belated regulation is supposed to remedy?

I also wonder why Chairman Martin has no interest in regulating other instances where market power and pricing control appears more clearcut, e.g., special access wireline services outside of central business districts and residential broadband Internet access. There is no applicable 70/70 rule and neither service comes close to 70% penetration. Still the regulatory urge does not exist for wireline telecommunications.

Maybe it's "I want my MTV" and I want it cheaper!

Why Thwart Network Usage When the Meter's On?

One of the many disconnects in the network neutrality debate---at least the wireless one-lies in the simple fact that carriers make money primarily when subscribers use the network. Of course ISPs do not want subscribers to use too much of the network, despite having encouraged consumption with so called, but not actual "All You Can Eat" pricing.

So with that in mind why on earth would an ISP drop packets, misrepresent their subscribers or engage in tactics that create disincentives for subscribers to consume? Well it may be a little like the mutual fund that wants to ration customer service representative access as a function of how much a particular customer has invested in the fund. The million dollar investor could have access to a special telephone number that gets answered by a real--and qualified--person while others are left to navigate through a gauntlet designed to migrate them to automated responses. But at least one mutual fund told particularly heavy calling customers with small financial stakes to take their business elsewhere. In practice ISPs are saying the same thing to heavy users and ones that may contribute to network congestion and the possible need for the carrier to upgrade facilities.

Nevertheless ISPs do not want too many subscribers to get frustrated or infer that they ought to take their business elsewhere. Perhaps that explains the announcement by Verizon that it seemingly embraces network neutrality; see Verizon Wireless To Introduce ‘Any Apps, Any Device’ Option For Customers In 2008 New Open Development Initiative Will Accelerate Innovation and Growth, available at:http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/11-27-2007/0004711790&EDATE=

So never mind about all the righteous indignation about how network neutrality would stifle investment, innovation, competition and freedom.

Regardless of the motivation, I am truly pleased to read that a major wireless carrier wants my business.

The Missing Human Link in an Internet Transaction

Over two years ago I had an automobile to sell. I opted for a combination of the conventional--print newspaper--and the relatively new--the Internet. My local newsaper provided the link for both outlets, a convenience that failed.

The newspaper interface offered interaction with a live person, who cheerfully took my ad and credit card number. I had no interaction whatsoever with Cars.com, the Internet sales channel. My newspaper ad terminated on schedule, but the Cars.com ad persists to this day. Worse yet after asking Cars.com via email to discontinue the ad, I received notification that I the car seller had no authority to terminate the ad, only the newspaper. Repeated efforts to contact my local paper have failed. So if you are in the market for an inexpensive 1999 Camry in State College on Cars.com disregard my ad.

The lesson: regardless of the wonderful reach provided via the Internet, a human interface probably remains essential. Should that interface fail, be prepared for more hassle than you might have expected. In my case I have to disappoint callers and emailers that they missed the chance to buy a cheap Camry by about 30 months!

Response to Two Columns on Comcast’s Traffic Management Tactics

Two columnists have offered their perspective on the Comcast peer-to-peer traffic management issue. See Larry Seltzer, eWeek.com, Network Policies Should Be Open, Not Neutral (Nov. 6, 2007) available at: http://www.eweek.com/article2/0,1895,2213092,00.asp and George Ou, ZDNet Blog, A Rational Debate on Comcast Traffic Management (Nov. 6, 2007); available at: http://blogs.zdnet.com/Ou/?p=852,

I agree with much of what they wrote, particularly the view that an ISP has a duty to disclose to subscribers what traffic management tactics the ISP can elect to use. Apparently Comcast and others do not want to commit to disclosing what traffic management tactics it might use ostensibly to preclude the onset of actual congestion. No one has disputed that Comcast forged TCP reset packets even though it appears that Comcast could have handled the actually occurring traffic volume without having to degrade anyone’s traffic.

On the other hand I endorse traffic management tactics that respond to actual congestion. I probably part company with some network neutrality advocates by endorsing an ISP offering premium services at a higher rate to power users, provided the ISP does not deliberately degrade service to standard service subscribers.

Neither of the authors addressed whether the current language, or the likely replacement language in subscription agreements, constitutes full disclosure that is fair. From my perspective ISPs cannot have it both ways by marketing “All You Can Eat” unlimited service and “blazing fast” bit rates only to establish, but not disclose quotas and bit rate throttle scenarios. That comes across as a classic “bait and switch” maneuver. ISPs should not be able to insert binding, “take it leave it” terms and conditions that include reserving the option of using “traffic management, “traffic shaping” and “rate-limiting” without defining the terms. ISPs should have to specify what these terms mean specifically as relates to monthly throughput quotas and bit rate throttling, and when such service degradation kicks in.

As the Internet matures and diversifies ISPs should have the option of targeting different consumer segments. As a light to moderate user of Internet access, I do not want to subsidize heavy users, nor do I want them bogging down the network and adversely impacting my service. But I also do not want a trigger happy ISP ready to punish power users regardless of whether these users have made it impossible or even difficult for the ISP to provide an adequate level of service.

I appreciate that ISPs need to recoup their sizeable network investments that seem to grow as more subscribers access bandwidth intensive services. But forging TCP resend packets comes across as a sneaky way to delay having to upgrade networks, or to establish the need for surcharges or rate increases.

In Praise of Relatively Dumb Pipes

Comcast's furtive and undisclosed traffic manipulation reminds me of a curious, red herring asserted by some incumbent carriers and their sponsored researchers: that without complete freedom to vertically and horizontally integrate the carriers would lose synergies, efficiencies and be relegated to operating "dumb pipes." For example, see Adam Thierer, Are "Dumb Pipe" Mandates Smart Public Policy? Vertical Integration, Net Neutrality, and the Network Layers Model, 3 Journal on Telecommunications & High Technology Law 275 (2005)

Constructing and operating the pipes instead of creating the stuff that traverses them gets a bad rap. It may not be sexy, but it probably has less risk. But of course with less risk comes less reward, and suddenly no one in the telecommunications business is content with that. So incumbent carriers assert that convergence and competitive necessity requires them to add "value" to the pipes.

Put another way, they would assert that any limitation on a carrier's "right" to add value is an unconstitutional taking. Of course we used to have common carriers that operated as neutral conduits carrying the content produced by someone else, but apparently that is an anachronism now.

The dumb pipe argument comes across to me as disingenuous. Would anyone buy an argument from an electricity carrier that it should not have to provide a neutral conduit for the carriage of electricity? It would seem that everyone makes more money and has more fun using the electricity to make something more valuable than just carrying electrons.

So it appears with Comcast. Hellbent to cash in on convergence, or at least generate greater returns for its pipe investment, Comcast wants to operate a non-neutral network with all sorts of intelligent packet sniffers ready to prioritize or degrade traffic. And I thought consumers would beat a path to Comcast instead of Verizon, because Comcast offered faster and better service. Who would want that when they can have a smart pipeline whose genius owners stand ready to delay and drop packets according to some secret and real smart plan?

What Can the FCC Do When ISPs Block or Degrade Certain Types of Traffic?

A group of pro network neutrality advocates have filed a Petition for Declaratory Ruling and Formal Complaint in response to Comcast’s furtive traffic “shaping” and “management” tactics that have the effect of blocking or degrading peer-to-peer traffic. See http://www.freepress.net/docs/fp_et_al_nn_declaratory_ruling.pdf; and http://www.freepress.net/docs/fp_pk_comcast_complaint.pdf.

The group asks the FCC to issue preliminary and permanent injunctions prohibiting Comcast from engaging in such tactics, to fine Comcast and to declare that such tactics violate the Commission’s Policy Statement that establishe network neutrality “principles” (see http://www.publicknowledge.org/pdf/FCC-05-151A1.pdf).

While I endorse the groups’ efforts, I believe the petition and complaint would achieve greater impact had the authors addressed the issue of whether and how the FCC can act in the ways the group proposes. Specifically both the group and the FCC have to examine the breadth of jurisdiction and regulatory options available to the Commission under Title I of the Communications Act.

Both the petitioners and the FCC assume that the Commission can act to enforce the network neutrality principles articulated in a three page Policy Statement that devotes two sentences to the issue:

While acknowledging that it cannot assert conventional, Title II common carrier regulation, because ISPs provide information services and not telecommunications services, the FCC stated summarily that it “has jurisdiction to impose additional regulatory obligations under its Title I ancillary jurisdiction to regulate interstate and foreign communications.” According to the Commission that translates into having “the jurisdiction necessary to ensure that providers of telecommunications for Internet access or Internet Protocol-enabled (IP-enabled) services are operated in a neutral manner.

Also noted by the petitions was a sentence in the FCC’s its order assigning the information service classification to cable modem Internet access where the Commission stated its intent “to take action to address . . . conduct” that violates network neutrality.

I fully expect opponents of the petition and complaint to state that the FCC has neither the jurisdiction nor the intent to impose on ISPs such as Comcast what opponents will frame as common carrier obligations. So the Internet Policy statement has to be interpreted as lawfully imposing responsibilities that serve the public interest without imposing common carrier responsibilities, but which cannot constitute the kind of unlawful expansion of jurisdiction Justice Scalia predicted would occur in his dissent in the Brand X case. I examine the risk of overstating the scope of Title I “ancillary jurisdiction” in What Do Pizza Delivery and Information Services Have in Common? Lessons From Recent Judicial and Regulatory Struggles with Convergence, 32 RUTGERS COMPUTER AND TECHNOLOGY LAW JOURNAL, No. 2, 247-296 (2006).

The FCC has taken great pains to create a deregulatory “safe harbor” for information services providers. The Commission has managed to shoe horn DSL, cable modems, BPL and wireless Internet access into the information services classification which the Commission considers completely separate from regulated telecommunications services. To underscore the absoluteness of this dichotomy the Commission has come up with a tenuous differential based on whether a carrier “offers” telecommunications versus “provides” telecommunications. The former falls into the common carriage telecommunications service category, while the latter qualifies for private carriage of an information service, because the Commission chooses to subordinate the telecommunications component into a minor and integrated activity.

The FCC already has invoked its Title I ancillary authority to impose a number of traditional common carrier duties on Voice over the Internet Protocol (“VoIP”) providers and courts have deferred to the agency’s expertise absent a clear statutory mandate.

But at some point the FCC may go to the Title I well too often. I suspect the FCC will have to flesh out its authority to abrogate contracts between landlords and cable operators, particularly in light of the traction gained over the years by incumbent telephone companies that interconnection regulation, such as unbundling and line sharing, “confiscates” their property. Perhaps also the FCC will have to explain why it and not the Federal Trade Commission should act on what can be deemed a consumer protection matter.

At the very least the FCC will have to do more than unilaterally and summarily state that it has jurisdiction under Title I to impose network neutrality principles. The petitioners could have helped the Commission come up with a compelling rationale.

DSL and Cable Modem Lose Over 24% Market Share in One Year??!!

In the lies, damn lies and statistics department the FCC has made another contribution. The Commisison's most current compilation of broadband market share shows wireless (satellite and cellular) acquiring over 24% from wireline cable television and telco options. See http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-277784A1.pdf and compare with the prior calculation: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-270128A1.pdf.

How could this be? Well in reality I doubt whether many consumers would gladly pay more than double for a fraction of the bit rate available from wired options. But (and here's the snarky part) if one calculated broadband using an unrealistically low bar--say 200 kilobits per second--and if one ignores cost, then suddenly wireless options have become a major--here's the pay off--FACILITIES-BASED COMPETITOR of the cable/telco duopoly.

If only I could think and grow rich just as the FCC thinks competition exists and its statistics make it so.

In reality wireless options have their niche role wven though they offer no more than 500 or so kilobits per second. If you are on the road and have no wi-fi or wired option, then 500 kbps is better than nothing. But the FCC wants the statistics to evidence that robust competition exists in the real broadband arena (1 megabit or faster). The cable/telco duopoly is alive and well.

Property Confiscation is in the Eye of the Beholder

The issue of FCC confiscation of private property has a long and checkered history in academic literature, sponsored research and litigation. In many instances incumbent telephone companies have argued that FCC regulation, which requires the carriers to do something they do not want to do, constitutes a confiscation or "taking" of property. So when the FCC orders an incumbent carrier to interconnect with a competitor--something common carriers have to do--incumbent carriers are quick to play the confiscation card if they do not like the terms and conditions under which they have to provide interconnection.

The incumbent carriers tried the confiscation argument before the Supreme Court claiming that unbundling and other affirmative obligations under the Telecommunications Act of 1996 constitued a taking of property. In Verizon Communications, Inc. v. FCC, 121 S.Ct. 877 (2001)the Court wisely rejected incumbent local exchange carrier arguments that using a theoretical, most efficient cost model, instead of actual historical costs, constituted a taking that violated the Fifth Amendment. See http://telefrieden.blogspot.com/2007/04/revisionism.html.

Nothwithstanding the Court's determination the FCC has methodically dismantled just about all of the line sharing, unbundling and interconnection obligations incumbent carriers must endure. The Commission rationalizes such deregulation on bogus determinations that marketplace self-regulation will suffice because of robust competition.

With this in mind I have some mixed feeling about the Commission's ostensibly procompetitive, pro consumer decision to abrogate exclusive service contracts between apartment owners and cabel television operators. See http://www.nytimes.com/2007/10/29/business/media/29cable.html?_r=1&oref=slogin

While I can appreciate that the initiative should trigger rate reductions for previously captive apartment dwellers, I wonder why similarly captive broadband subscribers do not warrant such aggressive and conscientious regulatory intervention. The FCC no longer requires incumbent local exchange carriers to share bandwidth available in their local loops at fair compensation rates. Bear in mind that these carriers installed such infrastructure and recouped their investment at a time when ratepayers were equally captive.

So once again the FCC can explain an inconsistent and assymetrical regulatory state of play on grounds that robust competition exists in one market and it does not exists in another market.

I cannot help but think that an alternative explanation exists: political expediency warrant accommodating Verizon, AT&T and other incumbent carriers in both instances. Eliminate unbundling, line sharing and now even most aspects of interconection (special access) regulation because the incumbent carriers want it and the FCC can make a claim that competition exists. Abrogate apartment owner-cable television operator contracts because Verizon and AT&T want the FCC to do so and because the Commission can make a claim that competition does not exist.

Well at least on the south facing side of many apartment tenants with access to private outside space, such as a balcony, can and do access Direct Broadcast Satellite television options. But more fundamentally the FCC can play the competition card in whatever way it chooses with impunity.

My Thoughts on Wireless Carterfone and Network Neutrality

I recently completed a piece that examines the law and policy of applying Carterfone and broader net neutrality obligations to cellphone service.

Here's the abstract:

Wireless operators in most nations qualify for streamlined regulation when providing telecommunications services and even less government oversight when providing information services, entertainment and electronic publishing. In the United States, Congressional legislation, real or perceived competition and regulator discomfort with ventures that provide both regulated and largely unregulated services contribute to the view that the Federal Communications Commission ("FCC") has no significant regulatory mandate to safeguard the public interest. Such a hands off approach made sense when cellular radiotelephone carriers primarily offered voice and text messaging services in a marketplace with six or more facilities-based competitors in most metropolitan areas. However the wireless industry has become significantly more concentrated even as wireless networking increasingly serves as a key medium for accessing a broad array of information, communications and entertainment ("ICE") services. As wireless ventures plan and install next generation networks ("NGNs"), these carriers expect to offer a diverse array of ICE services, including Internet access, free from common carrier regulatory responsibilities that nominally still apply to telecommunications services. Wireless carrier managers reject the need for governments to ensure consumers safeguards such as nondiscriminatory access and separating the sale of radiotelephone handsets from carrier services. Indeed the carriers claim that any network neutrality responsibilities would create disincentives for NGN investment and have no place in a competitive marketplace.

This article will examine the costs and benefits of government-imposed wireless network neutrality rules with an eye toward examining the lawfulness and need for such safeguards. The paper will consider the difference between wireless network neutrality and an earlier debate about neutral Internet access via wired networks. For example, wireless network neutrality includes consideration of separating Internet access equipment from Internet services, an unbundling principle established for wired networks decades ago. Because wireless carriers package subsidized handset sales often with a blend of ICE services and consumers welcome the opportunity to use and replace increasingly sophisticated handsets, regulators have refrained from ordering handset unbundling. But for other services, such as cable television, the FCC has pursued public safeguards that attempt to allow consumers the opportunity to access only desired content using least cost equipment options.

The article also examines why wireless carriers could avoid becoming involved in a network neutrality debate for several years, despite the fact that their common carrier status, vis a vis voice services, provides a statutorily supported basis for imposing nondiscrimination responsibilities. The article concludes that the rising importance of wireless networking for most ICE services and growing consumer disenchantment with carrier-imposed restrictions on handset versatility and wireless network access will trigger closer regulatory scrutiny of the public interest benefits accruing from wireless network neutrality.

A draft of the paper is available at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928 and http://www.personal.psu.edu/faculty/r/m/rmf5/

Empirical Evidence of Net Bias—Now What? (part two)

ISPs now acknowledge that they may meddle with subscribers’ traffic streams, but only to “manage” and “shape” traffic. ISPs typically reserve the option for such meddling in their contract with subscribers. Should you ever take the time to read this document, and a second documents about “Acceptable Use” you will see language that does reserve to the ISP the right to manage their network, ostensibly to optimize it for the benefit of subscribers. The subscriber agreement also attempts to foreclose litigation as an option by stating that subscribers can only seek arbitration to settle any grievance.
In reality the subscriber contract constitutes a unilateral, non-negotiable contract of adhesion, i.e., a “take it or leave” it proposition. In a truly competitive world, disgruntled subscribers could “vote” with their feet and dollars by taking their business elsewhere. But contrary to the FCC’s fantasy statistical reports about double digit service alternatives in most zip codes, consumers have limited options. Taking ones business from DSL to cable modem would not solve the problem if all carriers—through collusion or “conscious parallelism” had the same network management contractual language.
Because the FCC considers ISPs information service providers, the Commission offers no traditional consumer safeguards applicable to telecommunications service providers under Title II of the Communications Act., ISPs must use contracts in lieu of filed tariffs. However, ISP contracts must pass muster with general law and equity principles regarding the fairness of the terms, consumer protection and fraud. In other words, ISPs cannot unilaterally set any terms and conditions and have them stick.
While the FCC may have limited jurisdiction to examine ISP contracts, state and federal courts can lawfully assess whether an ISP has lawfully interpreted the terms of the contract it created and more broadly whether the agreement violates the court’s sense of fairness. In light of the FCC’s deregulation of information service providers, the Commission cannot readily claim that it should preempt judicial review because it still has “primary” jurisdiction to resolve fairness and consumer protection issues.
We may soon see an onslaught of individual and class action law suits against ISPs on grounds that they have not complied with the clear language of their service agreements. For example ISPs have cut off or throttled service to customers for using too much network resources despite an agreement that offers unlimited and unmetered “all you can eat” service. Peer-to-peer customers experience artificial network congestion—a hard thing to prove—may claim that the ISP has violated the service agreement.
A court may serve as the forum for assessing whether an ISP’s reserve right to manage its network includes preemptive strategies that mimic network congestion even when actual traffic conditions do not necessitate network conservation tactics.

Empirical Evidence of Net Bias—Now What?

A widely distributed and unassailable study by the Associated Press (see http://www.forbes.com/feeds/ap/2007/10/19/ap4240786.html) confirms what many Internet Service Provider (“ISP”) industry observers had speculated: some ISPs exploit deliberately ambiguous subscriber contracts to reserve the option for blocking, dropping, and downgrading certain types of traffic even when network conditions do not necessitate such congestion abatement strategies. ISPs frame the issue in terms of their contractual right to “shape traffic.” However such traffic “management” tactics generate false congestion and trigger delayed or dropped packets.

For years ISPs representatives and their snarky, righteously indignant sponsored advocates stated unequivocally that ISPs would never deliberately degrade the Internet access experience for any paying subscriber. See http://www.filmfestivaltoday.com/article_item.asp?ID=853 quoting Verizon CEO Ivan Seidenberg: "We don't block anything…never have, never will." see also, http://commdocs.house.gov/committees/judiciary/hju27225.000/hju27225_0.HTM.

Later they shaped the debate in terms of fair and appropriate allocation of their costs among low and high volume users. Now they consider the issue one of how they manage their network to maximize service to their subscribers.

In fact ISPs have two very key reasons for creating congestion of packets, just like Enron created congestion of electrons:

1) blocking, delaying, and degrading certain types of expensive to handle traffic, such as peer-to-peer file sharing, delays or forecloses the need to invest in costly network upgrades; and

2) blocking, delaying, and degrading certain types of expensive to handle traffic, such as peer-to-peer file sharing, can enable an ISP to create a new customer service tier for unblocked peer-to-peer traffic at premium price.

Heretofore I have stood midway between the groups claiming “no problem”camp and the “curtains for the free world” alarmists. However I have consistent stated that an ISP violates a reasonable sense of network neutrality, appropriate even for private carriers, when an ISP deliberately creates artificial network congestion to achieve an ulterior motive. See http://www.personal.psu.edu/faculty/r/m/rmf5/.

I would support Comcast’s option to create a premium “power user” peer-to-peer network optimized service. But I would equally protest any ISP strategy to extort such payments, or simply to punish peer-to-peer networkers, when the ISP network can easily handle such traffic without degrading service to other subscribers.

In another post I will Comcast examine whether Comcast and other ISPs can lawfully use language in subscriber contracts to degrade peer-to-peer traffic streams regardless of network conditions.

Expanding Pedestals

Telephone and cable companies have expanded their service offerings into a triple- or quadruple play of their core service (telephony or video) plus Internet access, wireless and the other companies' core offering. To deliver this package of service the companies often have to expand bandwidth and install additional equipment at or near consumers' homes.

These companies used to install a small pedestal for the electronics and line splice needed to provide service. The right to install such equipment derived from the rights of way granted by property owners or municipal ordinanaces that convery such rights. Of course these companies qualified for free of charge rights of way based on their "public utility" characteristics. Additionally federal, state and municipal regulations existed to safeguard the public.

Telephone and cable companies have qualified for deregulation particularly based on the determination that they provide information and other non-telecommunications services. Yet these companies continue to use "legacy" rights of ways, based on their prior regulated status. Now these companies are expanding the size and footprint of the pedestals they install on private property.

My cable company attempted to install a small refrigerator-sized device on my property. These device would use electric power surely to provide services other than the core service for which the right of way was granted.

Query: can companies providing largely unregulated information services exploit rights of way granted under the pretext of a public interest need for basic telecommunications and video services? Regardless of the actual legality of doing so telephone and cable companies have expanded the size and footprint of their rights of way use and pedestal installation without having to compensate land owners.

If companies enjoy the benefits of an information services safe harbor from regulation shouldn't they lose free rights of way access? bear in mind these are the very companies that loudly claim "confiscation" when government regulates them.

Consumer Protection for Cable Television But Not the Internet or Cellular Telephony

The FCC recently released an Order that extends until Oct. 2012 a prohibition on exclusive contracting by vertically integrated programmers who deliver video content via satellite. See Implementation of the Cable Television Consumer Protection and Competition Act of 1992, Development of Competition and Diversity in Video Programming Distribution: Section 628(c)(5) of the Communications Act: Sunset of Exclusive Contract Prohibition, MB Docket No. 07-29, Report and Order (rel. Oct. 1, 2007), available at: http://fjallfoss.fcc.gov/edocs_public/attachmatch/FCC-07-169A1.doc.

Section 628(c)(2)(D) of the Communications Act requires the FCC to safeguard consumers and video programming competition from vertically integrated programmers who the Commission determines still have the ability and the incentive to favor the operators with whom they are affiliated over other competitive providers. In light of the FCC’s determination that vertically integrated ventures still control, “must see” content, for which no viable substitute exists, the Commission retained the prohibition against exclusive content distribution contracts from ventures that verticially integrate content production and distribution to consumers.

This order shows the FCC in a curiously pro-consumer, market interventionist mode, quite an opposite posture vis a vis network neutrality and the Commission's typically pro-marketplace mindset. Why is this?

First there is a statutory mandate to assess the market for content by multi-channel video programming distributors. The Commission sees an ongoing market failure even as it nearly always determines that robust competition and a well oiled marketplace exists everywhere else. So a statutory mandate to examine industry conditions typically does not trigger a pro-regulatory oversight outcome.

Second perhaps there is something about television--particularly "must see" television--and voters attitudes that forces the Commission to act. Exclusive access to via cable television of a much loved program surely will trigger consumer outrage particularly if the exclusive supplier charges what an inelastic market will bear.

Third this is an issue about vertical integration by companies consumers and apparently FCC Commissioners love to hate--cable.

So take away an explicit Congressional mandate, address content perhaps even "must see" video and substitute much beloved (or feared) telephone companies and the FCC has no problem with vertical integration, exclusive contracts for content and walled gardens. The market fails for "must see" video via cable television, but the FCC has no problem whatsoever for any exclusive content deal, including video, via the Internet and cellular telephones. IPTV and cellular telephone display of video is not cable television, but it increasingly will compete with it.

Nomination for the Worst in Sponsored Research

With so much unsponsored, under-read research in telecommunications policy, I marvel how sponsored research finds its way into hard copy journals. Having read so much solid, thoughful work generated for the Telecommunications Policy Research Conference (see tprc.org) I thought I would nominate the worst in sponsored research I recently discovered.

My nominee: Hal J. Singer's THE COMPETITIVE EFFECTS OF A CABLE TELEVISION OPERATOR'S REFUSAL TO CARRY DSL ADVERTISING, Journal of Competition Law and Economics 2006 2(2):301-33; available at: http://jcle.oxfordjournals.org/cgi/content/abstract/2/2/301?ck=nck.

First of all I know that Dr. Singer can and does generate solid work. However, this piece simply does not match what he can produce and I infer that he may not have come up with this topic on his own accord. In any event the piece suggests that notwithstanding nearly constant efforts by consulting economists to justify the largest possible relevant market to support mega-mergers in the telecom sphere, Dr. Singer concludes that refusals by cable operators to sell advertising space to competiting DSL providers impairs rivals' efficiency and harms consumers by raising the cost of Internet access.

Dr. Singer reaches this conclusion by defining the relevant market as an incredibly small sliver of the information, communications and entertainment marketplace: local television advertising on cable networks. Dr. Singer concludes that DSL providers cannot compete as effectively as they would in the absence of the "ban."

Even if Dr. Singer provided empirical evidence that DSL providers faced an actual boycott of cable television advertising, he could not prove foreclosure of advertising access by companies such as Verizon, AT&T and his benefactor Qwest. Cable television company advertising represents a tiny sliver of the total broadcast and cable television advertising for which no bar on DSL advertising exists. Surely Dr. Singer knows that cable television operators' must carry obligations require them to carry without blockage any and all advertising contained in broadcast television signals.

Practically speaking is there anyone who believes that Verizon, AT&T, and Qwest lack the ability and resources to advertise their DSL product? Does anyone buy Dr. Singer's assertion that "local television advertising on cable networks is the most efficient form of advertising for DSL providers." On my cable system the local advertising inserts made by Comcast--State College include car dealers, restaurants and furniture stores. Even if Dr. Singer were to claim that Comcast forecloses all of its franchise holders from accepting DSL advertising, does anyone think this makes DSL competitively disadvantaged vis a vis cable modem service?

My nomination for first runner up is: J. Gregory Sidak and Hal J. Singer, Überregulation Without Economics: The World Trade Organization’s Decision In The U.S.-Mexico Arbitration On Telecommunications Services, available at: http://law.indiana.edu/fclj/pubs/v57/no1/Sidak.pdf.
In this piece the authors attempt to prove that the World Trade Organization, a treaty-level multilateral organization, illegally regulates telecommunications carriers' rates and practices. Acting on a complaint filed by the United States, the WTO determined that TelMex, the dominant telecommunications service provider in Mexico, imposed impermissibly high interconnection charges. These rates bordered on extortionate and well exceeded benchmarks suggested by the International Telecommunication Union, another one of those runaway multilateral organizations.

Global Best Practices in Telecom Policy

Papers presented at the 35th annual Telecommunications Policy Research Conference http://www.tprc.org/ held last weekend offered more evidence that the United States no longer offers other nations forward looking policy and regulatory models. I dare say the preoccupation with lobbying and litigation has generated an unanticipated extra liability: loss of best practices leadership.

My proof:

Rather than acknowledge that the U.S. lags many other nations in broadband penetration and affordability (see http://www.speedmatters.org/; http://www.benton.org/), representatives of the U.S. government quibble over the veracity of the statistics.

The dominant incumbent telecomms service provider in the U.K., Italy and Australia volunteered to create an access subsidiary to simplify and largely eliminate regulation of corporate activity at higher layers. U.S. carriers and the FCC summarily reject this approach as eliminating synergies, mandating "dumb" pipes and relegating any physical connection operator to perpetually regulated status.

Korea joins the EU in embracing layers/horizontal regulation in lieu of silo-based, media specific vertical regulation. U.SA. carrier reject this model for the same reasonas above.

Canada has largely solved its universal service challenge while U.S. consumers subsidize carriers with most of an annual $7 billion windfall.

Some day soon we in the United States will begin to recognize that expensive, lackluster broadband access and a highly politicized regulator and policy making process knocks off a few tenths of a percent in national productivity.

I-Phone Restrictions Herald the Benefits on Non-Neutral Networks--Not!!

George Mason University Law and Economics Professor Thomas Hazlett has written a short piece in the Financial Times heralding the virtue of closed wireless handsets and the wisdom of markets in lieu of regulation. See http://www.msnbc.msn.com/id/20976213/

He's right that no one put a gun in the ribs of buyers more than willing to tolerate deliberate strategies to limit access to networks, software applications and services. Yes, there surely are instances where consumers face a "take it or leave it" value proposition. But in robustly competitive markets, consumers can vote with their dollars and find alternative service arrangements that offer fewer restrictions.

The increasingly concentrated cellular telephone marketplace in the U.S. offers consumers limited options. Bear in mind that most cellular advertisements claim that the network generally works. Now that's a high bar: we're the network with the fewest dropped calls!

I can agree with Professor Hazlett about the virtues of marketplace competition. But I surely disagree with him that I should ignore locked phones, walled garden access to content, two year subscription lock-ins, the absence of a market for used phones able to access cheaper service, etc. and conclude that the cellular business "is a competitive process in which independent developers, content owners, hardware vendors and networks vie to discover preferred packages and pricing."

Living in Pennsylvania I have one source for wine and spirits, the state Liquor Control Board. This government monopoly regularly hires experts to claim that its absolute monopoly accrues public benefits without any consumer harm. So I am to ignore the extortionate prices, limited customer service and a dearth of choices.

The I-Phone early adopters have to make a similar leap of faith, but I dare suggest no one likes the fact that they could do more more with their I-Phone had Apple embraced an open access environment. Successful market debut of a closed I-Phone parallels the years of marketplace success AOL achieved with its walled garden of content and features. But consumers grew weary of limits on their access and lucky for them had opportunities to find a better value proposition.

Consumers seeking to unlock the I-Phone risk voiding warranties and limited relief in any event. So much for a robustly innovative and competitive cellular marketplace.

The U.S. Justice Department Opposes Net Neutrality

The Justice Department has filed comments opposing network neutrality with FCC. See http://www.freepress.net/docs/doj225767.pdf. These comments do not respond to a formal request for comments as had occurred previously,
see http://fjallfoss.fcc.gov/edocs_public/attachmatch/FCC-07-31A1.pdf.
Instead they are unsolicited ex parte comments which raises questions why the Justice Department saw the need to weigh just now.

The comments are incredibly simplistic and offer further proof of how sponsored research and questionable statistics become the basis for policy, regulations and law. In a nutshell the Justice Department buys the laissez faire view that the marketplace can resolve all potential problems and no real problem has arisen.

The Justice Department can make its case only by ignoring unsponsored research, that point to real potential for problems, statistical compilations that show the broadband marketplace in the U.S. as comparatively inferior to best practices both in terms of price and quality, and the practical consequence of a cable/telco duopoly in Internet access.

By the Justice Departments reasoning it should follow that because of deregulation and commensurate marketplace competition in the wheeling of electricity and packets there could be no potential market manipulation by any single player or group in either industry. We know that in the electricity marketplace Enron traders managed to create bottlenecks, run up the spot market price and generate false congestion.

I am willing to speculate that Enron-type tactics can occur in the wheeling of packets. The fact that a Title II regulated common carrier, telephone company (Madison River Communications, LLC) could not get away with absolute blocking of packets—without detection and punishment—says nothing about the ability of unregulated or lightly regulated Title I information service providers to engage in harmful and unlawful bit discrimination.

I have stood midway in the debate on network neutrality and have identified plenty of instances where price and QOS discrimination make economic sense and do not violate applicable laws. See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=893649;
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962181. But I cannot buy the Justice Department’s preoccupation with the virtue of discrimination, having absolutely no regard for the real potential for undetected or unremediable discrimination.

I hate to think—as others have—that “the fix is in” and this nation’s Justice Department files paper on behalf of specific stakeholders such as AT&T. But as the Network Neutrality debate plays out I increasingly believe that “Bellhead” investment recovery, pricing and billing mindsets will reshape the Internet to become a hybrid of the Public Switched Telephone Network, an outcome I predicted in 2001; see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=29012.

Recommended Reading

I stongly recommend The radio and the Internet written by law Professor Susan Crawford:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1007221.

Professor Crawford skillfully examines how prevailing political motivations, including accommodating incumbent dominant wireless and Internet access carriers, largely dominate how the FCC will auction choice 700 MHz spectrum.

Professor Crawford concludes by stating if the FCC "get[s] this wrong, the consequences will be severe." Regretably I think your last sentence should read "The FCC got this wrong and we will suffer in the competitive global information marketplace."

I can't get over feeling that as usual the fix is in. Sponsored researchers seem to have greater credibility and reach than Professor Crawford and me. They appear to have gained traction in explaining why forcing wireless carriers to accomomdate any handset ("wireless Carterfone policy) is unnecessary, bad policy and illegal. For example, Robert Hahn, Rober Litan and Hal Singer claim that Carterfone made economic sense only in a vertically integrated uncompetitive wireline marketplace, and that it would be ill-advised if not illegal for government to receive auction revenues and impose confiscatory regulatory conditions. See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111.

After I recover from painful knee ligament reconstruction Monday 9/10 I hope to follow up with an explanation why vertical integration was not the primary reason for Carterfone and certainly does not constitute a condition precedent for applying the policy wirelessly. Besides even without strict vertical integration, the wireless oligopoly surely can leverage market power to foreclose a resale/secondary market for handsets by collectively blocking the benefits in refusing to offer lower rates for subscribers who "bring their own phones" and do not receive a handset subsidy.

Limited Regulatory Relief When ISPs Misbehave

Consumers and the FCC have limited recourse when an Internet Service Provider acts in a fraudulent, discriminatory or abusive manner. ISPs are not common carriers. They are classified as information service providers and do not have to comply with the regulations deriving from Title II of the Communications Act that apply to telecommunications service providers.

The FCC has a back door way to regulate ISPs, something called "ancillary jurisdiction" based on the Commission's general public interest mandate contained in Title I of the Communications Act. The FCC invoked this authority to regulate cable television as potentially harmful to the availability of "free" broadcast television. Recently the FCC has stretched its Title I authority to
impose selective re-regulation of ISPs.

However, the FCC's limited regulation of ISPs will do nothing to prevent the cable modem/DSL duopoly for abusing collective market power. Even as the FCC plays games with broadband statistics to show how advanced we are compared to other nations, the data shows that nationwide over 96% of all broadband services are supplied by two types of ventures: cable television companies typically allocating 6MHz of bandwidth and telephone companies typically expanding the copper wire local loop by 1500 kHz.

By the FCC's self-fulfilling prophesy the broadband marketplace is robustly competitive and any extortionate or draconian ISP action would trigger a mass migration of subscribers. The FCC calculates that I have 9 broadband choices in my zip code, so I should be able to "vote with my dollars." In reality I have one and only one broadband option: $60 cable modem service. I can't get DSL, cellular broadband offers dialup 60-80 kilobits per second and satellite offers slow speed broadband at double the price.

So much for marketplace self-regulation.

The Power of a Slogan or Phrase

Mike Nelson, a former White House technology policy advisor in the Clinton administration now affiliated with IBM, offered the following advice on the Washington political process: distill your message into a slogan or phrase that can fit on a bumper sticker.

Officials in the AT&T Bell System knew this when they sought to prevent the separation of telephone handsets from telephone service. They argued that allowing consumers to own their own phone would violate "systemic integrity" and "harm" employees. In response to proposals to break up the Bell System, they argued "the system is the solution." Who would want to allow competition to harm networks and people?

Responding to consumer dissatisfaction at customer "service" and two year lock in contracts as well as the proposal to allow freer use of handsets, the wireless sloganeers again invoke technical harm as one good reason not to allow handset flexibility.

In the 1970s as now the risk of technical harm can easily be reduced or eliminated. Locking cellphones to one network, disabling handset features and preventing a seocndary market for cheap phones are anticompetitive plain and simple.

Two Recent Powerpoint Presentations on Net Neutrality and DRM

If your interested in network neutrality my latest thoughts on the subject are available at: http://ijoc.org/ojs/index.php/ijoc/article/view/160/86
and as a powerpoint presentation at: http://www.personal.psu.edu/faculty/r/m/rmf5/AEJMC%202007.ppt.

I also examine net neutrality in the context of Digital Rights Management achieved through deep packet inspection: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=995273; powerpoint presentation at: http://www.personal.psu.edu/faculty/r/m/rmf5/IPSC%202007%20Frieden.ppt.

I always appreciate thoughtful questions and comments.

Protecting the Wireless Crown Jewel

The incumbent wireline telephone companies increasingly rely on wireless service revenues to generate growth and upward trajectory in their stock. Accordingly it should come as no surprise that they would gear up their formidable public policy/sponsored research machinery to oppose any initiative that would generate more competition, enhance consumer welfare and possibly reduce profit.

That explains the noisy, but largely bogus explanations why it makes no sense to allow consumers to access any cellular network with any cellular telephone. A high ranking official at Verizon opposes the applying Carterfone principles to wireless on three grounds: 1) separating handsets from service was necessary for a monopoly, but not a competitive market; 2) separation would involve “sweeping government intervention;” and 3) an any handset rule would risk harm to wireless networks. see Link Hoewing, The Hype in the Skype Petition; available at http://policyblog.verizon.com/PolicyBlog/Blogs/policyblog/LinkHoewing9/294/The-Hype-in-the-Skype-Petition.aspx.

Ouch. These rationales come across as rehashed Bell System doctrine that made no sense in the 1970s and surely makes no sense now. Separating handsets from service is a smart regulatory remedy regardless of the market structure of the wireless business. The FCC would unleash billions of dollars in savings to consumers simply by allowing them to extend the usable lives of existing handsets and allow cheapskakes like me to activate the $1 handset I can buy at garage sales. Indeed some of the savings would flow to cellular operators who would have fewer handsets to subsidize. Of course the operators are not balking at having to subsidize handset sales. They want to preserve the two year lock in that the subsidy supports, limit customer churn and reduce price competition.

If consumers could bring their own phone to a new service arrangement, cellular operators might have to offer lower service rates, because they would have no subsidy obligation. Cellphone operators claim to allow consumers to use a “compatible” phone, but consumers receive no benefit through lower rates. U.S. cellphone operators do not want you to know that in other places in the world consumers have access to both cheap prepaid service, using calling cards, as well as cheap almost “throwaway” handsets geared to the prepaid services. These arrangements have no lock in and offer a far better value proposition than what Virgin and other so call mobile virtual network operators offer in the U.S.

I do not see how government sweeps in and pervasively regulates the commercial mobile radio service simply by requiring the unbundling of service and handset sales. If anything government remedies a market failure. When over 60% of all handset sales occur at cellphone company stores and another 30+% from a handful of Big Box stores, such as Best Buy, Circuit City and Walmart, I believe that the carriers have blocked the development of a secondary and resale market for handsets. According to the MIT Dictionary of Modern Economics market failure occurs as a result of the “inability of a system of private markets to provide certain goods either at all or at the most desirable or ‘optima’ level.” Safeguarding 95% to a captive, single distribution chain strikes me as viciously anticompetitive.


The harm to the network argument reminds me of the Bell System claim that attaching a non-Western Electric handset would “violate systemic integrity.” Of course systemic integrity had nothing to do with potential or real technical harm. The FCC established a lab certification and common interface requirement and the rest is history. The same could be done for wireless handsets.

Mr. Hoewing claims unbundling has not generated any major innovations in telephone handsets, but that misses the point in two ways. First he ignores that separating handsets from the network forced the network to remain largely neutral and accessible by any device and for any services. This did not relegate underlying carriers to operating “dumb” networks in perpetuity, but it did allow end users to inject network management functions at the edge instead of having to pay for a finite set of centralized options available from the carrier. Second, Mr. Hoewing ignores the widespread proliferation of handset types available in a competitive marketplace.

On the other hand what great innovations have the U.S. cellphone carriers provided consumers? Ringtones, short messaging and slow speed Internet access comes to mind. Compare that level of progress with the scope of innovation in the Internet.

Wireless State of Play: When Good Enough is the Enemy of Greatness

I marvel at the creativeness in the opposition to policy initiatives that I believe would confer ample consumer benefits by imposing lawful interconnection and accessibility requirements. You should consider reading closely the rationales proposed by Robert Hahn, Robert Litan and Hal Singer, The Economics of 'Wireless Net Neutrality' http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111
for objecting to rules that would force wireless carriers to comply with regulations long since applied to wireline carriers with great consumer benefits.

Professor Tim Wu proposed that wireless carriers comply with rules that would force them to decouple service from the sale of handsets and to comply with network neutrality principles. See Wireless Net Neutrality: Cellular Carterfone on Mobile Networks, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962027.

Opponents to the Wu proposal offer a glowing endorsement of how good the wireless infrastructure has become in the U.S. presumably because of light regulation and robust marketplace competition. Messrs Hahn, Litan and Singer would put the burden of proving market failure on Professor Wu in light of the wonderful output of self-regulation and competition. In other words regulatory safeguards, like the ones suggested by Professor Wu, are unnecessary and were applied when a vertically integrated monopolist operated.

First of all I marvel at how quickly opponents of wireless regulation ignore the still applicable common carrier requirements. Cellular carriers are subject to Title II of the Communications Act, including compulsory interconnection in a fair and nondiscriminatory manner. When 95% of all cellphones are sold at the time the cellular operator initiates service, I know there is an interconnection issue and a bundling problem. The cellular operator does not want anyone to buy a $2 phone at a garage sale, because a secondary market for handsets would prevent carriers from locking in consumers to 2 year service “commitments.” Additionally the carriers would lose any argument that they need two years of service to recoup the subsidy they paid to sell a $400 phone for much less. Yes the cellular carrier might reluctantly agree to interconnect and provide service to the used phone, but the consumer would have to pay rates as though the carrier supplied an expensive new phone.

So opponents to wireless net neutrality ignore the rents carriers capture when consumers can’t engage in a transaction that involves cellular service only. When wireline telephone service subscribers got the “right” to “own their own phone” telephone service rates dropped significantly because the carrier no longer could bundle the lease rate for the phone along with various maintenance fees.

Fair interconnection terms are needed for wireless carriers regardless of whether they are vertically integrated with a handset manufacturer and whether they operate as a monopoly. The integration allows any carrier to capture revenues well in excess of the handset subsidy. Indeed Iphone customers seem to be paying full price for the handset and cellular service rates as though a handset subsidy existed. Even in the absence of a monopoly the handful of cellphone service options available to consumers does not include lower cost bring your own handset rates.

I also take issue with the self-congratulatory assessment of the cellphone industry in the U.S. Contrary to what Messrs. Han, Litan and Singer would have you believe the U.S. does not come anywhere close to best practices in wireless in terms of throughout, cost, features, and even market penetration. The ITU ranks the U.S. at 63rd in wireless penetration. See http://www.itu.int/osg/spu/publications/digitalife/;
See also, http://www.itu.int/ITU-D/icteye/Reporting/ShowReportFrame.aspx?ReportName=/WTI/CellularSubscribersPublic&RP_intYear=2005&RP_intLanguageID=1;
High speed, broadband service is nothing like that available in Europe and Asia in terms of accessibility and price. The ITU reports that broadband access costs 49 cents per 100 kilobits per second in the U.S. versus 7 cents in Japan and 8 cents in Korea. See http://www.itu.int/osg/spu/publications/digitalife/statisticalhighlights.html.

Of course when statistics do not support the party line and display inconvenient truths, stakeholders shoot the messenger and challenge the veracity of the statistics. In the wireless arena mediocre to good performance provides the basis for rejecting initiatives that would force carriers to become better.

How Many Broadband Providers Does Your Zipcode Have?

For grins--or groans--I researched the FCC's broadband statistics to find out how many broadband providers my 16870 zip code has. Nine! See http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/hzip0606.pdf

I live in a mostly suburban/rural area about six miles from Penn State University. Verizon cannot or will not offer DSL to me, but they apparently serve someone--perhaps a school or library. I can get cable modem service and the FCC must also have counted cellular even though the promised 60-80 kilobits per second does not meet the low bar of 200 kbps established by the FCC. Add satellite service so I guess it's possible that we can get to 9.

The problem with this figure is that one might infer a vigorous facilities-based competitive marketplace exists in my hinterland locale.

No way.

Confiscation of ILEC Property?

The Telecommunications Act of 1996 ordered incumbent local exchange carriers to unbundle their networks as one of their common carrier interconnection responsibilities. Specifically Section 251 establishes “the duty to provide, to any requesting telecommunications carrier for the provision of a telecommunications service, nondiscriminatory access to network elements on an unbundled basis at any technically feasible point on rates, terms, and conditions that are just, reasonable, and nondiscriminatory in accordance with the terms and conditions of the agreement and the requirements of this section and section 252. An incumbent local exchange carrier shall provide such unbundled network elements in a manner that allows requesting carriers to combine such elements in order to provide such telecommunications service.”

Incumbent carriers have claimed that the FCC’s implementation of this requirement resulted in a taking or confiscation of their property. In a previous post I reported that the Supreme Court validated the general implementation plan of the FCC even as lower courts rejected specific elements of the plan.

I’m trying to delve more deeply into whether and how an interconnection responsibility of a telecommunications common carrier might violate their property rights. An argument could be made if the interconnecting carrier ended up having to invest in more facilities to accommodate the aggregate demands of carriers requesting interconnection using unbundled network elements. Likewise an argument could be made that interconnection foreclosed other more profitable undertakings, a type of opportunity cost.

But neither worst case scenario ever occurred. Using the FCC’s statistics, at the high point of having to accommodate competitive local exchange carrier unbundling requirements the incumbent carriers had to release 13.5% of their lines to competitors. See http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-270133A1.pdf, Table 4. The most recent figure is 9.3%.

Bear in mind the incumbent carriers received compensation for leasing lines. They dispute the rate of compensation, because pricing using forward looking, replacement costs or the long run incremental cost falls below—possibly well below—what the incumbent carrier would demand in commercial negotiations or what it would file as a tariff rate at the FCC.

Accepting the argument that unbundled network elements were provided at less than fully compensatory rates, the incumbent carriers surely had ample capacity to satisfy a lawful mandate while also seeking higher profits from their own retail and wholesale customers.

How could allocating no more than 13.5% of inventory, available at compulsorily "promotional" rates, constitute a taking?

FCC Makes the Right Call

The FCC today issued a Declaratory Ruling stating that "that no carriers, including interexchange carriers, may block, choke, reduce or restrict traffic in any way."
available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-07-2863A1.doc. I trust that statement is clear enough for the wireline and wireless carriers who decided they could serve as judge, jury and executioner when one of their telecom brethren gamed the system.

Several major carriers decided not to complete calls to clever independent local exchange carriers who pump up call volume and access charge interconnection payments by offering "free" conference and international calling. Ample FCC and case law precedent conclusively states that telecommunications service providers operate as common carriers. Likewise the "Filed Rate Doctrine" binds both carriers and end users to pay tariffed rates. If the blocking carriers did not like the access charge rate of compensation--and they surely should not like 7 or cents per minute rates--then they can contest the tariff when filed.

Remarkably the FCC made the right call.

Network Neutrality and Packet Sniffing

I have just completed the draft of a paper on the impact of deep packet inspection on the Network Neutrality debate and digital rights management. It's available on my web site: http://www.personal.psu.edu/faculty/r/m/rmf5/
and in a day or two in pdf. at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928.

In a nutshell I sugest that sniffing packet headers may disqualify ISPs from safe harbor copyright liability exemptions, because the ISP will have every opportunity to read (and comply with) DRM instructions. The potential disqualification raises some of the costs an ISP might have to incur in its quest to operate non-neutral networks, i.e., neterworks that use deep packet inspection to tier services by prices and QOS.

I would appreciate your thoughts on this paper.

Spam Filter Drives Wedge in Marriage

All of a sudden I lost email communications with my wife, another Penn State employee. I could send and receive emails with the rest of the world, but not my wife. Could this be an omen: do I need to pay greater attention to spousal communications? Might someone have the sick idea of meddling with my marriage?

It took hours of forensic examination by IT professionals at Penn State to find the answer. Blame it on Blogspot! My wife's mail server contains a potent spam filter that in its infinite wisdom determined that any REFERENCE to blogspot constituted probable cause to DELETE the message.

I had proudly added on my email signature a reference to Telefrieden thereby triggering the spam filter at my wife's Penn State server.

What can we learn from this unfortunate episode? Filters may be under- and over-inclusive, for sure. Might the spam filter software company render itself liable for damages by being overinclusive?

My remedy to the problem: eliminate the blogspot reference in my email signature. So even fewer people will know about TeleFrieden. Please tell your friends about this site as my email signature no longer can.

Separating Cellular Service From Handsets

You may know that Skype has proposed the unbundling of cellular service from the sale of handsets; see http://svartifoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6518909730. The FCC started the wireline equivalent of this in 1968, so why has it not occurred in the wireless arena?

One would think market separation as an option would serve the public interest and save money for consumers and possibly cellular operators as well. If you don't need the latest and greatest handset you could pick up a perfectly good handset for a couple of dollars. The cellular operator could activate service perhaps at a lower monthly rate and certainly without a 1-2 year lock-in period, becuase customer acquisition costs would near zero. There would be no handset to subsidize. But of course the handset provides the means (and justification) for the lock-in in the first place.

Cellular operators must have reached the conclusion that they have more to gain by locking in consumers to a 2 year service commitment, coupled with $175 early termination charges, than they lose in having to subsidize the cost of a handset. As usual there are plenty of hired scholars willing to ignore this simple fact and come up with spurious reasons why wireless unbundling is a bad idea and has no parallel to the successful wireline unbundling. For example, see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111.

Much of the opposition to wireless unbundling hypes the competitiveness and innovativeness of the industry and the fact that wireline unbundling occurred in a monopolized and vertically integrated environment. Fair enough, but what about the lost consumer welfare for people like me who want a month to month contract and the flexibility to vote with my feet to a better deal? If I can make do with a $5 garage sale handset, why shouldn't I get a cheaper rate plan?

BTW all cellular subscribers have paid hundreds of millions for number portability--the ability to migrate carriers while retaining an existing telephone number. The two year lock ins and the absence of a market for used handsets limits our ability to available ourselves of number portability.

Capitol Hill Briefing on Universal Service

Several of my Penn State colleagues and I briefed Senate and House staffers on universal service reform. Some of our papers are available at: http://www.benton.org/index.php?q=broadband_benefits.

It's been quite some time since I last made the rounds on Capitol Hill, but remarkably the process and the environment have changed little. The staffers are remarkably young and typically are both earnest and qualified. They welcomed our viewpoints, in part because we have the luxury of being able to answer their questions without a fixed party line. Having limited financial sponsorship--with no strings attached--appears to be the exception.

Additionally the staffer had a keen interest in hearing from anyone other than the telephone companies, their trade associations and their sponsored academic researchers. Several staffers mentioned how carpet bombing the Hill can work against stakeholders' interests. On the other hand an issue such as universal service has a substantial political and employment component.

Staffers want to find a way to avoid stranding sunk wireline telco investment, but also transition to an environment that recognizes voice telephony as a software application typically available at little cost.

The State of Telecom Policy Discourse in Washington

This week I accepted an invitation of Educause to appear on a panel discussing network neutrality. See http://www.educause.edu/about. As in my writing I try to offer an unbiased perspective that can see both sides particularly in light of the fact that I avoid financial sponsorship of my academic work.

Scott Cleland, a paid network neutrality opponent and agent provocateur attended and had particularly obnoxious and inappropriate comments about my presentation. See http://www.precursorblog.com/node/397. In a nutshell Scott could not come up with anything substantively incorrect about my presentation so he dissed it by writing that he could not understand it and that it offered nothing substantive.

I soon will post the presentation on my web site at:http://www.personal.psu.edu/faculty/r/m/rmf5/. Additionally I wrote Scott the following:

Hello Scott:You are sorely mistaken if you think I am an "ardent" supporter of net neutrality.As a matter of fact you know damn well I expressed clear support for most types of price and service discrimination and that my point of view does not jibe 100% with the net neutrality folks. Did you not hear me characterize the save the net folks as viewing change as "curtains for the free world."?

I know it does not make good copy to give me some credit for a fair and balanced perspective, but that is exactly what I offer as an unsponsored and unbiased observer.It is both unfair and obnoxious to deem my presentation and thoughtful commentary on network neutrality as nothing you can understand. Why not review the presentation and paper substantively and in the true spirit of peer review get back to me on areas with which you have a problem. I will need your email address to send you the presentation, but in the event I never hear from you I'll attach it here in any event.

Two papers I have written on the subject that quite frankly lies midway between Mssrs. Wu and Yoo are available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=893649 andhttp://www.personal.psu.edu/faculty/r/m/rmf5/Internet3.htm.

So here's the state of play in D.C.: hire a junkyard dog to spew vitriol and personal attacks. Is there any wonder why the level of discourse and analysis is so low? I take time out to prepare a fair and balanced point of view that Scott from his bully pulpit deems as echoing the collective brilliance and moral superiority of the panel. Ouch. I like to come across as self-effacing.

Does Video Have a Long Tail?

During one of the plenary sessions at the National Cable and Telecommunications Association annual conference a content supplier executive cut the tail off of video. He claimed that video content, such as movies and television, does not exhibit the same market characteristics as music and books.

A long tail for movies and books means that small, ideosyncratic demand can support the availability of diverse content, because suppliers can fill web shelf space that they know will trigger few sales. Itunes can offer consumers countless songs and Amazon can arrange the delivery for millions of books.

Presumably cable television operators could fill terabytes of storage with millions of movies and television shows, but perhaps they don't have to. When I visit Blockbuster I typically head to the most recent releases, despite having access to thousands of older movies at a substantial discount. My book library visits do not always focus on the new releases.

I am wondering what the implications of a shorter tail for video may be. Perhaps vertically integrated content plus distribution companies can leverage access to recent video releases to secure a competitive advantage. If so cable wins.

Insights From the National Cable Show

I had the opportunity to attend the National Cable and Telecommunications annual convention in Las Vegas. This show offers me an opportunity to kick the tires of new technology and get a sense of where the industry is headed. It also helps me replenish the cache of swag I use as door prizes in my classes at Penn State.

Here are the key take aways I got from the show:

Cable can more easily enhance its broadband platform than telcos simply by bonding about 12 MHz to the existing 6MHz (one anbalog television channel) currently allocated for broadband. I saw how cable can offer best practices 120+ megabits per second throughput using the DOCSIS 3.0 standard. This confirms what a transitional and inferior technology the telcos offers with DSL.

In a quasi-public session I swear I heard a senior officer of a major cable Multiple System Operator mention that broadband offers margins in the 98% range.

Cable managers understand full well that consumers expect to have access to compelling content anytime, anywhere and via any device. The operators expect new content access opportunities to be "additive," i.e., leading to more consumption rather than cannibalizing revenue streams.

Cable executives believe it will be easier for them to generate positive cash flow from non-video markets than it will be for telcos to master the content business.

Having not visited Las Vegas in 10+ years I enjoyed the people watching even as I marveled at the tawdriness of the place.

Monthly $2 Charge for Not Making Calls and How to Avoid It

My monthly Verizon landline bill arrived with a new $2.00 (plus 11% Universal Service Fund contribution) for not making any long distance calls. Like many consumers I have migrated most long distance calls to my cellphone and know the "casual calling" or "dial around" 10XXX option to make inexpensive toll calls.

I thought I had found a rate plan (at 40 cents a minute) that had no minimum and no charge to activate the presubscription when I departed from another company that had a monthly minimum. Verizon offered a rate plan I would never use, but one that could offer Verizon the chance to offer bundled services and other inducements.

Now Verizon has a $2.00 minimum and apparently no way of knowing that I am paying an affiliate of the company a cool $120 a month. So wireline Verizon treats me like a low tier non-revenue enhancer not worth the bother.

With an approach like that maybe I should join my college students in cutting the wireline cord and go wireless entirely. Something called the Missoula Plan (telcos like to name rate restructuring deals after the place the deal was first conceived) soon will cost wireline telephone subscribers $10 a month even before paying for a subscription.

The good news for me was a quite pleasant Verizon Customer Service Supervisor who waived the $2.19 and allowed me to eliminate Verizon as my presubscribed long distance carrier without having to pay about $6 for the privilege. I can still access long distance carriers, but not with the convenience of 1+ dialing.

Lies, Damn Lies and Broadband Statistics

For the better part of a decade, the United States lagged in broadband development largely because stakeholders invested in long haul capacity and failed local loop alternatives. Incumbent telephone company managers have emphasized regulatory uncertainty and “confiscatory” FCC sharing requirements, but the fact of the matter is that over $1 trillion was invested in the dotcom boom, a significant portion of which targeted burgeoning demand for local and long haul bandwidth.

Now that regulatory uncertainty provides no explanation for the United State’s comparatively poor performance in broadband market penetration the federal government has started to shoot the messenger reporting continuing poor penetration rates. Both the National Telecommunications and Information Administration and the State Department are challenging the statistics compiled by the Organization for Economic Cooperation and Development that ranks the U.S. 15th globally in broadband subscribers per 100 inhabitants (down from 12th last year). See
http://www.oecd.org/document/7/0,2340,en_2649_34223_38446855_1_1_1_1,00.html.

The State Department has made the issue something of a diplomatic affront to the U.S. See http://www.ntia.doc.gov/ntiahome/press/2007/State_OECD_042407.pdf NTIA offers explanations why scope of broadband access in places such as government offices and coffee shops means that the OECD ranking underestimates market penetration. See http://www.ntia.doc.gov/ntiahome/press/2007/ICTleader_042407.html.

So first stakeholders could blame the government for mandating common carriage facilities unbundling and interconnection. Now the government can blame outside data collectors as underestimating the kind of success the FCC found when it used zip codes as the relevant market penetration metric.

I am confident U.S. broadband penetration statistics will improve, but the initial “success” will occur in urban areas with greater likelihood for more than two facilities-based carriers offering true broadband at rates below $60 a month.

I fear the Digital Divide increasingly with cleve between cities and the hinterland.

The Dark Side of Incentive Creation

Much of the debate about broadband and next generation network development focuses on the alleged need for government to create incentives for carriers to invest. Ironically much of the excuses given for the disinclination to have invested emphasizes how government created disincentives, marketplace distortion and regulatory uncertainty.

So let me get this straight. The same person or corporation, with libertarian/deregulatory instincts, rails against government intervention as likely to fail even as they assert the need for incentive creation with a straight (if not disingenuous) face.

Let’s examine incentive creation, a government activity that has become so important that we now have a new word for it: incentivize, as in the FCC needs to incentivize broadband development in rural areas by expanding the universal service program.

With all this incentivization going on it’s no wonder that arbitrage and gaming opportunities abound. The most recent example lies in the realization by rural wireline telephone companies, particularly those entrepreneurial independent telephone companies in Iowa (see http://www.techdirt.com/articles/20070315/193857.shtml) that they can convert the universal service mission into cold cash. Because Congress and the FCC have created incentives for rural phone companies to wire up the hinterland, the crafty beneficiary of such incentives can earn extra cash by stimulating inbound traffic to the hinterland.

Brilliant! Funds designed to encourage telephone companies to serve expensive remote areas now flow more robustly into the coffers of the more creative incentive exploiters who offer outbound international long distance and conference calling all for the cost of the inbound call to rural Iowa. Wireless subscribers incur no additional charges for such calls made at nights and on weekends and cheap “postalized” long distance plans and calling cards offer 3-5 cents per minute calling any time of the day. The carriers handling the Iowa-bound call end up paying the Iowa telephone company as much as 7 cents a minute to terminate the call. Of course the call does not end ringing the telephone of some rural farmer in Iowa. It routes to a switch that provides second dial tone for outbound calling.

This clever money maker exploits the incentive to build out networks into the hinterland. Some of the outbound calling carriers, such as AT&T, have unilaterally decided to refuse to complete such calls. Unilaterally acting as judge, jury and executioner violates these carriers’ common carrier legal responsibilities. It also shows these carriers as asleep at the switch when the Iowa telephone company tariffed the extortionate 7 cent rate.

But most importantly the Iowa gambit shows that incentive creation has the very same potential to distort the marketplace and favor one group of stakeholders over others as the much more discussed disincentive creation.

Sponsored But Undisclosed "Research"

You might say fuzzy science made me blog. I decided to create this blog in part because of proliferating undisclosed, sponsored research. Far too many academics and think tank affiliates “contribute” to a public policy debate thanks to an undisclosed benefactor who surely expects something back for the hundreds of thousands invested.

Thanks to that wonderful concept of plausible deniability the sponsored researcher can state with a straight face that he or she does not receive any direct financial support for the White Paper, law review article or legislative testimony that just happens to offer unqualified support for a particular stakeholder or group viewpoint.

The money gets laundered. A stakeholder supports a think tank’s general mission with a sizeable grant. In turn the think tank’s staff or affiliates just happens to come up—unsolicited for sure—with creative thinking about a public policy issue that resonates with the stakeholder’s political and public relations agenda. The stakeholder’s grant helps pay for the employees’ or affiliates’ income, albeit indirectly. Hence no direct quid pro quo. How convenient.

I refuse to believe that so many public policy initiatives in telecommunications policy, first announced through the writing of an academic or think tank affiliate, arose completely unsolicited. We can thank undisclosed, but sponsored research for such innovative rethinking of economics and the law as the Efficient Components Pricing “Rule” and the view that the Telecommunications Act of 1996, as implemented by the FCC, “confiscated” incumbent carrier property.

Research also can pursue a specific and narrow agenda, e.g., attempting to discredit the lawfulness and accuracy of work conducted in official forums such as the World Trade Organization. See Sidak and Singer, Überregulation without Economics: The World Trade Organization’s Decision in the U.S.-Mexico Arbitration on Telecommunications Services; http://law.indiana.edu/fclj/pubs/v57/no1/Sidak.pdf. The piece contained a disclaimer that the American Enterprise Institute takes no position on specific legislative, regulatory, adjudicatory, or executive matters. But the reader gets no disclosure whether or not TelMex provided AEI any funding before or after this legal scholarship made its way into print.

Government Rent Seeking Versus Commercial Profit Seeking

Managers of commercial ventures invariably have to decide the proper balance of profit seeking investments and efforts versus seeking benefits (rents) from various government programs. For example, a professional sports team might leverage the possibility of leaving a city if the local or state taxpayers do not underwrite construction of a new stadium.

In telecommunications incumbent carriers have engaged in similar leverage: limiting investment in next generation networks unless and until government creates financial incentives or other inducements, e.g., removing “regulatory uncertainty” which might just mean unfavorable and costly regulatory obligations. For example, a telephone company might not build a fiber optic network capable of providing video competition with incumbent cable television ventures in a particular state or region unless and until the newcomer can avoid having to secure operating authority (a franchise) from each and every municipality within which the newcomer wants to operate. I understand that CEO of one major telephone company opted to “punish” the state of Illinois by targeting other states for new technology trials.

The tension between rent seeking and profit seeking has adversely affected the pace of next generation network deployment. Too many actual or prospective investors recognize the benefits in seeking government-generated incentives to invest. It becomes difficult to determine when competitive necessity would have forced an investment without government assistance and when incentive creation was necessary.

The recent substantial infusion of capital investment by incumbent carriers into next generation networks may evidence a healthy response to the elimination of unbundling and below market access pricing regulations. But it just as readily may evidence the fact that incumbent ventures, cable television and telephone companies alike, could not longer rely on core and previously captive revenues streams.

How much longer could the incumbent local exchange telephone companies see declining local voice service revenues, before they had to find and serve new profit centers? When stakeholders demand government incentives, it probably makes sense to ask whether the stakeholders would make the investment and take the risk without special accommodations.

Bandwidth and Throughput Math

Part of my current research agenda involves a comparative assessment of U.S. broadband market penetration and next generation network deployment. I am glad to note that the incumbent wireline carriers, such as Verizon, belatedly have invested billions of dollars. But on the other hand, because I live in the hinterlands I can get broadband at staggeringly high rates compared to what other consumers play in U.S. cities and in other nations. So I see a mixed bag corroborated by the relatively poor comparative performance of the U.S. in unbiased measurements of market penetration, digital opportunity and network readiness conducted by the International Telecommunication Union, see http://www.itu.int/osg/spu/newslog/CategoryView,category,Broadband.aspx; the Organization for Economic Cooperation and Development, see http://www.oecd.org/document/9/0,2340,en_2649_34223_37529673_1_1_1_1,00.html#Data2005; and http://www.websiteoptimization.com/bw/0510/; and the World Economic Forum, discussed in a previous blog entry.

Part of the challenge in this research lies in normalizing the data, i.e., comparing apples to apples, and deciding what constitutes success. The data compilations consider most helpful identify the number of subscribers per 100 residents, a broadband measure of “teledensity,” and the cost per 100 kilobits per month. See the ITU’s Digital Life Internet Report, http://www.itu.int/osg/spu/publications/digitalife/.

But even before one looks at the data, it makes sense to achieve consensus on the definition of terms such as bandwidth and throughput. Ironically the much maligned Senator Stevens from Alaska got it right: the Internet is a bunch of tubes or pipes. For the Digital Literacy course I teach at Penn State I analogize bandwidth as the size of the pipe, e.g., half-inch bathroom pipe versus 12 inch water main pipes. For throughput the pipe analogy considers the number of gallons that flow through the pipes per minute.

I am trying to consider the value proposition of broadband access in terms of available bandwidth (dedicated or shared), the likely throughput and aggregate usage per month. This is where the math and the value proposition get curious. You might not know that cable systems typically allocate only 6 MegaHertz of bandwidth for shared Ethernet-type access to the Internet. So if I am sharing 6MHz or less with hundreds of other subscribers, my virtual bandwidth allocation is quite small, even though I get multi-Megabit per second throughput and “All You Can Eat” uncapped access. Bear in mind that dial-up Internet access derives about 50,000 bits per second (50kbps) from an allocated bandwidth of 3-4 kiloHertz. For DSL, the dedicated copper local loop bandwidth expands by about 1.25 MHz. See http://electronics.howstuffworks.com/dsl2.htm.

Internet access subscribers actually care little about bandwidth except for its impact on about throughput, the number of downloadable and uploadable bits per second. But getting back to the value proposition, the ITU (in the Digital Life publication) ranked the U.S. 10th globally in terms of prices per 100 kilobits per second for 2006 using a $20.00 monthly subscription. Because I pay double the imputed rate, my value proposition would rank about 18th globally. Of course if you can get multi-megabit per second service for less than $20 a month, your value proposition is better than the national average

So the U.S. has some ways to go before government and carrier officials can self-congratulate. Still no one in the U.S. can come close to the global best practices of $0.07 per 100 kbits/s in Japan. Put another way the average U.S. broadband price is 700% higher than the Japanese average.