Can the FCC Turn a Network Neutrality Triple Play?

        Despite the remarkably large amount of coverage and analysis of the network neutrality debate, not everyone appreciates the wants, needs and desires of the major stakeholders.  Let’s step back and consider their motivations and incentives of the three primary stakeholders: consumers, retail ISPs and upstream carriers and sources of content.

            Consumers

 

            Consumers expect their monthly broadband subscription payments to guarantee a predictable level of service in terms of bit transmission speed and amount of downloadable (and uploadable) content allowed per month.  This expectation is not contingent on their service provider’s ability to demand and receive surcharge payments from upstream carriers and content providers.

            When common carrier phone companies provided dial up Internet access, consumers typically paid for unmetered service.  With the conversion to broadband, service terms increasingly have bitrate delivery commitments and generous, but metered caps on data downloading.  Retail ISPs complained about having to increase bandwidth without sharing in the windfall generated by their carriage of increasingly valuable and plentiful content.  Nevertheless these carriers upgraded their networks with only minor rate increases and without major episodes of congestion.

            Now consumers face rate increases, tiering of bit transmission speeds and efforts by their ISPs to make reliable service contingent on surcharge payments and/or bit prioritization offers.  Consumers now confront the prospect of greater cost of service and increased risk of degraded service, particularly for bandwidth intensive service like Netflix.  Consumers are not happy about this and may become more vocal advocates for network neutrality simply on grounds that the status quo of best efforts routing used to work fine, until ISPs got greedy.

            But aren’t some consumers becoming greedy themselves?  With the onset of full motion video services like Netflix and YouTube, Internet demand increases significantly.  Consumers want a medium capable of handling “mission critical” video bits representing “must see” television.  Real congestion can occur, not because retail ISPs play games with how many ports and bandwidth they allocate for Netflix traffic, but perhaps primarily because Netflix releases an entire season of must see programming and bandwidth hogs gorge themselves with possibly hundreds of gigabytes.

 

            Consumers want their Netflix video streams to arrive on time and seamless at the same time as they long for the kinder, gentler and less bandwidth intensive days when best efforts routing always worked fine. 

            Retail ISPs

            Retail ISPs provide the essential last mile delivery of content to relatively captive eyeballs.  While retail broadband subscribers can choose between various wireline and wireless providers, one and only one carrier typically provides all carriage.  Churning from one carrier to another can occur, but not without some consumer inconvenience and motivation.

            Having regularly upgraded their networks and enhanced the value proposition of service, retail ISPs predictably seek to recoup this sizeable investment and earn a generous return.  They have evidenced a growing interest in increasing revenues and profits not just by raising retail subscription rates, but also by demanding new or increased compensation from upstream carriers and even content providers directly.

            Retail ISPs like to frame their compensation rights in terms of a two-sided market: 1) downstream to end users paying monthly broadband subscriptions and 2) upstream to other carriers who either barter transmission capacity through peering agreements, or pay transiting fees when downstream and upstream traffic is not equal.

            Retail ISPs do not have a legal or guaranteed right to a double source of revenue.  In a possibly analogous situation, cable television operators benefit from some instances of a double-sided market, but not always.  Cable operators combine end user subscriptions with a share of the premium subscriptions paid for access to premium content such as HBO.  But cable operators also pay upstream sources of content, e.g., in copyright fees for the privilege of delivering content to subscribers. 

            Arguably retail ISP subscription rates should cover both the network cost of content delivery plus at least some of the value represented by the upstream content the Internet cloud access subscription provides.  In this scenario, retail ISPs do not operate like a credit card company that can capture payments from both credit card users and vendors, but instead have to rely solely on subscriptions and advertising.

            Of course retail ISPs do not see any need to compensate content providers for the value of what broadband subscribers seek.  Retail ISPs do not share in the advertising revenues flowing to upstream content providers and readily embrace a telephone company view that terminating carriers deserve payments from upstream carriers or content sources, particularly when traffic balances become disproportionately one sided.

            Retail ISPs cannot press the telephone service model too far, because of the concept of “cost causation” favors upstream payments.  Arguably ISPs and their subscribers trigger the cost of content carriage: a demand pull, instead of supply push rationale.

            Content Providers

            Content providers want downstream carriers to deliver increasingly robust volumes of content using the existing interconnection and compensation models that primarily rely on end user subscription payments.  When facing pushback primary content sources note that consumers agree to pay fees that have generated triple digit rates of return for carriers.  Alternatively content sources design ways to distribute their product at possibly lower costs by co-locating equipment on ISP premises.  In what they would consider the worst case scenario, content providers agree to new, more generous compensation agreements with retail ISPs as occurred in the Netflix-Comcast paid peering arrangement.

            Content providers do not share their subscription fees with downstream carriers, as HBO does.  On the other hand, retail broadband subscribers expect their Internet cloud access to include access to any source of content without regard to how much of the total bandwidth any single source requires.  Certainly the Netflix business model assumes low and unmetered broadband delivery charges ironically not like the physical delivery of disks model that has both higher total costs and is metered.

 

The FCC’s Dilemma

 

            The FCC faces an extraordinary quandary in trying to forge a compromises that satisfices these three constituencies.  No one can achieve total satisfaction here. Consumers will have to pay more for broadband.  Retail ISPs will not have unlimited opportunities to raise rates, particularly for content sources that can get by without prioritization of traffic absent deliberate strategies by retail ISPs to degrade basic service.  Content providers—particularly the major causes for ever increasing bandwidth demand—will have to pay more as well.

            The FCC has to forge a compromise where consumers can secure “better than best efforts” delivery of video at a price, but without making it possible for retail ISPs to demand a surcharge from every source of content.  I continue to believe that the FCC does not have to reclassify broadband access to achieve this compromise. 

 

            In large part marketplace negotiations can resolve the most pressing problems.  However network neutrality advocates make a convincing argument that non-charities like Comcast will have little self-restraint in their quest for new profit centers.  The FCC has to stand ready to discipline and sanction ISPs when they resort to strategies and tactics that degrade service as a nudge or a push to force the payment of unnecessary surcharges.

Reclassifying Internet Access as a Title II Regulated Telecommunications Service

           Today’s Notice of Proposed Rulemaking on Internet access reportedly contains a section inviting comments whether the FCC should reclassify Internet access from largely unregulated information service to telecommunications service.  Should the Commission opt to do this—something months away, if at all, in light of grave political impediments—any and all concerns about discrimination do not miraculously evaporate.

            Comcast EVP David L. Cohen and others correctly note that even Title II-regulated common carriers have the option of offering different tiers and categories of service.  Telecommunications service providers cannot discriminate among “similarly situated” carriers, but nothing prevents common carriers from offering different tiers of service, i.e., to offer different price points and levels of service. Put another way, even common carriers can engage in price and quality of service discrimination provided the differentiation is cost-based and available to anyone meeting a fair list of qualifying criteria.  Nothing prohibits the FCC from approving a tariff that contains this type of permissible discrimination applied to retail broadband subscribers, or upstream to other carriers and content providers.  Additionally nothing prevents the FCC from eliminating the requirement that Internet Service Providers even file tariffs.

            Title II regulation does not toggle on an all or nothing pivot.  Section 160 of the Telecommunications Act of 1996, allows the FCC to streamline and forbear from applying most common carrier regulations.  The FCC could reclassify information service at the same time as it forbears from applying most of the possibly unnecessary, costly and burdensome regulations.

             On the other hand Title II makes it clear that a carrier cannot engage in deliberate discrimination, such as dropping packets, simply to disadvantage a competitor, or to extort a surcharge payment from an upstream carrier satisfied with best efforts routing.  Title II regulated ISPs would have to operate more transparently and probably could not get away with tactics designed to generate artificial congestion as may have occurred with the slowdown of Netflix streaming video traffic.

             Here's another tricky issue from the Title II, telecom world: normally the carrier triggering the need for carriage--on behalf of its customers--incurs the cost of this service.  The FCC used to use the term "cost causative" carrier.  Under a pure ("old skool") view, it would appear that Comcast would have to compensate upstream carriers for the Netflix traffic and other demand from Comcast customers.   I don’t see this happening, just as I don’t see the FCC risking a show down with incumbents on a reclassification gambit.

Deconstructing the “If Only” Rationale for Megamergers in Telecommunications

            Year after year telecom ventures aspire to get bigger though mergers and acquisitions.  Buying market share serves to increase scale which presumably guarantees greater efficiency and greater profitability.

            Acquiring companies do not operate as charities, but they regularly launch charm offensives to explain how the deal will benefit consumers.  One often hears the assertion that a merger will “promote competition” presumably by making the acquiring company better able to compete with other mega firms.

            Acquiring companies use the If Only gambit to claim that they can only generate the benefits of enhanced competition if and only if they absorb a competitor.  Does this pass the smell test? 

            A company acquiring market share has to make a strategic decision.  Can it accrue more revenues by offering the same terms and conditions as its competitors, or can it do better by deviating from the status quo service terms and conditions?  Consumers have no guarantee that when a market becomes even more concentrated the remaining firms will become more energized to innovate and sharpen their pencils.  They could just as easily agree implicitly to avoid sleepless afternoons competing.

            Let’s consider Sprint’s If Only campaign.  Sprint claims that if and only if it can acquire T-Mobile, the merged company will become a vigorous competitor of Verizon and AT&T.  So what exactly is keeping Sprint from being the kind of competitor it claims it will become if only it can acquire T-Mobile? Does Sprint lack access to the debt and equity market even with an owner like Softbank?  Does Sprint lack the ability to bid for more spectrum?  Will Sprint’s questionable management suddenly get better with the infusion of T-Mobile talent?  What does Sprint’s costly acquisition of Nextel tell us about companies that combine incompatible technologies?

            And while we’re in the inquisitive mood: what does the behavior of T-Mobile tell us about the wireless marketplace.  From my perspective T-Mobile got serious about competing only after its sweetheart “merger” with AT&T did not occur.  Thanks to the failure to become a part of AT&T, T-Mobile became a far more aggressive innovator and competitor.  There would have been no chance that somehow AT&T would implement: bring your own device discounts, reduced or eliminated international roaming charges and aggressive pricing particularly for data plans.

            Comcast’s If Only campaign comes across as even more bogus.  The company surely has no problem borrowing funds given the value of its stock and the ease with which it can borrow funds.  Comcast does not lack any resource, like spectrum, that only an acquisition can provide.  The company touts as a virtue the “fact” that Time Warner Cable and it do not compete.  In fact the company does not emphasize how the deal will benefit consumers in terms of service rates.

             We need vigorous examination of mergers and acquisitions, particularly for markets lacking robust facilities-based competition.  But of course in these contentious times, there will always be ample lobbyists and sponsored researchers available to tell decision makers how robustly competitive any and all markets are, despite all evidence to the contrary.

Unintended and Intended Disinformation in Telecom Policy Discussions

           On too many occasions, I have tried to set the record straight in the face of untruths in telecom policy debates that become all too real, or at least accepted as conventional wisdom.  For years I dutifully prepared a rebuttal to just about every Wall Street Journal editorial, or op ed on telecommunications.

            Of course not one rebuttal ever made its way to print, either in the original publisher, or elsewhere.  Being an independent, unsponsored researcher, I don’t have a built in constituency or publicist.

            Generally I have given up on this never-ending endeavor. I want this blog and my academic work to orient toward the future.  But today I have to make an exception.   

            A prominent listserv covered AT&T’s campaign to convince the FCC not to reclassify Internet access as a telecommunications service, subject to Title II regulation.  See http://arstechnica.com/tech-policy/2014/05/att-claims-common-carrier-rules-would-ruin-the-whole-internet/.  For reasons other than AT&T’s, I conditionally support opposition to this reclassification.  However I did attempt to refute one of the premises in the AT&T campaign.   

            On this prominent list serve, one of AT&T rationales generated a supporting comment.  AT&T asserts that the FCC has a congenital inability to use a light regulatory touch should it reclassify ISPs and reacquire legal authority to regulate.  

 

            A prominent academic, with a longstanding record favoring deregulation, made the following assertion:   

Everyone who is supporting Title II seems to believe that the FCC will use only light touch regulation (never actually seen that, have you?) and it won't be like regulating the Bell System.  I personally think that is just what it is going to turn into; that's where the logic of regulation takes you: price, entry, exit, quality regulation.  To pretend that this time, the FCC will be much lighter seems farcical.

             I took issue with this statement, based on the fact that the FCC has a longstanding and consistent history of engaging in regulatory restrain by streamlining and forbearing from regulation when sustainable competition exists:

            I am not in the camp that believes Title II regulation should apply to ISPs.

            However, [the list serve Moderator and the author of the above assertion] should give the FCC credit for using a provision in the Telecommunications Act of 1996 (Sec. 160) to forbear and streamline Title II regulation.  When it has empirical evidence that facilities-based competition exists, the Commission has reduced regulation.  Examples include inter-exchange services, such as long distance, and many local exchange services.

            The facts do not support the premise that the FCC has a congenital inability to use a light regulatory touch---ever.

 

            Just like the Wall Street Journal, the listserv Moderator did not publish my response.

           Call me crazy, but I saw the need to prevent yet another instance of unintentional, or intentional misreading of the facts.  From my perspective, I see ample evidence that the FCC can forebear and streamline regulation.

            Doesn't the FCC have a record of using Sec. 160 to streamline and even forbear regulation? 

            I am disappointed that even at the list serve level, an attempt at respectfully challenging an assertion of the facts didn't get distributed for reasons that don’t pass the smell test.