Award Winning Blog

Monday, December 29, 2008

Fuzzy Math in Calculating the Cost and Profit in Wireless Text Messaging

The New York Times recently addressed the issue of wireless texting cost and strongly implied that carriers make a lot of money from this service that costs them little to provide. See Of course wireless carriers quickly will respond that consumers (can) get an incredible bargain by subscribing to an all you can eat (“AYCE”) rate plan. If you apply the typical non-rate plan of twenty cents per text message, you can conclude the carriers are gouging, but if you use a $10.00 per month rate, coupled with lots of usage, the per message cost drops substantially.

Texting provides a helpful case study for assessing the competitiveness of the wireless marketplace and the value proposition presented. First, we should appreciate that the wireless infrastructure has substantial upfront, sunk costs, e.g., the need for carriers to competitively bid for spectrum, construct towers and install other facilities before accruing the first dollar in revenues. However, once having sunk this substantial investment, the incremental cost of providing an additional minute of service approaches zero absent network congestion. For text messaging, the additional or “marginal” cost of providing service surely approaches zero, because carriers can load text traffic onto control channels already installed for a different purpose, to set up calls. See

One could argue that charging twenty cents for something that costs next to nothing constitutes a major rip off. However, you do have to keep in mind the substantial start up costs the carriers incurred and the need to recoup that investment from any and all services. On the other hand, even when offering texting at AYCE rates the carriers can generate ample profits.

So if texting is so popular and profitable why don’t wireless carriers compete on price? Good question. In a robustly competitive market price becomes a major factor, yet for wireless the carriers’ advertisements almost exclusively tout reliability and they match each other’s texting prices. Additionally carriers, their trade associations, and the FCC regularly emphasize the rate plan per text message or per minute talk time rate to show how competitive the wireless marketplace is and what great consumer surpluses subscribers accrue.

In reality not all wireless subscribers enroll in a text messaging plan, nor do all subscribers come close to using all their monthly allotments of use. For the high volume user, rate plans help reduce per minute costs, just as buffet restaurants reduce patrons costs per once of consumption. A big gap exists between metered and AYCE per minute costs, but to make the best claim of marketplace competitiveness one has to work with AYCE plans, or ones offering large buckets of minutes.

U.S. wireless carriers currently offer some of the most expensive and cheapest rates for texting and telephoning. Of course it makes sense for subcribers to enroll in rate plans, but only if they accept the reality that low cost results only from large usage.

Deconstructing AT&T’s Claims About the iPhone

Unlike the other wireless carriers, which primarily use advertisements to claim how well their networks work, AT&T pitches both reliability and speed. AT&T claims to operate the nation’s fastest 3G network. See The carrier claims the following bit rate delivery speeds: “typical download speeds of 700 Kbps—1.7 Mbps;” and “typical upload speeds of 500 Kbps—1.2 Mbps.” See

AT&T’s claims about transmission speeds remind me of the claimed distance coverage of Family Radio Service transceivers, the next generation of Citizens Band radios. Uniden claims my transceivers will provide service for “up to twelve miles.” Yeah, right. I am lucky to get one and one-half miles.

So what bitrates do AT&T 3G subscribers actually get? Wall Street Journal columnist Wall Mossberg measured the 3G iPhone bitrates at not terribly blazing 200-500 kbps.

The good news about AT&T’s suspect bitrates claim lies in the apparent strategy to pitch something more than service reliability. The bad news lies in the overstatement and the reality that U.S. wireless carriers comparatively lag carriers in many other nations. But of course that would require consumers, regulators and legislatures to question the claims of carriers, something "obviously" best left to the marketplace.

Wednesday, December 24, 2008

Do Transparency and Non-Discrimination Requirements Impose De facto Common Carriage Duties?

Birtelcom has asked whether a Network Neutrality requirement of transparency and nondiscrimination in effect imposes a common carrier responsibility on ISPs serving Goggle to provide edge caching. Fair question.

As Information Service providers, not subject to Title II telecommunications service regulation of the Communications Act, ISPs do not have to provide any service they do not care to offer. This means that any ISP can elect not to offer edge caching, or any form of premium, better than best efforts routing. An ISP serving Goggle can decline to offer Google what it wants—as ill-advised as that would appear.

A Title I (ancillary jurisdiction) requirement of transparency and nondiscrimination would require any ISP, voluntarily electing to provide edge caching service, to do so in such as a way as to provide any similarly situated client the option of taking the premium service. This requirement does not impose common carriage and tariff filing duties. It only would prohibit ISPs from cutting exclusive, “most favored customer” arrangements that no other client would know about and have an opportunity to take.

ISPs should have the opportunity to offer tiered services that offer different levels of service. But in doing so, ISPs should not have the option of making exclusive deals, obscured by nondisclosure agreements.

Quality of service and price differentiation can provide legitimate and lawful discrimination, subject to conditions and sanctions. ISPs would trigger sanctions for engaging in unfair trade practices by degrading service, e.g., dropping packets, to non-premium customers in the absence of severe congestion, and by deliberately partitioning their networks so that best efforts routing options are guaranteed to achieve unacceptably inferior service.

Tuesday, December 23, 2008

Wall Street Journal 100% Record Sustained—Deliberately Getting it Wrong on Network Neutrality

Month after month the Wall Street Journal (“WSJ”) pursues what appears to be a deliberate strategy of misinformation on the issue of Network Neutrality. The latest installment appears in Dec. 23rd editorial written by Gordon Crovitz who attempts to equate Google’s enhanced use of edge caching as evidence that the entire matter of Network Neutrality has been much ado about nothing. See

Mr. Crovitz starts by referring to a widely discredited WSJ article that reported on Google’s edge caching strategy and implied that such a strategy would violate Network Neutrality principles and evidences Google’s abandonment of advocacy for such principles. I would think the WSJ would applaud Google’s apparent change of heart from free rider of Internet resources to conscientious underwriter of the links that take content from the Googleplex to various servers closer to people making Internet searches. Instead Mr. Crovitz reiterates the red herring that companies like Goggle, Yahoo and Microsoft (key Network Neutrality advocates) “don’t want to have to pay tolls to the companies that provide the Web infrastructure.”

Does anyone see the irony in this statement? Goggle intends on paying more than it previously has paid for what I call “better than best efforts” routing of traffic. The existing traffic routing (“peering”) arrangements of the Internet Service Providers (“ISPs”) that carry Google’s traffic on a plain vanilla, “best efforts” basis do not include premium service. So Google will have to pay for superior distribution of the most commonly searched for results, just as CBS pays for ISPs to deliver “mission critical” bits corresponding to webcasts of March Madness college tournament basketball games.

Previously Google was pilloried for allegedly not paying for any access to consumers, a falsity that many believed despite the fact that Goggle does pay its ISPs and apparently has expressed a willingness to pay more. By the way, the downstream ISPs that also handle Google traffic also have received payment, directly from subscribers and also through barter agreements where ISPs offer access to their networks in lieu of direct payments.

As I have written in my blog, (see premium routing of content does not violate my sense of Network Neutrality, provided ISPs offer such service in a transparent and nondiscriminatory manner. My sense of Network Neutrality would only require ISPs not to drop packets deliberately as a ruse to force either end users or content providers to trade up in service, or to so partition their networks to all but guarantee that plain vanilla, regular service (best efforts routing ) becomes inadequate.

No fair minded advocate for Network Neutrality has rejected reasonable efforts by ISPs to manage their networks, nor does Network Neutrality somehow convert ISPs from information service providers into common carrier, public utilities as Mr. Crovitz alleges. He also makes the bold assertion that the United States’ poor standing in terms of broadband access directly results from Network Neutrality advocacy that creates disincentives for ISPs to invest in infrastructure.

Surely Mr. Crovitz knows that the FCC does not treat ISPs as telephone companies. Likewise neither the FCC nor any reasonable interpretation of its Internet policies foreclose ISPs from providing tiered services, or from accruing triple digit rates of return for Internet access, a reality some of the WSJ’s buy side stock analysts could confirm.

Perhaps Mr. Crovitz sees common carrier regulation in the manner in which the FCC responded to complaints about how Comcast throttled peer-to-peer traffic. Of course the FCC did not mandate common carrier nondiscrimination. The Commission did state that an ISP cannot use software that deliberately drops packets and thwarts delivery of traffic all the time without regard to whether actual network congestion exists. It strains credulity to characterize Comcast’s tactics as nothing more than ensuring that non peer-to-peer traffic “could move more smoothly,” unless Mr. Crovitz has some new evidence to prove that if Comcast did not resort to traffic throttling its network would perform in an inferior manner.

Lastly Mr. Crovitz appears to dismiss the Network Neutrality as nothing more than a tactical strategy by major content providers to avoid having to pay their fair share of the costs ISPs incur to provide Internet access. Like other opponents of Network Neutrality he ignores the major investments Google and other content providers have made to create compelling content which provide reasons for consumers to pay sizeable rates for Internet access. He conveniently ignores that the ISPs providing content delivery offer reciprocal access in lieu of cash payment, or perhaps he has bought into the notion that somehow Goggle and other content providers have managed to cheat ISPs of the right to charge both end user subscribers and upstream content providers.

Unlike telephone networks, the Internet seamlessly combines telecommunications bit delivery with access to content. Monthly Internet access subscriptions amply compensate ISPs and one would think Mr. Crovitz and the WSJ would use their bully pulpit to praise Google and others for providing new revenue streams for incumbent telephone and cable companies.

Sunday, December 21, 2008

No Way to Put the Public Back in Public Utilities?

Several years ago many state legislatures embraced the concept that technological innovations would stimulate robust competition in previously monopolized industries such as electricity, gas and telecommunications. The legislatures so bought into the certainty of competition that laws created a glide path to deregulation and the near complete elimination of consumer safeguards. The legislature accepted the premise of lobbyists and sponsored academic researchers that public utilities should qualify for treatment as competitive businesses surely entitled to cut off services to nonpaying customers, an outcome that has contributed to 81 deaths in Pennsylvania. See

With the passage of time, it has become quite clear that infrastructure industries with substantial investment needs do not typically have many facilities-based competitors, especially for the last mile of service to residential and small business consumers. Yet most state legislatures have not revise their laws, even after the Enron debacle showed how crafty public utility employees could exploit their less regulated status to create expensive, but artificial bottlenecks, congestion and shortages of power.

Having cut a deal based on the certain expectation of competition, state legislatures did not think to condition deregulation on confirmation that the competition arrived and flourished. Without such a safeguard, deregulated public utilities surely will claim that they relied on the promise of deregulation and any revision would unfairly and unlawfully confiscate their financial resources. So public utility consumers in many states have the worst of all worlds: deregulation based on competition that did not arrive and apparently no remedy for resumption of consumer safeguards in the absence of a self-regulating marketplace.

Thursday, December 18, 2008

Apple iPhone Apps Store—Refreshing Openness or Walled Garden?

Apple Computer has received high praise for the diversity of applications available for the iPhone. The company shows great willingness to accept third party software innovations. But Apple also solely decides whether to accept and make available any application. Rejected software vendors for the most part do not exist if they do not have shelf space at the Apple store. The possibility exists that iPhone users can download and install non-Apple endorsed software, but more likely Apple could reject any third party application when users download next generation Apple operating system software.

Apple serves as a bellwether for openness and innovation even as it appears to treats users’ screens as Apple property for a “walled garden” of its choosing. Consider this scenario: Apple cuts an exclusive deal with Exxon-Mobil for a GPS-based locator for nearby Exxon-Mobile gas stations. A new startup venture Cheapgas, Inc. has devised a GPS-based locators for all nearby gas stations, coupled with user reports on the per gallon rates for most of the listed stations. Exxon-Mobile invokes the exclusivity clause in its contract with Apple forcing Apple to reject the Cheapgas proposal for inclusion in the IPhone Apps Store. Cheapgas may try to find ways for iPhone owners to download the software, but even if this alternative is possible, far fewer downloads likely will result as users do not risk “bricking” their phone, or they simply take the path of least resistance and stick with the easy app download process offered by Apple.

Does Apple’s walled garden strategy violate a fair-minded concept of network neutrality? Does Apple rightly control what can appear on iPhone screens? Do exclusivity contracts, like that negotiated between DirecTV and Dish Network satellite operators, promote diversity and innovation?

Tuesday, December 16, 2008

Edge Caching and Better Than Best Efforts Routing

A recent WSJ article has caused a tempest in a teapot over the possibility that standard bearers for network neutrality, such as Google, have gone over to the dark side in favor of something akin to “better than best efforts” routing. See; Others dispute this; see In reality, Google seeks to pay a premium for distributing most likely to be requested search answers to proxy servers closer to the search initiator.

I do not see how this violates network neutrality, because Google seeks only the very same sort of expedited delivery of “mission critical” packets as CBS would for its coverage of March Madness basketball and Victoria’s Secret for its webcasted fashion shows. Better than best efforts routing, like that offered by Akamai, reduces the number of routers and the potential for lost packets and latency. Both subscribers downstream from content and upstream content providers should have the opportunity to pay for better than best efforts, plain vanilla packet routing. But network neutrality concerns weigh in when and if ISPs deliberately drop packets as a ruse to force either end users or content providers to trade up in service, or when ISPs so partition their networks to all but guarantee that best efforts routing will result in inadequate service.

Friday, December 12, 2008

The Downsides in Maximizing Spectrum Auction Proceeds

My classical economics training suggests that when governments maximize spectrum auctions—or the award of any franchise—the nation “wins” by awarding a public resource to the party most willing and able to maximize the value reflected by the asset. Surely a venture willing to part with the most money has maximum motivation to operate efficiently and to offer consumers what they want.

But might there exist long term downsides when the process extracts maximum value for the treasury? I think so, particularly in light of recent suggestions from economists that any condition on spectrum use, or any restriction on who qualifies to bid, simply reduces what the government will reap without any public benefit.

Most recently some economists grew apoplectic at the FCC’s small endorsement of wireless Carterfone principles and somewhat more open spectrum access to the C Block of the 700 MHz spectrum auction. True enough somewhat greater access translates into somewhat less revenue to the treasury, but might long standing public benefits compensate for this shortfall? I believe so, in light of how greater accessibility typically triggers greater competition, more robust and diverse applications and uses for spectrum and opportunities for spectrum users to customize their services. The wired Carterfone policy triggered competition in the market for handsets as well as uses for basic telecommunications line transport.

I will go one step farther and suggest that had the FCC maintained a cap on the amount of aggregate spectrum any single venture could control, the ensuring competition generated by market entrants would have forced incumbent carriers, such as Verizon and AT&T to compete more aggressively on price and perhaps even on network accessibility. One cannot readily quantify the downstream financial benefits when a nation establishes policies that in the short term lower auction proceeds, but surely enhances spectrum consumer welfare in the long term.

There certainly is one financial impact no one seems to consider when national treasuries reap billions in auction proceeds: the treasury probably will not receive much in the way of future tax proceeds from ventures able to spread its auction bid amount as an offset against current revenues.

Tuesday, December 2, 2008

Lessons From the Hawaii Telcom Bankruptcy

Hawaii Telcom, the incumbent local exchange telephone company, has filed for bankruptcy protection. Press accounts attribute this outcome to increased competition, the company’s struggle to finance capital spending while making debt payments, a significant downturn in the economy, as well as the difficulties in the transition following the leveraged buyout of the company from Verizon Communications Inc. See

I have a few other bogus and credible explanations that may offer greater insights. When something like this happens, it seems too easy for the culprits to evade responsibility by invoking the “perfect storm” explanation as appeared in the press account above. No person or group bears any specific responsibility. Bad things happen like the breaching of flood gates and levees in New Orleans. The perfect storm defense does not just shift the blame, it deflects the responsibility and accountability issue by claiming something akin to force majeure, an unavoidable event, or series of unfortunate events.

Another bogus defense invokes the “destructive” aspect of capitalism and competition. Joseph Schumpeter, an Austrian economist coined the phrase “creative destruction” in the early 1900s to refer to the long run creative and production benefits accruing when new firms replace failing firms. Some economists consider competition destructive if after a short period of low prices, competitors exit the market and consumers end up worse off by having fewer choices as surviving firms raise prices to recoup previous losses.

In HawTel’s case the firm’s troubles have not resulted primarily from macro-level assaults on its bottom line by the business cycle, VoIP and the cost of capital. As to destructive competition, few if any informed industry observers would declare local exchange telephony a natural monopoly, entitled to insulation from competition presumably in exchange for rigorous rate of return, public utility regulation.

The massive fees extracted from the leveraged buyout of HawTel, coupled with a vastly greater debt burden, sank the firm. Time after time state and federal regulators accept the pitch that a merger or acquisition will serve the public interest by “promoting competition” and “enhancing productivity and efficiency.” In reality some leveraged buyouts make the deal makers rich and the public worse off. A firm saddled with far greater debt may not have the wherewithal to handle its vastly higher debt load. The so called efficiency gains result by firing workers and cutting corners on customer service, maintenance and infrastructure upgrades. In HawTel’s case the house of cards fell down, and it may appear that the Carlyle Group, the private equity firm buyer of HawTel, ends up with a losing investment. I suspect that with close forensic scrutiny of the deal, the Carlyle Group, was able to extract ample upfront fees to abate if not eliminate the financial harm resulting from HawTel’s bankruptcy. Hawaiian wireline telephone subscribers probably will not end up harm free.

Friday, November 21, 2008

Demand Elasticity for ICE Services

The Wall Street Journal today reported that many electricity utilities in the United States have experienced an unexpected decline in demand, particularly from residential users. It comes as no surprise to me that even essential public utility services have some demand elasticity, i.e., consumption declines when consumers feel financially strapped. When one worries about job stability, or in my case coming up with a Cornell tuition, electricity consumption becomes one of many costs subject to greater scrutiny and conservation.

Does heightened scrutiny extend to information, communications and entertainment expenses particularly as companies providing these services experiment with new ways to extract greater compensation from high volume users? I think so, particularly for consumers being weaned off “all you can eat” unmetered service which has served as the predominant pricing model for Internet access.

In economics a concept called the “fallacy of consumption” warns that if many consumers start to reduce consumption service providers and consumers can become worse off. Internet service providers, keen on extracting surcharges from power users, have to consider the consequences that heavy volume users decide to throttle down on their consumption rather than pay more.

Similarly, it may come to pass that even recession resistant industries such as cable television and mobile telephony, may have to confront the possibility that they cannot raise rates without a reduction in subscribership or shift in service tiers. That said, this week I received a bill from my wireline local exchange carrier that noted a minor rate increase. One would think that wireline telephone companies, facing the triple threat of competition from cable operators, churn to wireless options and the poor economy would not opt to raise rates. Perhaps this telephone company banks on plenty of users displaying inelastic demand for such a traditional service.

Monday, November 17, 2008

Voodoo Economic Modeling and Telecom Policy

In my capacity as a university professor, one of the ways I serve “the academy” involves blind peer review of journal manuscripts. I also have the opportunity to read the academic literature. I marvel at the number of instances where someone—typically holding a PhD in economics—uses a model to rationalize a regulatory agency decision, or to quantify the harm resulting from an ill-advised initiative. The use of complex equations, complete with Greek symbols, attempts to legitimize any sort of bogus conclusion. Worse yet, far too many of these models did not arise out of an academic’s intellectually curious mind, but instead provides some scientific basis for a public policy outcome sought by a specific stakeholder who has financially sponsored the research.

This constitutes a corruption of academic research. The sponsored researcher does not disclose the direct sponsorship, e.g. payment, or the indirect process where a foundation, institute, or think tank receives funding that flows through to the researcher. In far too many instances notwithstanding some impressive math, the sponsored researcher concludes that a merger or acquisition will serve the public interest by “promoting competition.” Other researchers quantify the financial harm to the public or national treasury should the FCC do something or refrain from doing something.

Recently I have reviewed work that purports to quantify how much wireless subscribers benefit from access to subsidized handsets. I also have read a study that purports to quantify how much application of the wireless Carterfone policy would reduce carrier revenues, create disincentives for investment in new wireless infrastructure, promote further industry consolidation and reduce carrier profitability. Wow! Such big numbers all from a policy that I enthusiastically endorse, because it promotes competition among wireless carriers who cannot easily lock subscribers into a two year service commitment, and who cannot block subscribers from accessing content and software that competes with offerings of the carrier or a favored affiliate.

Both studies conveniently ignore counter arguments to their sponsor’s objective. In the case of subsidized handsets, seeing that wireless carriers do not operate as charities, might the carriers fully recoup the subsidy through the two year service commitment and the ability to charge rates in excess of what they would be if customers could more readily change carriers? In terms of the harm to the national treasury, carriers, and “innovation” the research conveniently ignores the public interest and individual consumer benefit in having access to more and different content, not just what the carrier’s “walled garden” offers. Might a substantial consumer welfare gain accrue when wireless consumers can buy cheaper and even used handsets and possibly force wireless carriers to offer cheaper service options for subscribers who trigger no handset subsidy obligation?

It has become painfully clear to me that if you see though the math equations, the sponsored researcher know what buttons to push a public policy initiative. These include:

Quantification of how many jobs a sought after initiative will create;

Estimates of how much money a change in regulatory policy will cost consumers;

Quantified claims that a change in policy will create disincentives for investment in $x billions; extra points for using the non-word incentivize; and

Estimates of how much money regulation will cost the sponsor, with no offsetting estimate of what consumer savings will accrue from more competition.

Let’s hope a new FCC will rely less on bogus, sponsored research to legitimize an preordained policy outcome.

Friday, October 3, 2008

Unlicensed White Space Use as an Airwave “Freeze”

Professors Tom Hazlett and Vernon Smith have an op ed piece in the Oct. 3rd edition of the Wall Street Journal entitled “Don’t Let Google Freeze the Airwaves.” Apparently advocacy by Google, Microsoft, the New America Foundation and others in favor of unlicensed access to unused broadcast television channels freezes out even better reallocation of spectrum that could eventually be auctioned off for highly efficient private use.

Professors Hazlett and Smith appear to think private, unlicensed use could not possibly be as efficient as the command and control provided by a single owner keen on recouping its investments. Using the Professors’ rationale, would unlicensed Wi-Fi home network operators be better off if a single venture secured the 2.4 GHz band and packaged innovative home networking “solutions”? Not for me. I’m doing just fine managing spectrum quite efficiently using a device whose manufacturer bore no great burden proving to the FCC that the device would not cause harmful interference. Millions of Wi-Fi network operators do not have to pay a dime for the privilege of using spectrum and they surely do not need a spectrum owner to restrict their freedom and charge them for the privilege of using public spectrum.

The same principle applies to the millions of cordless telephone users. Should we have to pay a fee to the telephone company, or whoever acquired the cordless telephone frequencies for the privilege of using cordless handsets? Of course not. There are plenty of instances where spectrum use does not have to be coordinated, managed and priced by a single licensee.

Consider all the innovations and consumer friendly applications that entrepreneurs have developed for unlicensed spectrum. One upcoming application, using low powered “femtocells” makes it possible to extend licensed cellular telephone service and signal penetration into homes and offices. Some femtocells use the unlicensed Wi-Fi frequency band while others transmit on licensed cellular radio frequencies. In either case, consumers benefit equally. However, if the Wi-Fi spectrum became inventory held by a venture other than a cellular company, we could expect the Wi-Fi spectrum owner to demand gatekeeper or bottleneck compensation, or at least to delay and complicate the beneficial extension of cellular telephone service inside buildings.

I share with Professors Hazlett and Smith antipathy toward maintaining status quo spectrum allocations that favor incumbent users and ignore technological innovations. However I part company with them in their apparently absolute dismissal of the spectrum sharing between incumbents and new users. The Professors’ model replaces one incumbent with superior, but unjustified, access rights for another who paid for the right. In both instances incumbency works against free, shared use by unlicensed operators who surely can exploit technological innovations that provide innovative and entrepreneurial ways to satisfy telecommunications and information processing requirements.

Wednesday, September 24, 2008

Such a Deal: Wireless Service Without a 2 Year Commitment

Today’s Wall Street Journal (at B5B) reports that Verizon Wireless will now allow subscribers to buy unsubsidized handsets in exchange for which subscribers can avoid a two year service commitment. Before you consider this a major concession to consumer sovereignty recognize that Verizon has not announced a discounted service rate to reflect the elimination of a handset subsidy obligation.

The WSJ article notes that Verizon will sell a Blackberry handset for $430 in lieu of the subsidized price of $100. Because Verizon surely does not operate as a charity, the two year service commitment required of subscribers acquiring a subsidized handset, has at least a value of $330 to both Verizon and subscribers. Verizon must build in its monthly service rate sufficient revenue to recoup the $330 over two years. Subscribers slowly pay back the $330 handset subsidy through higher service rates.

When someone becomes a Verizon subscriber using an unsubsidized handset, these subscribers in effect pay a surcharged rate of at least $165 annually by foregoing a handset subsidy yet paying the same rate as handset subsidized subscribers.

Such a deal.

Tuesday, September 16, 2008

Broadband Statistics and the Lack of Transparency

Above is a prepresentative page constituting the sum total of the FCC's broadband statistics compilation. Might the FCC have both the incentive and the ability to overstate penetration? I'll answer that question with a big yes! The FCC currently uses a 200 kilobits per second threshold and counts an entire zip code as served should one e-rate or other subscriber exist. Even with a 768 kbps thershold and greater geographical granularity the overstate remains. First the FCC does not use actual, measured throughput, but instead relies on carrier reports. Carriers sharing the FCC's incentive to overstate success can claim to meet the 200 or 768 kbps threshold based on a theoretical possibility. So the FCC can reach double digits even in rural areas based on the bogus assumption that 2G terrestrial wireless and satellite broadband exceed a theoretical throughput floor.

Additionally the FCC makes no price comparison, so a triple digit monthly subscription rate offers no disincentive at least for counting options.

The FCC proves the adage that there are lies, damn lies and statistics designed to prove a mission accomplished.

Wednesday, August 20, 2008

Summary of the FCC's Comcast Network Management Order

By a 3-2 vote, the FCC concluded that Comcast violated the Commission’s 2005 Policy Statement on the Internet and broadband service [1] in using software applications to block or delay subscriber peer-to-peer (“P2P”) file transfers. [2] Using quite strong, disapporinvg language, the Commission determined that Comcast unduly interfered with Internet users’ right to access the lawful Internet content and to use the applications of their choice:
Although Comcast asserts that its conduct is necessary to ease network congestion, we conclude that the company’s discriminatory and arbitrary practice unduly squelches the dynamic benefits of an open and accessible Internet and does not constitute reasonable network management. Moreover, Comcast’s failure to disclose the company’s practice to its customers has compounded the harm. [3]

Specifically, the Commission found that Comcast had deployed deep packet inspection equipment throughout its network to monitor the content of its customers’ Internet connections and to block specific types of P2P connections such as that facilitated by the use of BitTorrent software. [4]
Comcast used software to enable the company to masquerade as the recipient of a P2P file transfer sessions and to issue a command to reset, i.e., to stop sending traffic and start again. Comcast forged so-called TCP reset packets [5]even though it appears that the company could have handled the actually occurring traffic volume without having to degrade anyone’s traffic. [6] The Commission noted that while Comcast initially disclaimed any responsibility for its customers’ problems, tests conducted by the Associated Press and Electronic Frontier Foundation suggested that the company selectively interfered with attempts by customers to share files online using P2P applications, a practice that did not violate FCC rules, or Comcast’s service terms and conditions. Comcast later acknowledged that it did target its subscribers’ P2P traffic for interference and that such interference was not limited to times of network congestion.
The FCC concluded that Comcast’s practices did not constitute legitimate network management, because the practices discriminated against specific applications without regard to whether they actually caused congestion by depleting the Comcast network of sufficient bandwidth:
On its face, Comcast’s interference with peer-to-peer protocols appears to contravene the federal policy of “promot[ing] the continued development of the Internet” because that interference impedes consumers from “run[ning] applications . . . of their choice,” rather than those favored by Comcast, and that interference limits consumers’ ability “to access the lawful Internet content of their choice,” including the video programming made available by vendors like Vuze. Comcast’s selective interference also appears to discourage the “development of technologies” — such as peer-to-peer technologies — that “maximize user control over what information is received by individuals . . . who use the Internet” because that interference (again) impedes consumers from “run[ning] applications . . . of their choice,” rather than those favored by Comcast. [7]

The Commission noted that Comcast had an anticompetitive motive to interfere with customers’ use of peer-to-peer applications, because such software provides Internet users with a high-quality video access alternative to cable television services. Such video distribution poses a potential competitive threat to Comcast’s video-on-demand (“VOD”) service. The Commission also concluded that Comcast’s practices were not minimally intrusive, as the company claimed, but rather were invasive in that the company substantially impeded subscribers’ ability to access the content and to use the applications of their choice.
The Commission also concluded that Comcast exacerbated the situation by failing to disclose its practices to consumers. Because Comcast did not provide its customers with notice of the fact that it interfered with customers’ use of P2P applications, customers had no way of knowing when Comcast would interfere with their connections. As a result, the Commission found that many consumers experiencing difficulty using only certain applications would not place blame on Comcast, where it belonged, but rather on the applications themselves, thus further disadvantaging those applications in the competitive marketplace.
Perhaps mindful of the likelihood that Comcast will appeal the FCC’s Order the Commission extensively outlined its statutory authority for having substantive jurisdiction over Comcast’s Internet-based practices and for reaching an administrative decision without a formal rulemaking before adjudication. The Commission claims to have jurisdiction to resolve disputes regarding discriminatory network management practices based primarily on two statutory mandates: 1) Section 230(b) of the Communications Act of 1934, as amended, where Congress stated that it is the policy of the United States “to preserve the vibrant and competitive free market that presently exists for the Internet” as well as “to promote the continued development of the Internet;” and 2) Section 706(a) of the Act, where Congress directs the Commission to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.” [8] Comcast and other parties considered these broad statutory mandates an insufficiently specific in light of the requirements the FCC decided to impose on Comcast.
The FCC also stated that in establishing its 2005 Internet Policy Statement the Commission intended to incorporate the Policy Statement’s principles “into its ongoing policymaking activities.” [9] The FCC noted that contemporaneous with the issuance of its Internet Policy Statement, the Commission released its Wireline Broadband Order that largely eschewed regulation, but specifically warned that “[s]hould we see evidence that providers of telecommunications for Internet access or IP-enabled services are violating these principles, we will not hesitate to take action to address that conduct.” [10]
The FCC opted to exercise jurisdiction over peer-to-peer Internet connections based on the fact that such connections use “communication by wire.” [11] With that direct link to the general jurisdictional grant conferred under Title I of the Communications Act, the Commission exercised its ancillary jurisdiction on the premise that Comcast’s practices adversely impacted national Internet policy.
The Commission rejected Comcast’s argument that any regulation of network access and management violates the Commission 27 year old policy of leaving information services unregulated:
the Commission previously indicated that it would not hesitate to take action in the event that providers violated the principles set forth in the Internet Policy Statement. Moreover, the Commission repeatedly has stated its willingness to exercise the full range of its statutory authority to ensure that providers of cable modem service meet the public interest in a vibrant, competitive market for Internet-related services. For instance, in the Wireline Broadband Order, the Commission found that it had jurisdiction over providers of broadband Internet access services and stated that “we will not hesitate to adopt any non-economic regulatory obligations that are necessary to ensure consumer protection and network security and reliability in this dynamically changing broadband era.” Specifically with regard to cable modem service, in the 2002 Cable Modem Declaratory Ruling sustained by the Supreme Court in Brand X, the Commission sought comment on a wide range of statutory bases for exercising ancillary jurisdiction over cable modem service, including section 230(b) of the Act. The Commission also explicitly mentioned the blocking or impairing of subscriber access by a cable modem service provider as possible triggers for Commission “intervention.” [12]

While deciding that it should act on a case-by-case basis, the Commission held that it did not have to conduct a rulemaking or hearing to investigate and remedy Comcast’s practices:
And to the extent that Comcast implies that our ancillary authority does not extend to adjudications but rather must first be exercised in a rulemaking proceeding, it is simply wrong. The question of whether the Commission has jurisdiction to decide an issue is entirely separate from the question of how the Commission chooses to address that issue. Perhaps more to the point, the D.C. Circuit has affirmed the Commission’s exercise of ancillary authority in an adjudicatory proceeding and in the absence of regulations before. [13]
The FCC concluded that “Comcast has several available options it could use to manage network traffic without discriminating as it does” [14] including imposing caps on average users’ capacity and then charging overage fees, throttle back the connection speeds of high-capacity users (rather than any user who relies on peer-to-peer technology, no matter how infrequently) and working with the application vendors themselves. Notwithstanding the fact that Comcast and other Internet Service Providers have pursued each of these options, the Commission determined that Comcast had to change its network management practices on a timely basis and to act with greater transparency. [15] Within 30 days of release of the Commission’s Order Comcast must:
· Disclose the details of its discriminatory network management practices to the Commission;
· Submit a compliance plan describing how it intends to stop these discriminatory management practices by the end of the year; and
· Disclose to customers and the Commission the network management practices that will replace current practices. [16]
The FCC warned Comcast that if it fails to comply with the steps set forth in the Order, the Commission will impose immediate interim injunctive relief requiring the company to suspend its discriminatory network management practices pending a hearing. [17]
[1] Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Docket No. 02-33, Policy Statement, 20 FCC Rcd. 14986 (2005).

[2] Formal Complaint of Free Press and Public Knowledge Against Comcast Corporation for Secretly Degrading Peer-to-Peer Applications, File No. EB-08-IH-1518, Memorandum Opinion and Order, FCC 08-183 (rel. Aug. 20, 2008); available at: [hereinafter cited as Comcast Internet Order].

[3] Id. at ¶1.

[4] “When Comcast judges that there are too many peer-to-peer uploads in a given area, Comcast’s equipment terminates some of those connections by sending RST packets. In other words, Comcast determines how it will route some connections based not on their destinations but on their contents; in laymen’s terms, Comcast opens its customers’ mail because it wants to deliver mail not based on the address or type of stamp on the envelope but on the type of letter contained therein. Furthermore, Comcast’s interruption of customers’ uploads by definition interferes with Internet users’ downloads since ‘any end-point that is uploading has a corresponding end-point that is downloading.’ Also, because Comcast’s method, sending RST packets to both sides of a TCP connection, is the same method computers connected via TCP use to communicate with each other, a customer has no way of knowing when Comcast (rather than its peer) terminates a connection.
This practice is not ‘minimally intrusive’ but invasive and outright discriminatory.” Id. at ¶¶41-42(citations omitted).

[5] “When an Internet user opens a webpage, sends an email, or shares a document with a colleague, the user’s computer usually establishes a connection with another computer (such as a server or another end user’s computer) using, for example, the Transmission Control Protocol (TCP). For certain applications to work properly, that connection must be continuous and reliable. Computers linked via a TCP connection monitor that connection to ensure that packets of data sent from one user to the other over the connection ‘arrive in sequence and without error,’ at least from the perspective of the receiving computer. If either computer detects that “something seriously wrong has happened within the network,” it sends a ‘reset packet’ or ‘RST packet’ to the other, signaling that the current connection should be terminated and a new connection established “if reliable communication is to continue.” Id. at ¶39 (citations omitted).

[6] “Comcast’s practice is overinclusive for at least three independent reasons. First, it can affect customers who are using little bandwidth simply because they are using a disfavored application. Second, it is not employed only during times of the day when congestion is prevalent . . .. And third, its equipment does not appear to target only those neighborhoods that have congested nodes — evidence suggests that Comcast has deployed some of its network management equipment several routers (or hops) upstream from its customers, encompassing a broader geographic and system area. With some equipment deployed over a wider geographic or system area, Comcast’s technique may impact numerous nodes within its network simultaneously, regardless of whether any particular node is experiencing congestion.” Id. at ¶48 (citations omitted).

[7] Id. at ¶43 (citations omitted).
[8] The Commission also invoked the following statutory provisions as further justification for its decision to assume jurisdiction and to order a remedy: Section 1 of the Communications Act, 47 U.S.C. §151, Section 201, 47 U.S.C. §201, Section 256, 47 U.S.C. §256, Section 257, 47 U.S.C. §257 and Section 601(4), 47 U.S.C. §601(4).
[9] Id. at ¶13 quoting 2005 Internet Policy Statement, 20 FCC Rcd. 14988, ¶5.

[10] Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities; Universal Service Obligations of Broadband Providers; Review of Regulatory Requirements for Incumbent LEC Broadband Telecommunications Services; Computer III Further Remand Proceedings: Bell Operating Company Provision of Enhanced Services; 1998 Biennial Regulatory Review — Review of Computer III and ONA Safeguards and Requirements; Conditional Petition of the Verizon Telephone Companies for Forbearance Under 47 U.S.C. § 160(c) with regard to Broadband Services Provided via Fiber to the Premises; Petition of the Verizon Telephone Companies for Declaratory Ruling or, Alternatively, for Interim Waiver with Regard to Broadband Services Provided via Fiber to the Premises; Consumer Protection in the Broadband Era, WC Docket No. 04-242, 05-271, CC Docket Nos. 95-20, 98-10, 01-337, 02-33, Report and Order and Notice of Proposed Rulemaking, 20 FCC Rcd 14853, 14853, ¶96 (2005), petitions for review denied, Time Warner Telecom, Inc. v. FCC, 507 F.3d 205 (3d Cir. 2007).

[11] 47 U.S.C. § 152(a).
[12] Comcast Internet Order at ¶39 (citations omitted).

[13] Comcast Internet Order at ¶38, citing CBS, Inc. v. FCC, 629 F.2d 1, 26–27 (1980) (reasoning that the Commission had, in the context of an adjudication, reasonably construed its ancillary authority to encompass television networks), aff’d, 453 U.S. 367 (1981); Complaint of Carter-Mondale Presidential Committee, Inc. against The ABC, CBS and NBC Television Networks, Memorandum Opinion and Order, 74 FCC 2d 631, para. 25 n.9 (1979) (“Our power to adjudicate complaints involving requests for access to the networks is surely ‘reasonably ancillary to the effective performance of the Commission’s various responsibilities.’” (quoting Southwestern Cable Co., 392 U.S. at 178)); see also New York State Comm’n on Cable Television v. FCC, 749 F.2d 804, 815 (D.C. Cir. 1984) (upholding adjudicatory decision that preempted certain state and local satellite television regulations under Commission’s ancillary authority); Negrete-Rodriguez v. Mukasey, 518 F.3d 497, 504 (7th Cir. 2008) (“An agency is not precluded from announcing new principles in an adjudicative proceeding rather than through notice-and-comment rule-making.”).

[14] Comcast Internet Order at ¶49.

[15] “Comcast’s claim that it has always disclosed its network management practices to its customers is simply untrue. Although Comcast’s Terms of Use statement may have specified that its broadband Internet access service was subject to ‘speed and upstream and downstream rate limitations,’ such vague terms are of no practical utility to the average customer.” Id. at ¶53. “Our overriding aim here is to end Comcast’s use of unreasonable network management practices, and our remedy sends the unmistakable message that Comcast’s conduct must stop.” Id. at ¶54.
[16] Id. at ¶54.

[17] Id. at ¶55.

Thursday, July 31, 2008

Another Wrong-headed WSJ Editorial

Those wacky editorial writers at the Wall Street Journal just cannot seem to get the facts straight about network neutrality and what the FCC has done or can do on this matter. In the July 30, 2008 edition (Review and Outlook A14), the Journal vilifies FCC Chairman Kevin Martin for starting along the slippery slope of regulating Internet content.

The Journal writers just seem to love hyperbole, and are not beyond ignoring the facts when they do not support a party line. Here are a few examples from the editorial.

The editorial states that Chairman Martin wants to use a “set of principles” to punish Comcast for engaging in legitimate network management. Chairman Martin’s predecessor Republican Michael Powell drafted a Policy Statement and a Republican majority FCC approved them. See

The network management undertaken by Comcast involved masquerading as the recipient of a peer-to-peer (“P2P”) file transfer and issuing a command to reset, i.e., to stop sending traffic and start again. Comcast forged so-called TCP reset packets even though it appears that the company could have handled the actually occurring traffic volume without having to degrade anyone’s traffic.

The Journal editorial characterizes Comcast’s action as a technical dispute over network management apparently resolved when Comcast discussed P2P traffic management issues with BitTorrent one of many firms that create software used to send and receive P2P traffic. In a world of non-disclosure agreements, we have no sense of what the parties agreed to, and more importantly if Comcast will extend to other software providers and Comcast subscribers fairer network management terms and conditions.

One infers from the editorial that the FCC’s action amounts to overkill, but the FCC has not yet issued an order, much less announced a fine or other sort of punishment. Nevertheless, the upcoming decision apparently will start a regulatory regime ruining the Internet, because the FCC allegedly has leveraged a Policy Statement into the apparent resurrection of common carrier regulation resulting in “unprecedented control over how consumers use the web.”

The editorial claims that network neutrality advocates want the FCC to “prohibit Internet service providers from using price” to address “ever-growing” bandwidth demand and network management functions. I do not know of any network neutrality proponent who thinks the FCC should outlaw the practices of Akamai and other providers of “better than best efforts” traffic routing at premium prices. I did not hear of any network neutrality advocate argue against proposals by Time Warner and other Internet Service Providers (“ISPs”) to offer subscribers various tiers of service instead of a one size fits all, unmetered service.

What does trigger concern are undisclosed practices, unavailable to subscribers and content providers alike, that create artificial bottlenecks and congestion. If smart Enron traders could extract incredible wealth by manipulating the flow of electrons along a grid, what prevent Comcast and others from manipulating packets for similar gain?

I am at a lost to understand how the Wall Street Journal regularly attempts to pillory FCC Chairman Martin as itching to impose heavy-handed regulation. Despite the Journal’s penchant for alarmism, Chairman Martin has not abdicated his general free market advocacy. The Chairman realizes that ISPs cannot operate completely free of a rule enforcing referee. Nondisclosure agreements, and the lack any effective means to monitor performance creates conditions where ISPs have unprecedented opportunities to engage in practices that are characterized as necessary network management, but in reality serve a specific agenda, e.g., to punish heavy network users whether they be highly popular content sources, or consumers of P2P file transfers.

Rather than surreptitiously drop packets to degrade service, ISPs need to find ways to enhance heavy users’ Internet experience as Akamai does. The FCC has to act when an ISP decides to punish a heavy volume user that might cause congestion even though the ISP has yet to offer the heavy user premium service options.

Sunday, July 20, 2008

U.S. Wireless: Cutting Edge or Inferior?

The FCC’s 12th Annual Report to Congress on the Commercial Mobile Radio Service offers an unconditionally upbeat assessment of the wireless marketplace in the United States. See From start to finish, the Report contains summary conclusions that leave no doubt that “U.S. consumers continue to reap significant benefits – including low prices, new technologies, improved service quality, and choice among providers” (¶1) and they “continue to benefit from effective competition in the CMRS marketplace.” (¶290).

Has the FCC made a fair-minded and truthful assessment, or made yet another deliberate overstatement?

If the wireless marketplace has unquestionable characteristics such as robust facilities-based competition, then it follows that U.S. wireless consumers should benefit from best in class innovation and other dividends. Economists have convinced me that competitive necessity forces competitors to spend sleepless afternoons sharpening their pencils and marking down prices even as they work overtime thinking about how to capture market share by enhancing the value proposition of their service.

So if I’m supposed to join in a wireless lovefest here how could the Economist (July 12th edition), not known for false reporting, come up with a far less sanguine assessment in the context of Apple’s introducing a 3G iPhone:

PITY us poor mobile-phone users in America. While the rest of the world enjoys network speeds that let people watch television on the move, surf the mobile web in its living glory, download videos in a trice, or exchange video messages with one another, we celebrate Apple’s launch of its iPhone 3G today as if were some great leap for mankind. (available at:

The Economist article mentions that the iPhone offers bitrate speeds in the 400-700 kilobits per second (“kbps”) range, throughput that hardly constitutes broadband except in the United States where the FCC still uses a 200 kbps threshold. Wall Street Journal columnist Walt Mossburg calculated the 3G iPhone bitrates at not terribly blazing 200-500 kbps, still an improvement over 70-150 kbps on AT&T’s old EDGE network.. See

I agree that wireless throughput offers only one benchmark for a reality-based assessment U.S. wireless performance. But for this criterion even the next best thing, using the best network available, does not come close to showing global best practices, or event true 3G performance.

I have no doubt that the FCC’s bogus broadband assessments include terrestrial wireless carriers in the Commission’s numerical count of broadband providers. But credible assessments show that U.S. 2.5G networks do not meet even the 200 kbps broadband threshold and current 3G networks do not match DSL speeds.

So much for the FCC’s undisciplined shout out to the wireless industry.

Wednesday, July 9, 2008

Consequences of Opt-in Better Than Best Efforts Internet Routing

While attending the International Telecommunications Society’s 17th bi-annual conference I attended yet another network neutrality session. Economists predominated at this conference and their collective read on network neutrality emphasizes the need for ISPs to “extract value” from content providers primarily by converting zero cost peering with ISPs into specific payments from individual content sources.

I have no problem with offers of non-neutral, “better than best efforts” routing options to content providers who voluntarily opt in, particularly if the offer is made transparently and anyone can opt in. What troubles me is the impact of opt-in on content providers that opt out.

In the satellite industry, an opt-in/opt-out dichotomy exists: content providers seeking better than best efforts can secure what is known as “protected” transponder capacity—a commitment by the satellite operator to prioritize service and to replace transmission capacity should it become defective. Unprotected transponder lessees get no expedited access to replacement capacity, but they suffer no additional punishments for refusing to pay the premium rate.

I am not confident ISPs will follow the satellite capacity model as opposed to applying the Enron model where traders quickly learned that they could make more money creating bottlenecks and spot capacity shortages where no lack of grid distribution, or electricity capacity existed. If the smart folks at Enron could learn how to manipulate the flow of electrons what prevents smart ISP operators from similarly manipulating the flow of packets similarly requiring “urgent” real time delivery?

Put another way will ISPs retaliate against opt-out content providers with the creation of artificial congestion, by dropping packets, inserting traffic resend commands and partitioning bandwidth with an eye toward forcing migration to premium service even as the division guarantees inferior service that breaches contractual QOS commitments?

The opt in/opt out dichotomy does not necessary cleave between deep pocketed content providers who can afford to pay for premium service and providers lacking such financial resources. One paper at the ITS conference suggested that unknown content providers might have the most to gain from premium access. What presents a problem, not addressed by the economists at ITS or elsewhere is the impact of practices that exceed necessary price and QOS discrimination.

The FCC has imposed a number of behavioral regulations on cable television ventures based on their ability and incentive to engage in unreasonable discrimination by favoring corporate affiliates vis a vis competitors. In the cable context discrimination applies to the availability and price of “must have/must see” video content. Arguably ISPs have a similar ability to create a bottleneck or boycott.

Tuesday, July 1, 2008

New Journalism Vocabulary Words: Newsprint Trims and Access Points

My local newspaper has reduced its value proposition by cutting content and pages. Local managers of this McClatchy asset use the term “newsprint trims” to label the streamlining process. In an email conversation with the Executive Editor I leaned that another benefit from such trimming is that readers and I will have additional “entry points” to the paper, despite the fewer pages.

So I am paying the same $160 a year for a newspaper subscription that provides me with access to a newsletter in lieu of a newspaper. One would think that declining circulation would motivate a newspaper to enhance rather than reduce the value proposition. The Orlando Sentinel appears to embrace this strategy despite the fact that its new owner Sam Zell seems intent on economizing; see

Despite the new nonsense words here are two key realities for newspapers in this convergent environment: 1) The newspaper business faces great challenges that have reduced double digit margins to single digit margins. I do not see Sam Zell buying any business if he did not think he could generate above average returns; and 2) Local papers generate higher margins than most urban papers.

I do not see newspapers fully exploiting convergence by offering less.

Maybe We All Should Be Economists

I recently had the opportunity to attend the 17th biannual conference of the International Telecommunications Society; see The conference attracts academics, practitioners and consultants, with economists predominating.
Attending a conference of this sort showcases the strengths and weaknesses of economists. I marvel at their confidence. Perhaps that comes from their mastery of math, statistics and the Greek alphabet. Or maybe it stems from the fact that many of the ITS attendees get paid handsome hourly rates to offer expert opinions.

I admit I am envious. These folks get to assume anything. You might know the lame joke about how economists can make their way out of a deep hole: they assume a ladder! So stakeholders in telecommunications policy contests employ economists to issue opinions based on most favorable assumptions. On the other hand lawyers have to work around case precedent and therefore cannot work with a blank slate.

My economist friends show extreme impatience when I challenge their assumptions. At the conference most of the economists dismissed the network neutrality debate as simple and misguided opposition to carrier efforts to secure some of the rents, i.e., profits, accruing to content providers. The economists at ITS seemed primarily to work with carriers, so there was little concern about the impact of such extraction on startup content providers, civil society and democracy. The economists at ITS assumed that a two-sided market should exist in the Internet with two payments: 1) downstream from content providers and 2) upstream from end users. No one seemed to recognize or acknowledge that peering substitutes for monetary transfers upstream.

In another conversation I had with a top flight economist, I was the one who became impatient when I explained that the concept of common carriage confers both rights and responsibilities and that carriers seemed to emphasize the responsibilities as “confiscatory” and an unlawful “taking.” This economists could not equate unbundling with such monetary benefits accruing from common carriage as below market or free access to property (for rights of way, ducts and tower sites) through eminent domain and by law (the Telecommunications Act of 1996).

Lastly I marvel how economists can create new Rules that some would consider as powerful case precedent. Now that’s something worth $600 an hour.

Monday, June 23, 2008

Any Link Between Telecom Capacity Swaps and Flipping Oil Contracts?

Not so long ago employees at Enron and at numerous telecom firms learned a financially lucrative lesson: there was (is?) more money to be made in swapping capacity than in delivering it. Indeed there was plenty more money available if traders could collectively create artificial bottlenecks and shortages.

My takeaway from that experience: if traders can manipulate electrons delivering electric power and telecommunications traffic, it’s quite possible that managers of packet streams can engage in similar conduct. Packet management can represent legitimate (and lawful) network management, or it can represent surreptitious meddling with an eye toward raising the cost of doing business for competitors and favoring affiliates or third parties.

A variety of petroleum industry observers reckon that traders may have helped artificially run up the price of oil. Notwithstanding some significant confidence in marketplace forces, I am beginning to wonder whether previous attempts to manipulate the price and profitability of electricity and telecom capacity may present a model emulated by oil traders.

While not hankering for oil trading regulation, I wonder whether empirical data might corporate this suspicion.

Sunday, June 22, 2008

Grieving Loss of the Filed Rate Doctrine

In their quest for deregulation wireless carriers in the United States may regret one regulatory feature: the Filed Rate doctrine and more generally the power of tariffs to establish compulsory contractual terms and conditions. With tariffs carriers enjoy substantial insulation from subscriber law suits and liability for violating consumer protection safeguards. Presumably a regulator approved tariff offers such adequate consumer safeguards that other consumer protections would be unnecessary. In any event the tariff supersedes any contract or marketing promise made to seal the deal.

In the current wireless environment the carriers apply “take it or leave it” contracts with subscribers and no longer have to file tariffs. The carriers have to defend their contracts and their often suspect behavior against violations of state consumer, fair trade and other laws. The carriers now seek to remove the applicability of such laws on federal preemption grounds, i.e., that the risk of balkanized policies—50 different jurisdictions applying different laws—would so confuse and otherwise harm consumers that the FCC needs to establish one uniform set of rules.

In light of the FCC’s current lax attitude toward consumer protection federal preemption would offer wireless carriers a sweet deal: make some minor accommodation on early termination charges and receive some possibly significant degree of insulation from state consumer protection laws. What consumers save in terms of pro-rated early termination charges, the FCC will transfer that and more if wireless carriers can get away with behavior that otherwise would have them paying millions in damages for violating state law.

Tuesday, June 10, 2008

The Lack of Imputatation and How It Tilts the Competitive Playing Field

Some time ago, before the FCC streamlined tariffing regulations for ILECs and eliminated structural separation requirements, the long distance carrier side of an ILEC presumably had to pay the local exchange carrier side of an ILEC the $10 to change a subscriber's Primary Interexchange Carrier ("PIC") presubscriptions for 1+ inter-LATA and intra-LATA long distance calling. Now a company like Verizon can secure what I consider an artificial competitive advantage, because it does not have to incur and charge itself (i.e., impute) the $10 charge. Of course any competitor, or a competitor's subscriber has to pay 2 $5 PIC change fees.

It seems to me that a company like Verizon can generate some reluctance to change to a competing long distance carrier by charging a $10 while "waiving" the charge if a Verizon subscriber stays with, or changes to Verizon. Bear in mind that Verizon charges $4 or so for the privilege of making 5-7 cent per minute long distance calls, while other carriers offer lower rates without an additional recurring monthly charge.

I recognize that lots of people make all of their long distance calls via their cellphones--one of the benefits in having large monthly baskets of minutes. But for the consumer who still makes long distance calls via the wireline network, Verizon has the opportunity to make consumers think whether changing long distance carriers is worth a $10 "cover charge" that Verizon readily waives if you stick with their bundled services.

Friday, June 6, 2008

Winners and Losers in Yet Another Mega-Billion Dollar Acquisition—Verizon/Alltel

I’m going out on a very short and sturdy limb here to predict that the FCC will approve Verizon’s acquisition of Alltel with few conditions and with glowing endorsement of how the public benefits from the transaction. If I am correct then we have yet another instance where the FCC will have allowed partisanship, shoddy economic analysis and blind adherence to doctrine to ignore the obvious: a horizontal merger of this sort gives Verizon a few more market percentage points, concentrates the market further, and reduces the likelihood that the public will benefit from increased wireless competition.

Of course the FCC will see it another way and so probably would a reviewing court. In this time, horizontal mergers get rejected if and only if empirical evidence clearly demonstrates that consumers will face higher costs. In other words the burden of proof lies with opponents who have to show that significant harm will result as opposed to the proponents of the merger showing that significant benefits will accrue to the public.

Just who wins in a merger like this?

The venture capitalists who took Alltel private benefit with the infusion of cash to pay for their incredible “management fees” and for equity in the company. The VCs added absolutely no value to the company during the few months they owned it, but isn’t capitalism great? The VCs will get $28.1 billion, some of which will become available for new leveraged buyouts.

Verizon benefits big time. It can claim market leadership, reduce its rural roaming costs and raise the roaming costs of competitors, Sprint in particular. Verizon reduces competition now and in the future. The wireless market grows increasingly concentrated despite the bogus claim by the FCC that there are hundreds of megaHertz available for competitive services (see the FCC’s 12th Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile Services; available at:

Here are a few inconvenient facts the FCC will have to ignore. Before the merger the top 4 wireless carriers (AT&T, Verizon, Sprint/Nextel and T-Mobile) controlled just shy of 90% of the market with the top 3 controlling 77%). The carriers’ advertisements emphasize service reliability (“Can you hear me now?) and rarely mention price. The carriers engage in consciously parallel pricing behavior and do not deviate significantly in terms of price and service terms. The carriers can tout lower per minute costs because they offer large baskets of minutes that well exceed what some consumers want. The United States prepaid wireless market has limited market penetration, as compared to Asia and Europe, with limited price competition. U.S. carriers enjoy comparatively rich profits as measured in Average Return per User.

Who loses in a merger like this?

The public once again suffers by having a less competitive wireless marketplace. The United States does not have a wireless industry demonstrating best practices. The FCC may offer effusive and undeserved praise to the wireless industry, but globally U.S. carriers lag in terms of next generation services. The next time you see a foreign film where wireless handsets play a role, notice how actors use the handsets. We in the U.S. continue to use our handsets for first and second generation services such as voice, messaging, ringtones and music downloads. Yesterday as I queued in line to secure conference registration materials and later waited four hours for a flight, I would have benefited by access to generation 2.5 services that offer bar codes on cellphone screens and flight information.

Alltel may not have had a national footprint, but it offered some degree of competition in many more markets than where it had facilities. Alltel’s absence will not necessarily raise consumer prices, but the Big Four carriers can rest a little bit easier that they won’t have to spend sleepless afternoons competing.

Friday, May 30, 2008

The Front and Back End of a Two Year Wireless Subscription

In the United States just about everyone trades off typical consumer rights and handset freedoms in exchange for “ownership” of a subsidized handset. Of course the handset is neither free, nor fully owned. In exchange for the a subsidy cellphone service subscribers agree to an intricate installment sales contract that limits what they can do with the handset.

But what happens after the two years run? Well the typical subscriber renews service and gets a new handset installment sales contract. He or she has no real alternative, because the cellphone oligopoly in lock step have foreclosed a market for used handsets and by offering no savings to subscribers who make do with their existing handset.

FCC Chairman Martin wants to show what a consumer advocate he is by tackling financial penalties for early termination. He wants consumers to have an opportunity to opt out of a contract within the first billing cycle. Fine. But the real consumer affront is the tacit collusion among cellphone companies not to compete on price, particularly for low end subscribers who do not want or need a subsidized handset and a two year service commitment.

Unlike just about everywhere else the United States does not have a robust and competitive wireless prepaid, calling card marketplace. The handful of Mobile Virtual Network Operators offer similar and not terribly attractive rates, primarily for youth and ethnic markets. I do not fit those demographics, but no carrier wants to offer lower rates to subscribers more than likely to accept a two year lock in.

Am I some kind marketplace orphan, or have the wireless carriers engaged in anticompetitive conduct?

Friday, May 2, 2008

Stealth Deregulation

Wireless carriers in the United States and elsewhere appear to have come up with a clever new strategy to achieve deregulation: assume that it exists even in the absence of official agency action. Unlike the doubtful ploy of “think and grow rich,” carriers need only assume an outcome and act as though it has occurred. Absent contradiction by a regulatory agency or court the deregulatory assumption may stick.

Consider the example of wireless text messaging. Is this an extension of what common carrier paging companies offered, or has this basic service some how transformed into an information service? Bear in mind that the wireless carrier simply delivers alpha- numeric characters to a wireless handset. There is no information processing, no format conversion, no data manipulation, and no extensive storing and forwarding. Short messaging looks everything like paging attached to a handset capable of providing telephone calls.

So here comes the sleight of hand: because wireless telecommunications has become so popular, its success apparently justifies a regulatory hands off approach—the old “if it isn’t broke, don’t fix it approach.” But aggressive advertising budgets, large baskets of SMS minutes, and anything else contributing to wireless service popularity has nothing to do with whether an alpha-numeric transmission loses its telecommunications service characteristic. Nor does the popularity of a service somehow convert the service provider from a common carrier, subject to title II of the Communications Act, to an unregulated information service provider. And by the way just what costs and burdens would having to provide the service on a common carrier basis impose in the first place?

Common carriers probably do not have to accommodate every alpha numeric content source which seeks point-to-multipoint, “batch” distribution of a message. By analogy not every seeker of a short code NXX telephone number, like 611 access to a telephone company’s customer service department, can get them. But a refusal to provide service, as occurred when Verizon said no to the pro-life organization, NARAL, has to have some basis other than “we don’t want to carry your traffic based on the nature of the content or message transmitted.”

Public relations concerns, and not the threat of regulatory sanctions, prompted Verizon to rethink its refusal to provide service. This temporary embarrassment will not prompt wireless carriers to redouble their common carrier service commitment. Quite the contrary: expect wireless carriers to gear up their considerable in-house and funded third party resources to perpetuate the myth that alpha-numeric messaging no longer constitutes a telecommunications service.

Tuesday, April 15, 2008

Wireless Carterfone is Not Overbearing Regulation

I don't understand why applying Carterfone to wireless is controversial and successfully framed by opponents as an extension of regulation. I consider it consumer empowerment/protection and a logical extension of the consumer welfare enhancement achieved when wireline telcos had to decouple compulsory handset rentals with mandatory inside wiring “maintenance” and telephone service. I see the same consumer welfare gain when wireless subscribers, like me, do not want to play the “free” handset subsidy game and simply want cheaper service. Using the $5 a month offset from the early termination penalty I do not see why one or more wireless carriers won’t offer me a $5 a month discount if I bring my use my own phone and do not trigger a subsidy. But when 4 carriers control 88%+ of the market it’s quite easy for them to engage in consciously parallel behavior. No carrier offers a discount rate plan for existing subscribers coming off a 2 year plan, or a new subscriber who wants to use an existing phone. Why not? BTW I am not expecting the FCC to compel such a discount or to “meddle” with carriers’ business decisions.

I consider it a disingenuous argument to deem Carterfone applicable only to a vertically integrated Bell System environment 30 years past. First the FCC has applied Carterfone post-Divestiture to non-vertically integrated markets such as cable. Second one could argue that by bundling the handset with service, the wireless carriers in effect are doing the same integration as the pre-Carterfone wireline carriers did. In reality Nokia and few independent companies retail handsets; over 80% of all handsets come from the carriers themselves or from big box stores such as Best Buy who get a commission. Third wireless carriers (CMRS operators) remain common carriers when providing telecommunications services; the Commission has authority to require these carriers to comply with handset attachment/interconnection requirements no different than wireline carriers have done for 40 years. No one seems to recall that wireless common carriers accrue ample, quantifiable financial benefits from this classification, e.g., below market access to federal, state and municipal land for tower sites.

We could have quite a disagreement about the scope of competition in the wireless and broadband marketplace. From my perspective and that of the HHI, 2 carriers controlling 96+% of the broadband market and 4 carriers controlling 88+% of the wireless market do not show robust competition. Imagine an airline marketplace in the U.S. served only by United and American. Furthermore someone really ought to introduce the concept of cross elasticity to the FCC statisticians: do you think satellite delivered “broadband” at one tenth the bitrate and 2-3 times the cost is a functional equivalent? Do you think terrestrial wireless 600-800 kilobits per second is a functional equivalent to 4000 or more kilobits per second?

Perhaps I can make a more persuasive argument if we examine Carterfone outside the wireline/wireless environment. You probably know that the Commission requires cable companies to support a CableCard alternative to compulsory leasing of set top converters. The CableCard rental typically is $1-2 a month compared to a set top box rental of $5-7 a month. I don’t see many researchers claiming the mandatory CableCard alternative is over reaching regulation and a taking of cable company property. And I surely don’t see anyone making a credible argument that consumers opting for the CableCard option don’t extract a quantifiable welfare gain. Wireline and wireless subscribers should have the freedom to acquire a cheap but functional phone subject to a Part 68 process that creates a certification process using third party labs and third party IEEE standards. I am not fully comfortable with the fox guarding the chicken coop, i.e., carriers making the decision which phones, applications and software are permissible.

Lastly I recognize that wireless subscribers heretofore have liked the option to get a new phone every 2 years. But there is no doubt they pay a premium that more than compensates the carrier for the handset subsidy. Increasingly consumers recognize what they give up in terms of handset freedom. The million+ hacked iPhones attest to the self help tactics of consumers. Perhaps the wireless carriers have gotten religion from such consumer push back. I still would fee more comfortable with a formal determination that Carterfone applies in the event the carriers are not as fair and as transparent as a third party would be.

Wednesday, April 2, 2008

Who Makes the Any Apps Any Handset Call?

The Wall Street Journal today reported that FCC Chairman Kevin Martin wants to reject a Petition for Declaratory Ruling filed by Skype that would establish a wireless Carterfone policy, i.e., that wireless carriers must allow subscribers to use any compatible handset to aceess any application, content or software.

Chairman Martin has confidence that the marketplace solutions obviate any necessary FCC intervention. Such optimism must derive in part from the apparently newfound willingness of one major wireless carrier, Verizon, to support aspects of open access. Perhaps Chairman Martin has confidence in the marketplace based on the magnanimous offer of most wireless carriers to pro-rate their early termination penalties by $5 a month.

But here’s the rub: there is a big difference between a carrier making the decision of what constitutes compatibility and network harmlessness and the neutral criteria driven decisions of a third party. The variety of handset options that attached to wired networks attests to a robust marketplace structured by a rule that simply requires a third party lab certification that the handset will not cause technical harm to the any wired network. But for wireless handset access the carrier—and not a third party--can serve as judge, jury and executioner.

I recognize that wireless carriers have invested greatly in networks that they own and operate. But these network operators have agreed to take on the responsibilities of common carriers in exchange for major, financially quantifiable benefits. It works both ways, but the wireless carriers never seem to have to acknowledge the benefits for which they qualify including access to government owned rights of ways at bargain rates. Wireless carriers may not have gotten free access to land, which their wired carrier counterparts got, but the right to install towers adjoining the interstate highways and on other public lands does not cost anything near the price of access to private land.

Sponsored researchers, including economists who ought to know better, have attempted to make the concept of market failure an oxymoron. Call it what you will, but with a market as concentrated at wireless is in the United States with generally the same terms and conditions available to subscribers, does not appear to be a market upon which we can rely on the carriers to self-regulate.

I surely do not see the wireless carriers busting a gut to offer a discount to subscribers who do not trigger a handset subsidy, or to encourage more network use with generally open access policies. If the market were so robust, would not at least one carrier consider an alternative to bundling a subsidized handset with higher monthly rates to recoup the handset subsidy? For subscribers content to continuing using an existing handset, no carrier offers a lower rate reflecting the fact that they do not have to subsidize a handset.
The carriers might want to have every subscriber equipped with the latest handset containing the latest average return per user (“ARPU”) enhancing options, but I do not see the carriers aggressively offering new third generation features.

I guess one can infer that Chairman Martin seems to think a wireless Carterfone policy imposes more unnecessary regulations. But that simply is not the case. Carterfone establishes game rules about what constitutes fair play in terms of what subscribers can do with the handsets that they own. Carterfone established the consumer right to own and attach telephones to the wireline network. Chairman Martin has endorse applying Carterfone principles to the cable industry by requiring operators to support the CableCard option in lieu of allowing carriers to tie cable television service with a compulsory lease of a set top box.

But when it comes to wireless handsets—even one that you think you own—Chairman Martin thinks it just fine for those market-driven wireless carriers to limit subscribers’ freedoms well beyond any legitimate concerns about network harm.

Tuesday, March 25, 2008

What Consultants Generally Do

You may have heard the rather lame joke about the definition of a consultant: someone who borrows your watch and tells you the time. Consultants sometimes have the liberty to tell clients what is not obvious, or what does not serve the clients’ interests—“tough love.” But in many instances consultants—including some of my academic sisters and brothers-- tell clients what they want to hear even if it’s neither obvious nor true. By way of full disclosure I serve as a consultant, but have the luxury of never having to have my name associated with the former type of “research.”

In researching updates for a loose leaf treatise on cable television, All About Cable (Law Journal Press) I came across one of those clear, “smoking gun” instances where a consultant tells the client what it wants to hear. In turn the client, an industry association, files the “research” with the FCC which then relies heavily on the work to justify a pre-ordained outcome, i.e., what the FCC wants to conclude. In 2004 the FCC wanted to say that ala carte access to cable television channels would cost consumers money.

Two years later the FCC—or at least Chairman Martin—wanted the opposite outcome. Why the change? Perhaps a heightened concern for accommodating families and pro-family advocates. Maybe a Chairman considering a run for elective office in a few years. With ala carte access cable television consumers can opt only for those channels that do not offend them. But the FCC had concluded that mandating such access would harm consumers.

The solution: discredit a consultant’s report, despite an extensive history of hook, line and sinker buying consultants’ vision of reality, because they jibe with the Commission’s objectives. In a relatively short period of time the FCC’s goals changed, so it had to discredit that pesky “research” that it had relied upon in a Report to Congress. Compare FCC, Report on the Packaging & Sale of Video Programming Servs. to the Pub. (2004), with FCC, Further Report on the Packaging & Sale of Video Programming Servs. to the Pub. (2006),

There are times when I think I am living in a dual world: my isolated world where I deal with facts, policies and the law on its face versus DC World where things are not as they appear to be.

Friday, March 21, 2008

Game, Set and Match: How AT&T and Verizon Will Largely Lock Down the Third Screen

The results of the 700 MHz spectrum auction solidify the market dominance of AT&T and Verizon by locking up the best additional spectrum a competitor could access for the foreseeable future. In light of shroud of secrecy surrounding the mechanics of the auction—no doubt to maximize the one time windfall for the national treasury—we will never know what sort of premium these two carriers paid to force out even such a deep pocketed player as Google.

AT&T and Verizon now have plenty of warehoused bandwidth to add to their considerable market share. The top four cellular telephone carriers in the United States have a combined market share of 88.1 percent . See Leslie Cauley, AT&T eager to wield its iWeapon, USA TODAY May 21, 2007)(displaying statistics compiled by Forrester Research); available at: With Sprint/Nextel a likely acquisition target, look for the next generation network of choice to become almost as tightly controlled as when benevolent Ma Bell dominated.

Once upon a time the United States demonstrated best practices in market performance and government oversight of the ICT sector. That cannot be said now. Instead we have an acutely political FCC which panders to economic doctrine and deep pocketed advocacy of stakeholders such as AT&T and Verizon. How can this nation not suffer in the global information economy when two incumbent carrier types (telco and cable television) share a 96+ percent duopoly over broadband terrestrial networks while one of the two incumbents (telco) dominate the wireless alternative. Susan Crawford notes that AT&T and Verizon have every incentive not to make wireless a robust competitor of wireline broadband; see

Verizon can tell us how close to a open network they will operate, but absent a third party certification process—which is what a wireless Carterfone policy would require—carriers can invoke network and “systemic” integrity to preserve walled gardens and a mutual non aggression pact with their wireline brethren.

Former FCC Chairman Reed Hundt says it succinctly:
“[The U.S.] is the last market in the world that people choose to bring a new wireless product to. Not second or third--the absolute last. Right now the policy of the FCC has been to encourage AT&T and Verizon to become the twin Bells that dominate the wireless business. They’re allowed to buy all the spectrum they can find. The antitrust laws are waived and ignored every time they appear to be a problem. The FCC is the only spectrum auction entity in the world that does not carve out spectrum for new entrants. They do it in Mexico, Canada, the U.K., China and Japan. Only here does the new entrant not get much of a chance. This is the only country in the world where the rule is the big guys can buy all of it. When you consolidate service providers, just like in the old days, when there was not two Bells like today but one, everybody knows what happens. It’s very hard for innovators to get into the market, in terms of content or software or hardware.” Reed Hundt, Interview with Ed Gubbins, Telephony Online, Feb 28, 2008; available at: