Insights on Future FCC Decision-making Gleaned From a Judicial Dissent

            As unorthodox as it might seem, Senior Circuit Judge Stephen F. Williams dissenting opinion in a major FCC case offers a likely roadmap on how the FCC will operate with Trump appointees and a Republican majority.  Judge Williams’ extensive opinion in U.S. Telecom v. FCC, available at: http://pdfserver.amlaw.com/nlj/6-14-16%20DC%20Circuit%20net%20neutrality%20opinion.pdf, has a flavor remarkably unlike a legal dissent.  At its best, his work identifies real defects in the logic used by the FCC to reclassify broadband Internet access as a telecommunications service.  Additionally, the Judge raises legitimate questions about the FCC’s rationales supporting a near total prohibition on paid prioritization of traffic. 

            I am not keen on ex ante regulation and can identify significant consumer benefits in having the option to receive “better than best efforts” traffic routing.  Judge Williams offers considerable evidence that consumers do not benefit and may be harmed by a prohibition on price and quality of service discrimination.

            At its worst, the Williams dissent misreads case precedent, misinterprets the statutory duty of the FCC to apply Title II common carriage regulation and shows a penchant for economic analysis regardless whether it is appropriate, helpful or sponsored by a stakeholder.   Additionally, the opinion offers copious sanctimony and snark at a high level even for dissenting jurists.

            Judge Williams believes the FCC failed to provide stakeholders adequate notice that the Commission had opted to use a new standard for assessing whether and how to apply Title II regulation.  He chides the FCC for not conducting a thorough assessment of market power to determine whether the broadband access marketplace operate competitively.  From his perspective, Judge Williams considers the Title II classification as lawful if and only if the broadband marketplace lacks competition. 

            There should be no dispute that common carriage regulation, established in Title II of the Communications Act, can apply even if a telecommunications market segment operates competitively.  For example, Congress ordered the FCC to treat Commercial Mobile Radio Service operators as common carriers (47 U.S.C. §322) regardless whether the wireless marketplace is, or will become competitive. 

            Even as I do not think the FCC should have imposed the common carrier classification, I have no doubt the FCC can lawfully make the call.  Judge Williams would prevent the FCC from applying Title II unless the Commission can prove market failure, an extraordinarily high  standard of proof no law requires.  Additionally, the Judge would deny the Commission any deference based on its expertise to interpret and apply ambiguous statutory language as the Supreme Court established in its Chevron Doctrine.

            Judge Williams appears so enamored with economic analysis, that a failure to showcase it constitutes reversible error.  Nothing in the Communications Act mandates economic analysis as the primary, “make or break” analytical tool the FCC must use.  The FCC has to assemble a complete evidentiary record based on facts, an empirical record, the advocacy documents of stakeholders and the Commission’s assessment of what would best serve the public interest.  Of course economic analysis can help the FCC meet its statutory duties, but it does not constitute a sine qua non. 

            Economic analysis, perhaps even more so than legal analysis, is rife with pitfalls.  Economists do not have to operate with the discipline and rigor of legal advocates, despite the strategic use of mathematics.  Economists can construct a theory, convert it into an unimpeachable rule and offer this rule in advocacy documents for adoption by the FCC. 

            Much of the so-called economics used in FCC proceedings by stakeholders is sponsored advocacy.  The vast majority of this advocacy attempts to legitimize and make scientific policy prescriptions that do not pass the smell test.  For example, any and all mergers promote competition and enhance consumer welfare, but set top box competition would harm competition and consumers.  Economic analysis has a legitimate role at the FCC, but Judge Williams would elevate its importance at the risk of bolstering the potential for sponsored research to provide scientific support for results-driven decision making.  In the words of a former Republican President, the FCC may be headed for a full embrace of Voodoo Economics if it provides the foundation for a desired policy outcome.  Judge Williams appears keen on replacing an “economics-free” FCC to one obsessed with anything masquerading as economics.

            In the snark and sanctimoniousness department, I sense Judge Williams takes great pride in analogizing the FCC’s Open Internet Order to a bicyclist shifting from sidewalk to roadway travel routes.  He chides the FCC for applying common carriage regulation and then abandoning most of the burdensome elements.  From my perspective the FCC evidences flexibility and a keen interest in calibrating the reach and scope of regulation to what tools are needed.

            I fear Judge Williams dissent foreshadows an FCC willing to misinterpret case law and statutory mandates to achieve a desired outcome.  I worry that an infatuation with economics will legitimize bogus rationales that the FCC will embrace hook, line and sinker.  Who needs a maverick wireless carrier like TMobile when economists prove that any and all markets work just fine with 3 competitors? 


            Lastly, I have concerns that FCC decision makers will overplay their hand.  I have seen ample and unjustified arrogance, hubris and political intrigue at the FCC.  It looks like the new management will continue—if not expand—the trend.

In Praise of Domestic Engineering

     My dear wife, Katie, broke two ankle bones while walking two dogs only a few hours after arriving at her elderly parents’ home in Medina, Ohio.  Katie reluctantly has ceded home management duties to me.


     While I did not need any reminder to feel and express gratitude, I do have a better sense of the physical, time consuming and expansive work in domestic engineering.  As well, I recognize what a luxury I have had in pursing intellectual curiosity and reading everything in the telecommunications/Internet sphere. 




     For some indeterminate time, I won’t have the chance to read every blog entry, law review article, white paper, sponsored research, FCC decision, web page, etc. out there.  Might this be a blessing, or just an apt reminder?

Likely and Behind the Scenes Changes at the FCC

            It should come as no surprise that the Federal Communications Commission will substantially change its regulatory approach, wingspan and philosophy under a Trump appointed Chairman.  One can readily predict that the new FCC will largely undo what has transpired in previous years.  However, that conclusion warrants greater calibration.

            As a threshold matter, the new senior managers at the FCC will have to establish new broad themes and missions.  They have several options, some of which will limit how deregulatory and libertarian the Commission can proceed.

            Several ways forward come to mind:

            1)         Channeling Trump Populism—the FCC can execute President Trump’s mission of standing up to cronyism and rent seeking, even when it harms traditional constituencies and stakeholders.

            2)         What’s Good for Incumbents is Good for America—the FCC can revert to the comfortable and typical bias in favor of incumbents like Comcast, Verizon, AT&T and the major broadcast networks.

            3)         A Libertarian Credo—the FCC can reduce its regulatory wingspan, budget and economic impact by concentrating on limited core statutory mandates, such as spectrum management.

            4)         Humility—without having the goal of draining the FCC’s pond, senior managers can temper their partisanship and snarkiness by refraining from mission creep.

            Each of the above scenarios hints at major and equally significant, but unpublicized changes at the agency.  A populist FCC equates the public interest with what the court of public opinion supports.  For example, most consumers like subsidies that make products and services appear free.  A populist FCC responds to consumers by interpreting network neutrality rules as allowing zero rating and sponsored data plans.

            However, a populist FCC risks overemphasis on public opinion that stakeholders can energize as occurred when companies like Netflix and Google used their web sites for 24/7 opposition to the Stop Online Piracy Act and when Jon Oliver motivated 4 million viewers to file informal comments favoring network neutrality on the overburdened FCC web site.

            On the other hand, a populist FCC can remind rural residents of how much they count in this new political environment.  The FCC can validate rural constituencies by refraining from modifying—if not eliminating--inefficient and poorly calibrated universal service cross-subsidies.  Most telephone subscribers in the U.S. do not realize that they are paying a 10%+ surcharge on their bills to support universal service funding, most of which flows to incumbent telephone companies.  Consumers would quickly contract compassion fatigue if knew about this sweetheart arrangement.

            The favoring incumbents scenario has a long and tawdry history at the FCC.  If the new FCC reverts to this model, the Commission will largely give up fining companies for regulatory violations.  Additionally, it might purport to reintroduce economic analysis to its decision making by adopting incumbent-advocated, but highly controversial templates.  For example, incumbents have touted the “Rule of 3” to support further industry consolidation.  This rule is nothing more than an advocacy viewpoint that markets with 3 competitors generate most of the consumer benefits accruing from markets with more than 3 competitors. Having only 3 competitors may work if 1 of them does not collude and match the terms, conditions and prices offered by the other 2.  But in many markets—think commercial aviation—having only 3 operators risks markets organized to extract maximum revenues from consumers with little incentive to innovate and compete.

           

            An incumbent friendly FCC likely will approve mergers and acquisitions with limited, if any, conditions and negotiated conditions.  This kind of FCC will approve AT&T’s acquisition of Time Warner despite President Trump’s disapproval.  The FCC probably also would have no problem with a wireless marketplace duopoly of AT&T and Verizon controlling 90+% of the national market, because the Commission will have largely abandoned the use of a specific market penetration caps and other indices (such as the Herfindahl-Hirschman index) to identify dangerously concentrated markets.

            Many press analysts assume the FCC will embark on a libertarian bent, possibly leading to the elimination of the agency.  I believe the press has misread advocacy items written by Trump Transition Team members who couldn’t easily pitch a short term gig at the FCC and who readily acknowledge the perennial need for core functions performed by the agency.  A libertarian FCC strictly limits its statutory interpretations and does not seek to expand its regulatory wingspan.  However, the national interest—surely including the corporate interests of incumbents—requires the FCC to participate in global standard setting, radio frequency allocation and Internet governance.  The national interests suffers if the FCC does not attend intergovernmental forums and does not forge alliances with other governments keen on reigning in the motivation of global forums to favor specific governments and expand its reach and significance.

            Last, but not least, the new FCC could emphasize humility and bipartisanship using its independence and expertise to determine what best serves the public interest.  This requires abandonment of results-driven decision making and creative statutory interpretation.  I really like this option.

Reform the FCC!

In this volatile and contentious time, it has become even more likely that any advocacy position may trigger misperception, intentional or not.  Recently, one of the two FCC transition managers for the incoming Trump administration, has been characterized as calling for the agency’s closure.  See http://www.techpolicydaily.com/communications/do-we-need-the-fcc/.

 

I do not read Dr. Mark A. Jamison as advocating a torch to the very agency he will help staff with senior managers.  Instead, I get a strong message with which I agree: the FCC has become far too partisan and political on matters that do not typically cleave on a Democrat/Republican fulcrum.  For decades, FCC Commissioners did not split on party lines.

Why now?

 

I attribute the polarization of the agency as directly resulting from Commissioner appointments of congressional staffers who in turn hire the same type of professional to serve as their senior staff.  Rather than consider major regulatory issues in terms of the national interest, it appears that baser, political motivations predominate.  We really, really, really need an independent, expert regulatory agency that does not allow its work product to be molded by politics.

 

This is a two-party problem: if Democratic FCC senior management allowed President Obama to lobby for a preferred network neutrality policy to rousing Republican indignation, then these very same folks should resist efforts by President Trump to direct a preferred agency decision on, for example, the proposed merger of Time Warner and AT&T.  Science, or as close to dispassionate scientific analysis, should apply, regardless of what that analysis generates.  Economic analysis does matter, and for the Commission’s part, it must be free of results-driven assumptions and strategies.

Making the FCC apolitical, requires fortitude and the commitment to empirical analysis, rather than the lazy and convenient reliance on sponsored research used in advocacy documents by stakeholders.


We do need to replace the current partisan FCC with an honest broker ready, willing and able to apply science and empiricism.

           

A Curious Blend of Millennial Indignation and Glitchy Bar Code Pricing

            A grocery store cashier called me a liar and shot me the bird yesterday as I insisted a 2 for 1 promotion applied to my pretzel purchase.  Wow! I didn’t think Millennials knew about obscene gestures, nor did I think a representative of this “snowflake” generation could muster the indignation about something having nothing to do with her.

            What a bizarre story I have to tell that combines defective bar code pricing with a Millennial’s reminder that I have no reason to live, much less demand application of a promotional price.  The Weis grocery chain currently offers buy one get one free for their store-branded pretzels.  However, at the same time as the promotion, the company has changed the trade dress, reduced the portion size and changed the bar code for the product.  At purchase, the scanned bar code did not trigger the savings, despite on the shelf price tags touting the 2 for 1 offer.
 

            As this pricing glitch had sucked 20 minutes out of my day on the previous day, I expedited the display of my lawyer tone which offspring and student alike consider “yelling.”  For the record, I cannot yell, having had vocal cord surgery that substantially reduces the volume I can generate.
 

          The 60-something cashier handling my order gladly offered to check the price, but her granddaughter cashier in the next line reported the price without a doubt.  This Millennial refused to accept my report of the discount and quickly escalated the conflict.  How could an old person like myself possibly know the price of an item, or maybe she tagged me as a petit scam artist?
 

            Do Millennial service workers reverse the traditional business premise that the customer is always right?  For my part, I accept that customers are not always right, but surely they cannot always be wrong.

            I had a pleasant, but inconclusive chat with the store manager and suggested that customers do not deserve vilification as liars when challenging a price.  His perception of the situation was influenced by another, more regular customer, who attested to the wonderfulness of the cashier who shot me the bird.

            My university has forced me to reframe the student-teacher relationship into one with high touch customer service in light of Millennial expectations and the cost of post-secondary instruction.  I suspect that lesson has not reached many Millennials when the shoe is on the other foot.

Oh Joy: Another Group of Email Addressees Who Ignore My Correspondence

            As a parent, college instructor and occasional job applicant, I am used to non-responses.  I regularly eat humble pie and I recommend it.  Lately, to maintain my weight and reduce the pain of two arthritic hips, I equate hunger with humility.

            As a former presidential candidate, regularly remarked: I get it.

            I understand email torrents, and confidential email addresses that get you to the person and not his or her agent.  I appreciate how busy people can be, or think they are.  Still, I cannot predict just who will, or will not respond to me.  Bear in mind that in most instances, I seek nothing from the correspondent other than an answer to a question, or the possibility that she might read a recent work in progress, or increase my readership of published works above the average of 10.

            My high average of ignoring respondents crosses party lines, but I suspect my right of center friends will increasingly fail to respond.  Why bother for someone who maintains his independence and offers no certain allegiance?

            For my part, I try to respond to anyone, including high school students who want me to do their homework on network neutrality.  I do not calibrate whether and how to respond based on the person’s celebrity status, or lack thereof. I do not calculate a cost/benefit.

            I try to be a good citizen, academic colleague and seeker of the truth.  I am rewarded when some luminaries readily and regularly respond.  However, I cannot understand why, for example, one Stanford Law School rock star responds and shares his research with me, while another one can’t be bothered ever.  I cannot explain why one Penn State University President responded to an occasional email, but two subsequent ones have used intermediaries that reply with scripts and corporate gobbledygook.

            I know I need to buck up, but it grieves me when my right of center colleagues apparently have become the latest non-responders.  For my part, I have always sought to listen and learn rather than engage in one-upmanship and snark.

            As a trite, but on point bumper sticker states: Let’s try more wag and less bark.  Do respond to your emails.

 

           

A Nuanced Analysis of Zero Rating

            Zero rating has become the next network neutrality issue in light of two simultaneously occurring marketplace developments: 1) wireless and now wireline carriers impose data caps as a part of their revenue maximization strategy and 2) these very same carriers want to create deal enhancers to improve the value proposition of more expensive service tiers by offering zero rating to specific data streams.  Can carriers get away with a strategy of creating scarcity, rationing broadband capacity, despite its low incremental cost, and upselling subscribers to more generous data plans at higher rates?

            The zero rating issue generates the most controversy when carriers ration and tier broadband access. While they may frame the matter in terms of congestion and network management, in application, zero rating provides a convenient way to tier service at different price points.  Broadband carriers largely have eliminated the prospect of actual congestion and they have every right to recoup substantial infrastructure investment.  However, broadband capacity does not closely match the cost characteristics of other metered, public utility services, such as electricity and water.  Broadband carriers incur insignificant extra costs when increasing a monthly data allotment.  How else can they profitably offer truly unlimited voice and text, particularly a few years ago when subscribers primarily relied on their handsets for these services?

            Unfortunately carriers have resorted to zero rating as a solution to problems they have created for consumers: “unlimited data plans” that punish high volume users with throttling at 2G bit transmission rates; disabling subscriber commands not to auto play commercials; and miserly data rate plans with high financial penalties for overages. 

            Also in the mix is the possibility for artificial congestion manufactured by carriers to justify data caps.  Consider the on again/off again congestion subscribers of both Netflix and Comcast experienced. A remarkable thing happened virtually overnight after Netflix agreed to a preferred co-location/paid peering arrangement.  Congestion evaporated without any new facilities construction and Netflix traffic returned to normal.

            Network neutrality advocates fairly point out that zero rating prioritizes specific traffic streams, by making them more attractive to consumers in light of their lower out of pocket cost.  However, I believe they overstate their case, particularly with the premise that zero rating condemns people with low incomes to perpetual hardship resulting from subsidized access to an inferior, curated sliver of Internet content.

            Zero rating offers access opportunities to individuals who want broadband access, but lack sufficient discretionary income.  A subsidy provides an opportunity to test the waters and to decide whether to change spending priorities.  In developing countries, penetration rates continue to rise to near that of developed countries, because even poor people want and will pay for access.

            Zero rating also provides a new incentive for people with sufficient funds who do not see the value proposition in ascending a steep learning curve toward digital literacy, plus making even a small financial commitment in buying a smartphone and subscribing to a monthly data plan.  Surely these people are not condemned to a lifetime of inferior access, because they might opt to pay for access to the entire Internet cloud.

            Lastly, we should consider the consequences if the FCC—or any regulatory agency—rules against a subsidy arrangement that consumers like.  Does the FCC really want to invoke fairness when doing so prevents consumers from “free” access to certain video streams?

            I provide a deep dive on zero rating in a paper available at:  https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928.

 

 

           

Direct and Indirect Ways the FCC Will Weigh in on the AT&T-Time Warner Merger

            Depending on your economic and political alliance, I have good, or bad news.  I fully expect the FCC to lend its regulatory “good offices” and provide binding or advisory opinion on AT&T acquisition of Time Warner.  In any event, we have a real time case study in the political economy of regulatory agencies and the incentive to expand reach, budget and significance.

The Direct Link

            The FCC has direct statutory authority to oversee a merger when one or more licenses require approval for a transfer of ownership and control.  Time Warner owns one television station and holds several satellite uplink licenses for remote news gathering.  Section 214 of the Communications Act requires FCC approval of a transfer, albeit on a pro forma, expedited basis. 

Several Indirect Links

            The FCC has available a number of creative and quite possibly lawful ways to assert ancillary authority.  Soon after the market debut of cable television, the FCC asserted jurisdiction, despite the lack of direct statutory authority.  The Commission created a regulatory hook based on the transitive principle in math: A is to B as B is to C.  Therefore A is to C.

            In application, the FCC reasoned that because it has direct statutory authority to regulate broadcasting, and because cable television has the potential to adversely affect broadcasting (e.g., thorough audience fragmentation), therefore the FCC can regulate cable television.  The Commission’s strategy passed muster with a reviewing court in the United States v. Sw. Cable Co., 392 U.S. 157, 178 (1968), but the strategy did not work for network neutrality

            The FCC also has exercised jurisdiction over media cross-ownership, with an explicit concern about content diversity and market concentration, including matters for which it does not have direct jurisdiction over one category of media outlet, e.g., newspapers.  The Commission established rules prohibiting cross ownership of a broadcast television station and a general circulation newspaper in the same market.

            Additionally, on several occasions, the FCC deftly leverages congressional mandate to investigate and report on marketplace conditions as the foundation for establishing rules, regulations and safeguards ostensibly to achieve a legislatively created goal.  For example, Section 706 of the Telecommunications Act of 1996 requires the FCC to assess marketplace conditions in advanced telecommunications capability.  That mandate has morphed into secondary legislative support for network neutrality.

            Lastly, I believe that formally or informally, the Justice Department will collaborate with the FCC--if only to spread the heat/blame if the ultimate decision is no, or conditioned in ways that are politically unpalatable.  The Justice Department has collaborated with the FCC before, even as each agency has a different oversight template: DOJ uses quantitative measures, such as Herfindahl-Hirschman Index of market concentration and the FCC uses qualitative, "public interest" measures.

Another Day, Another $34 Billion in Telecom Industry Consolidation

            Today’s mega-merger combines CenturyLink and Level 3 Communications, two major players, but surely not on most consumers’ radar screens.  CenturyLink has acquired an impressive array of companies over the years including the AT&T spunoff Bell Operating Company, formerly known as US West and before that, Mountain Bell.  Level 3 owns and operates one of the largest inventories of domestic and international fiber optic transmission lines in the world.  If you run a traceroute for just about any web link, Level 3 would have at least one line in the list of networks traversed.  The company also serves as the major Content Distribution Network for Netflix.

            In this time of low interest rates, massive retained earnings and the urge to acquire scale, this merger will generate little concern, or interest.  One can dismiss all the hype about efficiency, scale and synergy gains and still tolerate a merger of this sort, because of how much it differs from AT&T’s recent announcement of its intent to acquire Time Warner.

            With the exception of CenturyLink’s first and last mile, local exchange services and middle mile links between businesses in the Mountain West, both this company and Level 3 operate in mostly competitive markets, or at least ones that lack substantial barriers to market entry.  There are existing facilities-based competitors and technological innovations support new ways to expand transmission capacity and use new radio spectrum options.

            In the vernacular, both companies face inter-modal and intra-modal competition.  Inter-modal competition occurs when there are multiple content transmission options: fiber optic cables, copper wire, satellites, terrestrial microwave radio, Wi-Fi, Wi-Max, 4G and 5G cellular radio, etc. Intra-modal competition refers to the availability of multiple carriers in each of the above content transmission media.

            I am not thrilled when companies have easy and expedient ways to buy market share, instead of earning it through superior business skills.  I wish companies had to devote sleepless afternoons sharpening their pencils and the value position of the goods and services they offer.  On the other hand, we should realize that bigness and unlimited access to capital does not guarantee success.

            Sponsored researchers may wax poetic about the virtues of vertical and horizontal integration and how it only takes 2 or 3 players to achieve a competitive market.  They cannot guarantee that a fully integrated company can achieve best practices, much less ok practices, in each of the industry sectors they choose to operate.

             Telecommunications history provides countless examples of how large companies unilaterally opted to divest non-core assets including Time Warner (print media, films, cable television operators) and General Electric (NBC).  Are their spun off ventures worst off?

Make Versus Buy in Information, Communications and Entertainment –Comparing the Strategy of AT&T with Facebook, Google and Other Unicorns

            With ample lines of credit and a relaxed global monetary policy, AT&T can easily move up and down the ICE food chain with massive acquisitions.  Sensing opportunities presented by changing marketplace conditions and threats to legacy business lines, the company has opted to buy market share and expertise. Other major ICE ventures have opted to make new products and services, or to blend make and buy as appropriate. 

            I believe differences in strategy largely depends on the confidence a venture has in its ability to integrate acquisitions into the family by exploiting the skills, expertise and market share the acquired venture offers.  We hear how merged companies will exploit synergies and efficiencies, but doing this requires great finesse.  Can AT&T embrace people, plans and skills not invented from within?

            Consider what Amazon, Facebook, Google, Microsoft and other major firms have done on the make versus buy dichotomy for telecommunications transmission capacity.  These firms have opted to build undersea fiber optic transmission capacity rather than lease it from incumbent carriers on a cost plus, plus basis.

            Making content carriage instead of renting it makes absolute sense, because content companies can achieve savings in a major cost center, but one that is fungible. In other words, transmission capacity has substantial costs that content companies must incur, but transmission capacity does not significantly differ between carriers, or between a self-provisioning venture and one that leases capacity.

            Content does not have such fungible characteristics, because of a far wider range of good versus bad quality. Fiber optic transmission capacity matches, best practice, global standards, while content can be nation specific, idiosyncratic and quite risky to produce.  Perhaps Netflix has found ways to reduce risk of failure through data mining and a business plan where even large investments in single series will not threaten the ongoing viability of the company.  Generally speaking, even today, generating a winning content formula involves gut instinct, a long learning curve and many failures.  That explains why producers stick and copy with winning formulas resulting in countless sequels, prequels and duplicates.

            AT&T has ample funds to experiment, but with such a deep pocket the company risks buying at the top of a market and paying too great a premium over the stock price.  Consider its $48.5 billion DirecTV acquisition.  AT&T has bought a venture that has substantial recurring investment costs including the satellites with ten year useable lives and launch technology that historically has a one third probability of failure or live reducing anomaly.  Worse yet, AT&T did not get any internally generated content for its investment, at a time when consumers appear increasingly disinclined to pay for large and costly bundles of content, only a small portion of which they want to view.

            On the other hand, AT&T has grown and become a major powerhouse through successful acquisitions.  Only AT&T and Verizon remain from the seven divested Bell Companies.  Additionally AT&T knows how to bundle services and bill for it.

            Maybe AT&T can keep its acquisition success streak intact.  If it succeeds, it will have beaten stiff odds and proven its superior management skills, forecasting talent and business acumen.

AOL-Time Warner ($160 Billion in 2000) vs. AT&T-Time Warner ($85 Billion in 2017): Is It Different This Time?

            A little over 16 years ago, the merger of Time Warner and America Online resulted in an unprecedented loss in market capitalization.  Visions of synergy, efficiency and enhanced share valuation evaporated as reality kicked in quickly.  By 2002, the merged company already had to write off $99 billion in goodwill, an implicit recognition that a lucrative transformation did not occur.  See http://fortune.com/2015/01/10/15-years-later-lessons-from-the-failed-aol-time-warner-merger/.

            A significantly changed Time Warner, in a substantially changed marketplace, welcomes another mega-merger.  Proponents invoke the common refrain: This Time It’s Different.

So is it?  The answer lies in the changes in the company, AT&T and the information, communications and entertainment (“ICE”) marketplace.

            Time Warner has largely spun off non-core ventures, ironically an elimination of the vertical integration AT&T now seeks to achieve.  Time Warner now concentrates on content creation and distribution.  AT&T has invested heavily in migrating from wired and wireless telephony into a fully integrated and ubiquitous ICE venture.  Like Time Warner, AT&T recognizes the absolute need to change its market targets, or risk loss market share and declining prospects.  AT&T sees content ownership as key to its survival as the content carriage business declines.

            So far so good: AT&T vertically integrates and move up the ICE food chain into content creation.  It can better manage its transformation (there’s that word again) into a one stop shop for content access via any medium, including satellite, fiber, copper and terrestrial radio spectrum.

            AOL and a more diversified Time Warner had similar goals and expectations.  To put it mildly, it did not work out as planned. AOL’s stock capitalization dropped from about $226 billion to $20 billion.  The merged company could not come up with a successful strategy for managing the transition from a narrowband, dial up Internet access environment to one with easy and low cost market access by content and app makers using the broadband networks of unaffiliated carriers.

            Even if “necessity is the mother of invention” and adaptation, AOL-Time Warner could not make it work.  Maybe AT&T-Time Warner can with new synergies and enhanced consumer value propositions.  For example, AT&T offers its wireless subscribers a nearly unlimited data plan if they add DirecTV.  Such upselling and bundling positively exploits synergies and the merits in one stop shopping.

            We shall see in 2017 onward, because I expect the deal to achieve grudging, conditional, but not harmful regulatory approval.

AT&T—Time Warner and the Mixed Results in Vertical Integration by Bellheads

              Another day, another multi-billion dollar merger in the telecommunications marketplace.  See http://www.wsj.com/articles/at-t-reaches-deal-to-buy-time-warner-for-more-than-80-billion-1477157084.  Despite the disinformation about how incumbents have closed their pocketbooks to investment because of network neutrality and assorted regulation, AT&T appears ready to push the antitrust envelop with yet another massive $80 billion acquisition.  Not content to acquire more than 50% of the satellite television market, with its $49 billion acquisition of DirecTV, AT&T has its sights on the content Time Warner creates.

            AT&T has a business plan to integrate vertically throughout the information, communications and entertainment (“ICE”) ecosystem.  Acquisitions provide the fastest way for the company to move up and down the ICE “food chain” of content creation, syndication, distribution and delivery to consumers.

            Vertical integration can achieve operational efficiencies as a single company can achieve savings through scale and a wide footprint of related business ventures.  On the other hand, it takes remarkably talented and nimble management to handle different components in the food chain.  Companies like General Electric have succeeded, but ironically this company has launched a campaign to divest itself of non-core business lines.  Other companies have failed even when they thought consumers would welcome having a “one stop shopping” opportunity, e.g., one call to book air travel, rental car and hotel.

            Depending on how your rate AT&T senior management, the company has wisely invested in the convergence of content and conduit, or it has unwisely deviated from its true competency.  Bear in mind that at divestiture from AT&T, companies like Verizon (then Bell Atlantic) invested heavily in content creation.  Verizon failed, because it did not ascend the content creation learning curve quickly enough.

            Simply put, the ICE marketplace has Bellhead, Nethead and Contenthead players with core competencies in legacy network conduits, next generation, Internet carriage and content, and core expertise in entertainment content.  The Bellheads historically have concentrated on installing and managing the networks needed to deliver content.  Incumbent Bellheads see the conduit business as having declining profit margins coupled with substantial capital expenditure requirements in new distribution technologies.  Bellheads have a twin mission to eliminate the need to maintain the fast becoming obsolete copper wire telephone networks, but also to invest in 4^th and 5^th generation wireless infrastructure.  Additionally, they hedge the network bet by moving up the food chain into content.

            Bellheads envy the profit margins Contentheads sometimes achieve and the business plans of some Netheads who use software to achieve unicorn status (multibillion dollar valuation with miniscule staff and investment) by using Bellhead networks for value added content delivery.

            Can you teach old dogs new tricks?  Bellhead telephone company senior management have to acquire the skills and understand the culture of Netheads and Contentheads.  Companies like Verizon and AT&T have made the transition into the Nethead world through acquisitions of companies such as MCI and UUNet.  Now comes an even harder challenge to embrace the Contenthead culture of Hollywood.   Good luck with that!

Regulation by Contractual Fine Print

            Advocates for telecommunications deregulation work themselves into a lather when thinking about how government regulation kills jobs and robs stakeholders of the incentive to invest and innovate.  Sponsored researchers provide cover with selective analysis of data and its quite bogus extrapolation.  For example, even as incumbent carriers like Verizon and AT&T spend billions on content and future technologies, like 5G, to deliver it, the carriers and their consulting advocates attribute regulation as severely dampening any reason to invest in new plant.

            Let me get this straight.  Incumbents have no reason to keep their business alive and fresh with cutting edge technologies, because regulators will prevent them from reaping the fruits of their labor by forcing network sharing and imposing network neutrality requirements? 

            Does this pass smell test?  Why would Verizon spend over $4 billion to buy Yahoo and its considerable inventory of content and customer base if the carrier business was being starved of funds to increase transmission speed and capacity? 

            Let’s consider the dead weight social loss in regulation.  I’ll readily admit that uncalibrated and unwarranted government oversight can harm consumers and competition.  Incumbents do not want you to know this, but they welcome regulation that imposes a disproportionate burden on competitors and creates barriers to market entry by prospective competitors.

            Incumbents also do not want you to know that their service contracts—and the regulated tariffs that preceded them—impose far worse costs on consumers than anything the FCC could impose.  Regulation by contractual fine print refers to the anticompetitive and consumer harming language carriers sneak into their terms of service.

            Here are some examples:

            Unlimited data does not mean unmetered and boundless downloading opportunities. Fine print in service terms, like that offered on a “take it or leave basis” by TMobile, offer metered service and severe penalties for exceeding a cap on so-called unlimited data service.  Should a subscriber exceed a data threshold, then the carrier downgrades network performance to a rate incapable of transmitting most data applications.

            How many commercial ventures can deliberately ruin their service with an eye toward forcing customers to upgrade to a more expensive tier?  Pretty risky proposition, but wireless carriers can get away with this strategy.

            Here’s another example: AT&T and other carriers, as well as content providers, like Yahoo, reserve the option of scanning anything you do and say online, mining it, collating it and marketing it. For ventures like Yahoo and social network like Facebook, subscribers accrue value in exchange for abandoning most privacy protection.  But in the case of carriers like AT&T, the scanning and marketing of subscriber usage data does not result in the offer of discounted service.  Just the opposite.  AT&T and other carriers floated a trial balloon of offering to eschew some customer snooping in exchange for additional monthly compensation.  Such a deal!  Customer can pay for somewhat better privacy, but the default is abdication of virtually all privacy.

            Another example is compulsory arbitration on terms set by the carrier using a venture hard wired to favor the carrier in light of the business it generates for the arbitrator.

            Consumers face a non-negotiable service terms severely tilted in favor of the carrier that writes the contract.  Even a brief scan of these agreements would show terms that reduce, regulate, limit, minimize and dilute consumer bargaining power.  Subscribers cannot simple churn out from one carrier to another one offering better terms, because these so-called robust competitors have nearly identical terms and conditions.

            So who’s the regulatory beast these days?

Take-Aways From the Yahoo Network-wide Scan

            Yahoo appears to have provided the U.S government with key word scanning of each and every email message traversing the Yahoo network for a limited time period.  See http://www.reuters.com/article/us-yahoo-nsa-exclusive-idUSKCN1241YT.  There are significant legal and technological issues triggered by this news. 

            On the legal side, it appears that the national intelligence community can and will make a case for email carrier scans of an entire user population when a narrower set of suspects and email accounts cannot be identified.  The Foreign Intelligence Surveillance Act imposes no cap on the number of scanned email accounts, nor does it impose a requirement that government agencies first exhaust all internal options before seeking industry cooperation, or compliance with a court order.

            On the technological side, it appears that only Yahoo could have executed the scans on short notice, because Yahoo email subscribers can opt to encrypt their messages.  Having written or at least installed the encryption technology, Yahoo may be the only one able to deencrypt and conduct deep packet inspection of massive traffic volume on a real time basis.

            As to the impact on Verizon’s acquisition of the company, I suspect this news will not have any effect.  It seems like Yahoo had no basis to contest the order (if there was one) in light of the short notice, limited duration and likely assertion by government officials that the company alone could achieve the desired outcome.

            On matters of national security, even at the risk of abuse and overuse, government assertions about the potential for imminent harm trumps individual privacy concerns.

The Strategy in Smartphone Battery Location

            Once upon a time, most cellphone users could easily replace their batteries should they want to extend the life of their handset. Absent operator error, the decline in the performance of rechargeable batteries constitutes one of the major motivators for handset owners to replace and upgrade.  When wireless carriers subsidized handsets, consumers readily handed over their phones for something better, thereby reducing churn as they extended their subscription for another two years.  They could have replaced the battery, but why bother?

            With the passage of time, cellphone manufacturers and carriers saw the strategic benefit in making devices less modular, with battery replacement costly and difficult.  Most currently used smartphones don’t offer a quick and easy replacement opportunity.  One must use a device to pry open the handset possibly voiding the warranty and damaging the phone. 

             Operators and device manufacturers appear to have elevated the battery hassle factor even as handset subsidies started to evaporate.  Wireless consumers may want to extend the usable life of their handsets, but replacing the first to degrade or fail component has become a major effort.

            On balance, making handset batteries hard to reach has worked out well for both carriers and handset manufacturers.  Until now.  Users of the Samsung 7 would easily have received by mail a replacement battery for their fire prone handsets without any inconvenient and device downtime.  Instead, they must part with their lifeline to the cloud for some indeterminate period of time until a replacement handset arrives.

            Maybe this unfortunate episode will prompt a return to easy battery access.  I wouldn’t bank on it now that wireless users need external nudges not to squeeze additional months of use.

So This is How the Internet of Things Works

            This week my digital printer notified the office systems administrator by email that it needed a replacement ink cartridge.  How very helpful and timely you might think, but there’s more to the story.

            My printer did not really need ink.  It simply reached a specified number of page prints, after which it stopped working!  Full stop.  Not coaxing it to handle a few more pages after a couple of cartridge shakes.

            The printer manufacturer has a software, middleware, or firmware default for stopping printing after reaching a page threshold. There is a way to override the default, but one needs to issue that instruction at the printer’s specific Internet Protocol address which may not be common knowledge.

            How clever of the printer company to exploit the Internet of Things to expedite the replacement of ink cartridge that might have hundreds of pages left.  Clever and greedy I’d say.

Paying Mooching Carriers—Wi-Fi Spectrum Use by Licensed Operators

            Some stakeholders support a growing strategy by incumbent carriers to offload ever increasing bandwidth demand onto other networks including unlicensed Wi-Fi.  See https://www.qualcomm.com/.../making-the-best-use-of-unlicensed-spectrum

           Others consider this a clever tactic to reduce spectrum auction payments while contributing to congestion in frequency band designed to provide consumers with an unlicensed, unmetered and cheaper alternative to licensed carrier service.  http://www.infoworld.com/article/2942455/networking/lte-u-is-coming-to-take-your-wi-fi-away-consumer-advocates-warn.html#tk.drr_mlt.

             Not so long ago, carriers prematurely handing off traffic to another carrier risked being branded as a “hot potato” router.  See a 2013 blog entry on the subject: http://telefrieden.blogspot.com/2012/03/hot-potato-routing-and-real-or-imagined.html.

The consolidated Bell System took pride in offering “one system with end to end responsibility.” Now it does not seem to matter if another carrier handles traffic if the strategies accrue cost savings.

             It should come as no surprise that incumbent licensed carriers would prefer consumers not have an unlicensed alternative, particularly in light of the billions paid for spectrum. Whether provided free, below cost, or on profit generating terms, municipal Wi-Fi is reviled as socialism.  Many legislators have bought this logic, even though they don’t seem to fret over taxpayer subsidized stadiums, golf courses, cemeteries, libraries, sewers and water authorities.  With righteous indignation, opponents of municipal Wi-Fi networks claim the socialists ignore the rule of law.  Never mind the law was championed, (make that written) by stakeholders keen on removing, or reducing any unmetered option.  They would love a prohibition on home Wi-Fi routers, but somewhere a line can be drawn where federal authority preempts “states’ rights” and offers consumers a much welcomed option to increase the value of a broadband subscription. 

            Incumbent carriers must maneuver a difficult course where they tolerate (if not welcome) some free spectrum, if they can use it for commercial purposes, coupled with a global bar on the socialistic version called municipal Wi-Fi.

Another Study in Inconsistency: North Carolina Politics

            North Carolina has a lot to offer including world class beaches, technology parks and barbeque.  Sadly it also leads the nation in partisan and checkbook politics.  This state’s majority party appears obsessed with remedying non-existent election fraud, bathroom gender ambiguity and the scourge of municipal broadband service.  Let’s consider the latter topic.

            From my perspective, municipal Wi-Fi and wired broadband offer a community service in the same vein as libraries, parking decks, parks, zoos, water authorities, etc.  For many types of services, it makes no sense to wait for, and rely on, the marketplace to recognize and serve consumers’ wants, needs, or desires.  The concept of market failure also applies when private industry refrains from providing a service based on forecasts showing insufficient returns on investment.

            Municipalities provide Wi-Fi and fiber optic broadband largely based on the view that the service enhances the welfare of residents while also accruing intangible, or at least hard to quantify benefits.  The Wilson, N.C. local government invested in broadband early, opting not to wait for the possible market expansion by incumbents, or newcomers.  The city mothers and fathers properly concluded that no venture would consider it worthwhile to invest in infrastructure for such a small and relatively isolated place.  Bear in mind that fiber optic ventures, such as Verizon’s FiOS, simply do not extend far from the most densely populated portions of the United States.

            Even though incumbent carriers have little likelihood of actually providing Wi-Fi or any alternative to metered service, they want the “right” to foreclose even cities from resorting to self-help.  In Pennsylvania, Bell of Pennsylvania secured a legislatively conferred right of first refusal for the entire state, except for Philadelphia.  Predictably, the company never acted on this option, but simply having it has achieved the goal of blocking home grown initiatives.

            In North Carolina, incumbent carriers simply convinced legislators that municipal broadband networks would unfairly compete with private ventures who have to enter the private debt and equity market instead of having captive taxpayers bear the financial burden.  In reality, incumbents simply bought a way to preempt town wide, unmetered Wi-Fi, or wired broadband.  Residents, not within the original  broadband service footprint, and in countless other localities have to pay on a metered basis for wireless broadband, or be grateful that they live in a location where cable modem or DSL service is available.

            Elsewhere in North Carolina, Google has installed a major server farm in Lenoir and recently announced that it will include Raleigh in future extremely high speed wireless projects.  In one state, we can see how cutting edge technologies contribute to the tax base, employ people and enhance community welfare.  Elsewhere, checkbook politics blocks community initiatives that would enhance the livability and commercial appeal of a rural locale.  

Consistently Inconsistent: How Very Large ICT Ventures Cannot Maintain a Consistent Legal/Regulatory Posture

            Technological and marketplace convergence makes it increasingly difficult for large, integrated firms, like AT&T, to maintain a single, consistent position on legal and regulatory issues.  This results in rich, irony. 

            Consider AT&T’s recent Kentucky law suit to prevent Google Fiber from using federal pole attachment law to secure access to AT&T-owned telephone poles, at relatively attractive rates, using a congressionally created formula.  See, e.g., http://www.bizjournals.com/louisville/news/2016/05/25/where-at-ts-lawsuit-against-the-citystands.html. 

            This litigation reeks of irony, because AT&T, in its capacity as an Internet Service Provider, would qualify under federal law to attach lines to poles owned by electric, telephone and cable television companies.  Federal pole attachment law prevents companies from refusing to provide pole access, or to allow access, but only at extortionate rates.  AT&T surely would benefit in cities where it does not own telephone poles and needs to install lines using the poles of another, potentially competing company.  But of course AT&T does not make it a practice of trying to compete in localities where it does not also happen to owe telephone poles.

            Adding to the irony—make that disingenuousness and other D words—is AT&T’s consistent legal and regulatory position on state and municipal laws and ordinances affecting access to cellphone towers.  When it comes to that technology, which AT&T considers a functional equivalent and competing option, the company vigorously asserts that federal law preempts state and municipal laws.

            Clearly both wireline and wireless access to the Internet qualifies as interstate telecommunications.  A long body of case precedent supports a “contamination” standard that favors federal preemption, and in turn FCC jurisdiction, whenever a line carriers both interstate and intrastate traffic that cannot be separated.  AT&T regularly seeks federal preemption of state and municipal laws that impose any sort of cost, delay, environmental impact assessment, etc. Federal preemption renders the state and municipal law invalid and inapplicable. 

             The FCC recently failed to convince an appellate federal court that the Commission should be able to preempt any and all state laws that limit or prohibit municipalities from offering Wi-Fi service. See http://docs.techfreedom.org/Tennessee_v_FCC.pdf.

This means there are some instances where federalism prevails, i.e., the national legislature did not clearly and unconditionally prevent states from enacting laws and some argument can be made that the law does not affect interstate commerce.  But when it comes to still lawful state and municipal laws affecting tower locations, etc. AT&T speaks clearly and unconditionally: that federal law severely restricts what states and municipalities can do, despite the intense local nature of tower siting issues.

            Ironically, AT&T’s absolute certainty that federal law trumps states and cities in terms of wireless Internet access, does not extend to functionally equivalent wireline Internet access.  This has nothing to do with respecting the “Rule of Law” and everything to do with stifling Goggle and the innovation and price competition it would offer. 

             The same conclusion applies to those incumbent carriers opposing municipal Wi-Fi networks and coverage expansion.  These carriers invoke law to short-circuit competition, but in other forums invoke the same laws, policies and precedent to justify their lawful right to ignore state and municipal law.  Consider this strategy rent seeking and not some lofty respect for the Constitution.

             

Underappreciated Reasons Why Cable Operators Don’t Want Set Top Box Competition

            Behind all the bluster, misinformation and distortion in the spin campaign of cable operators lies three under-recognized motivations.  Cable operators want to control consumers’ access to content in three ways: 1) digital rights management (copyright); 2) navigation (downstream delivery of content); and 3) search for content.

            It recently dawned on me that cable and satellite television providers don’t want the best in class content search firm, Google, anywhere near video content search.  How best to block innovation, particularly the permission-less innovation, Google could provide? Vilify Google as hell-bent on stealing content, replacing advertisements and otherwise ruining the current model for content access negotiation and retransmission (delivery). 

            To be clear there are muscular, clear and unavoidable laws about what Google can and more importantly cannot do vis a vis copyrighted content.  Have we forgotten what happened to Aereo, the company that thought it had come up with a clever way to avoid copyright liability?  Because Google cannot masquerade as a cable television company, even if it wanted to, it cannot retransmit, repurpose and otherwise take control over copyrighted content for which it has no license to use.  Similarly whatever set top box Google might make, or provide content search software, the content flowing through it cannot be touched. 

            Incumbent operators know the severe limitations on set top box functions.  They helped write the Cable Act of 1992 and other laws that legitimize their carriage of content in exchange for a compulsory copyright license for broadcast content.  For access to non-broadcast content, cable and satellite operators accept limitations on what set top boxes can do.  For example, no set top box can completely eliminate exposure to advertising.  Retransmitters of content know they cannot encourage or induce copyright piracy.  Surely Google would have to comply with similar constraints on how well its set top boxes operate.

            What’s primarily at risk here is the potential for Google to run circles around the set top box functionality offered by cable and satellite operators, even the much touted Comcast X1, or the options Comcast now says it can offers without a set top box.  

            We live in a strange world where the potential for innovation is reframed as somehow harmful to consumers, competition and the quality of video search.

Make Versus Buy in Telecommunications—Verizon/Yahoo

        In a matter of days, Verizon will likely add to its inventory of content by acquiring much of Yahoo.  This deal and the earlier acquisition of America Online confirms the trend that deep-pocketed incumbents see the benefit in acquiring content, rather than growing their own.

            Many years ago, soon after divestiture from the Bell System several Regional Bello Operating Companies threw millions of dollars at becoming content creators, with little to show for it (pun intended).  Now incumbent telephone and cable television companies see the benefit in overnight vertical integration.  You can call it defensive, in light of declining margins and revenues for core, “legacy” business lines.  Alternatively, you can call it prudent recognition that in-house talent might not have necessary mindset and creative skills to flourish in Hollywood.

            The billions of dollars recently invested by companies such as Comcast, Verizon and AT&T confirm that regulatory uncertainty and the “scourge” of network neutrality have not and will not stop investment and capital expenditures.  No company will invest in content if its managers conclude that they should not also make the necessary, concomitant investment in the physical plant needed to deliver content to consumers.  The new, or upgraded infrastructure will exploit technological innovations, such as the fifth generation cellular radio.  Some desirable technologies will not become ubiquitous simply because a profitable business case cannot be made for rural market penetration.

            Let us put to rest the red herring that today’s regulatory wingspan stymies investment in telecommunications.  Ask any senior executive—off the record—and she or he will acknowledge that the regulatory climate falls well below key financial and marketplace variables.  When regulation enters the calculus, too often incumbents use it as a vehicle to stymie innovation and competition. 

            I still do not understand how choice in set top box interfaces with broadband networks somehow hurts consumers and competition.  It does not, but incumbents can cast themselves as victims of bullies like Google and throw sand in the works.  Meanwhile managers at these very same companies proceed with multi-billion dollar acquisitions.  They seem quite optimistic about their staying power and ability to identify and capture new revenue streams.