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?