The Regulatory Uncertainty Red Herring

            I wish I had a dollar every time I see and hear regulatory uncertainty vilified. In telecommunications regulation and policy, stakeholders involve RU as the reason for any ailment. RU prevents capital investment; RU stifles innovation; RU kills jobs; RU hurts national competitiveness.   RU causes the common cold.

            Here’s a news flash: unless one operates in a market completely free of regulation, there always will be some degree of uncertainty what the future regulatory climate will be.  Speaking of uncertainty, who knows what the cost of capital will be in a year, what law suits will confound a particular company; what technological innovation will challenge the status quo?

            Regulation constitutes one of very many variables for which a commercial venture cannot control.  Companies have to deal with it, but in this day telecom executives speak in complete opposites depending on the audience. To Congress, the FCC and the court of public opinion corporate executives trout out RU as a terrible scourge.  To buy side analysis and in commercial practice the very same executives accept RU as one of many variables in business.

            Has RU prevented wireless companies from making substantial sunk investments in next generation network spectrum and plant?  If RU is such an abomination how can AT&T CEO Randall Stephenson tell one constituency AT&T has had to curb capex investment while at the same time the company pays 45 billion dollars to acquire DirecTV and may offer its own mobile video streaming service? 

            So let me get this straight: RU curbs innovation and investment even as billions of dollars in mergers, acquisitions and new ventures continue to sprout.  

AT&T-DirecTV and the Benefit of Multiple Requests

            AT&T appears likely to secure all required governmental approvals of its $48.5 billion acquisition of DirecTV.  AT&T has made multiple requests for acquisition authority of late and the odds of multiple “mother may Is” seems to work here.  The company couldn’t get the needed authority to buy out TMobile and the wireless consumers are far better off in having a maverick innovator among the 4 carriers that pretty much control the nation’s wireless infrastructure.  Most analysts think a merger of AT&T and DirecTV won’t matter much.

            AT&T can make plausible arguments that the merged venture will not harm competition, or consumers even as it provides desirable diversification opportunities for both companies.  The FCC and Justice Department will have to emphasize this prospect rather than dwell of the snarky and unnecessary threats by CEO Randall Stephenson that AT&T won’t invest in next generation network infrastructure because of burdensome network neutrality obligations and general notions of regulatory uncertainty.  See Washington Post, AT&T is putting its fiber deployment on ice over net neutrality — for now (Nov. 12, 2014)

available at: https://www.washingtonpost.com/blogs/the-switch/wp/2014/11/12/att-is-putting-its-fiber-deployment-on-ice-over-net-neutrality-for-now/.

            So AT&T has ample retained earnings and borrowing options to shell out $48.5 to buy out a content competitor, but the marketplace is too risky to invest in plant?  Apparently it makes financial sense to buy market share and diversify content distribution technologies rather than extend the geographical market coverage of AT&T’s hybrid fiber optic/copper U-verse network.

            AT&T is neither a maverick, nor an innovator.  Its interest in DirecTV may evidence backward, or status-quo thinking.  In the worst case, AT&T will have bought a venture whose one service will decline in value and market share over the next few years. If cord cutting and shaving picks up momentum in the wired cable television environment, won’t subscriber churn increase for the satellite alternative to cable?  Or will exclusive rights to some NFL football games pay for the deal?

            Does it make sense to double down on an incumbent medium, rather than emphasize new media opportunities?  The managers at AT&T appear keen on hedging their bets by embracing old media even as technological and market convergence point elsewhere.

Revenge of the Cord Nevers

            More and more young users of the Internet will access the cloud without ever having used a corded device--what older folks know as telephones and personal computers.  These “Cord Nevers” do not have to accept the limitations of wired telephone and cable television service.  A nomadic species, Cord Nevers have little tolerance for tethered telephones and “appointment television” where content creators and distributors decide when, where and how often viewers can access programs.  Cord Nevers want access anytime, anywhere, via any device and in any format allowing them to talk, text and watch video content via different screens on their terms.                        

            Cord Nevers are technology agnostic.  They care little about the medium used to deliver service, only that access occurs quickly, reliably and without impediments.  Netflix and some new media players understand this mindset and try to accommodate it.  For example, Netflix allows subscribers to binge on an entire season of “must see” video content by downloading all episodes, instead of applying the appointment television model that rations access to one episode per week.  HBO appears ready to become more accommodating by offering Amazon customers access to some programing without requiring proof of a cable television subscription.

            Cord Nevers appear quite flexible on the size and quality of the screen used to view content.  They want flexibility on the device they use to access content, but appear willing to tolerate much smaller screens than what televisions and computer monitors have to offer.  While screen size does not matter much, the interface providing access has to operate in a user friendly and intuitive way. 

            Cord Nevers may appear both fickle and loyal.  On one hand they constantly seek the next great application and cloud enhancement, quick to jettison one site for another.  Few even recall the early social networking success of MySpace.  On the other hand, Cord Nevers appear willing to stick with a brand, such as Apple, and even pay a premium if a device or service continues to enhance the perceived value proposition. 

            Cord Nevers have the potential to disrupt the status quo in many segments of the Internet ecosystem.  The expectation of anytime, anywhere content access threatens the longstanding distribution model that relies on several “windows” of access at different price points. Disruption will occur when movie access deviates from a standard course of theatrical display, limited and locked down access on a pay per view basis, DVD release, rental and download opportunity, availability on cable television premium networks, etc.  

            However disruption does not mean destruction of business plans and revenue streams.  When cable television made its market debut, movie theater operators and their content producers feared annihilation.  In reality accommodation occurred and so too will Cord Nevers trigger change without causing incumbents to fail. 

            Incumbents need to think strategically rather than simply conclude that Cord Nevers constitute a threat to their intellectual property and livelihoods.    Cord Nevers will pay for content, sometimes in ways that generate more profit than via previously limited commercial options.  For example, some cellphone subscribers regularly paid more for 20 seconds of a song for use as a ringtone, than for access to a disc or file containing the entire song.  Yes, many Cord Nevers think nothing of violating copyright laws, but if the content is compelling and the interface friendly, most will pay for convenient access.

            Incumbents—particularly telephone and cable television companies—appear quick to consider Cord Nevers as threats, rather than premier customers.  Cord Nevers are vilified as bandwidth hogs, copyright thieves and cheapskates.  Many incumbent punish them for these tendencies by throttling the bit transmission speeds of heavy users, threatening litigation and sneaking new billing line items.  A more profitable strategy seeks to reward and accommodate power users, particularly when doing so migrates them to more profitable service tiers.

            Cord Nevers bring their televisions and computers with them everywhere they go.  Incumbents should understand that such expanded access can translate into more services and higher revenues.

 

           

Short Netflix, Go Long Verizon?

            Reduced to its least common denominator, the network neutrality/open Internet debate involves money: who pays and who receives in the delivery of traffic.  After the Internet’s government incubation phase, where taxpayers underwrote traffic delivery, the payment issue has focused on the balance of traffic streams between two directly interconnecting Internet Service Providers.  If traffic balances roughly match, the ISPs barter equivalent access to their networks without a cash settlement.  For unequal traffic flows, the ISP generating more traffic than it receives has to pay transit fees to compensate the ISP handling more traffic.

            When we focus on the first and last mile link to and from the Internet cloud, the “retail ISP” currently has two sources of revenue: 1) Internet access subscriptions from end users and 2) transit payments from ISPs with more traffic for retail ISP delivery than for the upstream ISP to deliver farther into the Internet cloud.

            Not satisfied with this doubled-sided market and two sources of revenues, some retail ISPs want a third source: content creators and distributors farther upstream with which the retail ISP does not directly interconnect.  Ventures like Netflix and Youtube have pushed back, because they already pay to have their considerable traffic enter into the Internet cloud.   Arguably a portion of the payments made by companies like Netflix already reach retail ISPs when upstream ISPs, such as Level 3,  have to pay “surcharges” in light of the disproportionately higher downstream traffic volumes.

            So are retail ISPs such as Verizon greedy?  The marketplace will decide, but it would help consumers to know a few inconvenient truths.  First, the Internet access business already has extraordinary margins often exceeding 100%.  Two, at least some consumers consider their $30-75 monthly Internet access payments ample compensation for the retail ISP to deliver traffic without whining.  Three, ISPs will further slice and dice the broadband access market with an eye toward extracting high average revenue per subscriber.  With significant upward pressure on  retail Internet access rates,  “toll-free” data plans paid by content providers and distributors look increasingly attractive, if not essential.

The D.C. Circuit Court Decision on the FCC’s Open Access Order

            The D.C. Circuit Court of Appeals has affirmed the FCC’s reading of Section 706 in the Communications Act, but also determined that the FCC could not extrapolate from that Section statutory authority to prohibit Internet Service Providers from engaging in discriminatory practices, including blocking access to specific content. See http://www.cadc.uscourts.gov/internet/opinions.nsf/3AF8B4D938CDEEA685257C6000532062/$file/11-1355-1474943.pdf.

            This is “damning with faint praise” at its finest, so much so that the author of the decision condescendingly notes that “even a federal agency is entitled to a little pride” (p. 20) when after losing the first case on network neutrality (Comcast v. FCC, 600 F.3d 642 (D.C. Cir. 2010) the Commission struggled onward to find lawful authority.  This decision offers the FCC a generally worthless victory that the Commission can lawfully find some statutory basis for jurisdiction over Internet Service Providers so long as the responsibilities imposed do not constitute common carriage. 

            The court again reminded the FCC that having classified Internet access as an information service, the Commission has no foundation whatsoever to impose common carrier duties:

even though the Commission has general authority to regulate in this arena, it may not impose requirements that contravene express statutory mandates. Given that the Commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the Commission from nonetheless regulating them as such. Because the Commission has failed to establish that the anti-discrimination and anti-blocking rules do not impose per se common carrier obligations, we vacate those portions of the Open Internet Order. (p.4)

            Some network neutrality advocates had expressed hope that the court would have considered nondiscrimination and anti-blocking rules as permissible in light of a recent case that approved as non-common carriage specific interconnection requirements on wireless carriers. In Cellco Partnership v. FCC, 700 F.3d 534, 541 (D.C. Cir. 2012) the court approved the FCC requirement that wireless carriers negotiate commercial terms and conditions for data roaming, Internet access via smartphones located outside the customer’s home service territory.  The FCC treats all forms of Internet access as non-common carriage by classifying the offering as an information service.  The court affirmed the FCC, because the imposition of some duties to deal, e.g., providing data roaming, does not rise to the level of compulsory carriage, particularly because the FCC only required commercial negotiations and recognized that the duty is not mandatory if technologically infeasible, or that the terms and conditions be uniform across all instances of interconnection.

            Even with a quasi-common carrier option, the FCC cannot expressly impose non-discrimination and anti-blocking duties.  Section 706(a) of the Communications Act requires  the FCC to “encourage the deployment on a reasonable and timely basis of advanced

telecommunications capability to all Americans . . ..” Section 706(b) requires the Commission to conduct a regular inquiry “concerning the availability of advanced telecommunications capability” and if it determines that access is not available on “a reasonable and timely fashion” “to take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.”

            The court determined that the FCC could reasonably interpret Sec. 706 as providing statutory authority for some degree of private carrier oversight, despite the FCC having previously determined that this Section provided no such foundation when the Commission previously sought to classify ISPs as information service providers entitled to a largely deregulated status.  The court defers to the FCC and its later in time decision to consider Sec. 706(a) as providing a statutory basis for regulatory oversight: “Does the Commission’s current understanding of section 706(a) as a grant of regulatory authority represent a reasonable interpretation of an ambiguous statute? We believe it does.” (p.22)

            The court accepts the ability of the FCC to change course and even change factual determinations, as when the Commission determined that the Internet access market lacked sufficient competition having previously determined that it did. The court also does not dispute the FCC’s finding that ISPs have the ability to engage in discriminatory practices: “there appears little dispute that broadband providers have the technological ability to distinguish between and discriminate against certain types of Internet traffic,” p. 38 nor does the court dispute that the Internet access subscribers cannot or will not quickly change providers if potentially harmful discrimination actually occurs:  
For example, a broadband provider like Comcast would be unable to threaten Netflix that it would slow Netflix traffic if all Comcast subscribers would then immediately switch to a competing broadband provider. But we see no basis for questioning the Commission’s conclusion that end user are unlikely to react in this fashion. (p.39)

            However, the ability to discriminate does not automatically translate into illegal discrimination particularly when the FCC has determined that discrimination is something only common carriers cannot pursue.

            The FCC may seize upon the approval of its reliance on Sec. 706 to assert statutory authority to regulate ISPs.  However, the Commission will have little latitude and even less deference to craft quasi-common carrier duties on ISPs.  One permissible duty would require transparency and full disclosure of non-neutral service arrangements.  The Commission lawfully can require "truth in billing" by private carriers.  Perhaps the potential for consumer pushback in response to disclosed sweetheart deals with corporate affiliates and favored ventures might create a disincentive for ISPs not to go overboard. 

Netflix and the Future of NGN Interconnection

            Recent press accounts report that Netflix and cable television companies have collaborated on carriage agreements.  What results from these negotiations may provide a model on next generation network (“NGN”) interconnection and compensation arrangements.

            Currently telecommunications, cable television and Internet arrangements have problems for video-heavy traffic flows.  Traditional telephone carrier settlements have too much granularity when the meter counts minutes of use.  Cable television retransmission consent agreements primarily cover copyright licensing, because the content typically arrives at the cable head end via satellite (paid by the content provider) leaving the cable operator with the last mile distribution it already performs for all other channels.  Current Internet arrangements focus on directly interconnecting carriers and customers making it difficult to extend a compensation demand farther upstream to sources or distributors of content.

            Retail ISPs in particular have objected to providing last mile carriage of Netflix traffic “without compensation,” a false allegation, but one gaining some traction.  ISPs want Netflix to pay them directly, in addition to the significant retail subscriptions paid by their end users and the transit, paid peering and other compensation arrangements paid to them by Content Delivery Networks and even other ISPs with comparatively more traffic needing downstream delivery.

            Netflix and cable operators appear to work on a mutually beneficial interconnection and compensation regime where compensation flows directly to the cable operator, but the length of carriage—and presumably the cost—drops with the installation of a proxy server directly at the headend.  Netflix benefits by securing higher quality of service and some future assurance that the cable broadband plant can and will handle even more traffic as Netflix’s subscribership grows and when content formats increase in bandwidth requirements, e.g., 3D and ultra high definition. 

            Cable operators benefit, by securing financial compensation for their retransmission consent.  While the interconnection arrangement may differ from other satellite-delivered cable networks, or the retransmission of broadcast channels, cable operators will receive direct compensation for providing a subscriber-friendly platform using the existing set top box.

            Consumers may end up having to pay more for their Netflix subscription to cover higher delivery costs as well as higher copyright licenses, but the convenience in access enhances the value proposition.  Rather than trying to engineer and “sling” Netflix content from the computer to the television set wirelessly, the content arrives directly to the television set, a winning proposition.

Determining Causality in Telecommunications

With the FCC and most government actors obsessed with incentive creation, it makes sense to determine whether and how a regulatory or deregulatory action causes some desired outcome. Consider the creation of incentives to invest in physical plant. Incumbent carriers have spent a lot of time, money and effort arguing that regulation creates investment disincentives and deregulation does the desired opposite. This simplistic and not always correct premise constitutes the prevailing wisdom in the U.S.

Using this mindset, sponsored researchers have argued that next generation network plant skyrocketed soon after the FCC abandoned local loop unbundling and other “sharing” requirements. Let’s probe this assertion. First, recall that local loop unbundling was not something incumbent Local Exchange Carriers (“ILECs”) gave away or shared. Resellers and repackagers of local switching and routing plant paid the incumbents, albeit at a rate below what the ILECs would like to have been paid. Second I have found—deep, deep, deep in the FCC’s obscure statistics and data collection process—that compulsory rentals from incumbents to newcomers peaked at 12%, a level never close to forcing incumbents to invest in plant that they would have to make available solely to competitors. See Trends in Telephone Service (Aug. 2008), at p. 8-8; available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-284932A1.pdf.

The FCC stopped preparing this helpful source of information, but the percentage of resold ILEC lines has declined below the 8% reported in 2007 in light of the fact that rates to Competitive Local Exchange Carriers (“CLECs”) can exceed retail rates to end users, a price squeeze, but one the FCC and the Supreme Court in the Linkline case has no concerns.

Let’s assume that ILECs actually did increase their aggregate plant investment after the FCC abandoned local loop unbundling, bearing in mind that the Commission never required leasing of next generation plant such as dark or even lit fiber. Did deregulation cause all of the new investment? Of course not. Might the business cycle have had something to do with it? Might the cost of capital have had something to do with it? Might competitive necessity have had something to do with it? Oh and might declining market share and revenues in core business lines such as Plain Old Telephone Service have had something to do with it?

Whatever disincentive local loop unbundling imposed paled in comparison to incumbents’ need to find new revenues. Giving the ILECs due credit they have invested in next generation networks, mostly wireless and video plant for which no unbundling requirement ever applied. As to new found zeal in investing in Digital Subscriber Line services, might the ILECs want to make relatively small additional investment in already amortized copper plant, to secure some of the broadband growth market?

In a nutshell: do not buy the assertion that carriers make investment go/no decisions solely on the state of regulatory oversight. Carriers make sound business decisions, affected more by business conditions than the relatively minor impact of any FCC regulatory or deregulatory decision.

New Book Galley Proof Edit Completed

My blogging absence has occurred largely because of teaching, consulting and book manuscript work. I am glad to report completion of the galley proof edits of my new Yale University Press book entitled: Winning the Silicon Sweepstakes--Can the U.S. Compete in Global Telecommunications?

The book asks and answers the following questions:

Why does the United States demonstrate global best practices in some information and communications technology markets, such as software and computing, but woefully lag in others, such as wireless and broadband services?

If the information revolution was supposed to “change everything,” how did more than one trillion dollars in investment largely evaporate in three years?5

How can incumbent telephone companies successfully argue the need for governments to create incentives for investment in next-generation networks and at the same time claim that the existence of robust competition eliminates the need for any other sort of government involvement?

Why have nations failed to bridge the “digital divide”6 despite having created subsidy mechanisms to invest billions annually in never-achieved solutions?7

If the ICE marketplace has become so robustly competitive, where are the usual consumer benefits of lower prices, diverse choices, and responsive customer service?

How can incumbent ventures regularly avoid the adverse consequences of failing to anticipate developing trends and serve new markets by belatedly acquiring or extinguishing most competitive threats through mergers and acquisitions?

Why have some nations, including the United States, lost their comparative and competitive advantage in ICE products and services?

Why does it look as though the next-generation Internet will be less open, less neutral, and less accessible, possibly turning the playing field into “walled gardens” of content and services offered by incumbents keen on disadvantaging newcomers offering “the next best thing”?

The book will be available in the spring.

Boring into Broadband Penetration Statistics

In preparation for a conference on network neutrality, I am taking a closer look at broadband penetration statistics in the U.S. and in other countries. I conclude that broadband policy should address both accessibility and affordability.

The U.S. has achieved a mixed record in broadband penetration not accessibility. In other words while some potential subscribers can access broadband at "best practices" rates, others have quite high charges to consider. Normalizing rates on a per 100 kilobit rate provides a good measure of affordability.

Promoting broadband in the U.S. going forward will have less to do with achieving geographic penetration and more with promoting lower rates. Devising a workable plan for subsidizing access is a daunting task. U.S. long distance telephone service callers contributed over $7 billion for promoting mostly narrowband, basic voice service affordability last year. The current universal service funding mechanism is expensive, flawed, prone to abuse and lacking a broadband component outside schools, libraries, and medical facilities.

Here's a link to my presentation entitled " Internet Access as Essential Infrastructure: Public Utility, Private Utility or Neither?":http://www.personal.psu.edu/faculty/r/m/rmf5/USF%20Network%20Neutrality%20Conference.ppt.

European Assessment of Network Neutrality

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

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

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

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

Who's Behind That Blog?

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

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

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

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

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

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

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

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

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

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

My Thoughts on Wireless Carterfone and Network Neutrality

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

Here's the abstract:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How Many Broadband Providers Does Your Zipcode Have?

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

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

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

No way.

World Economic Forum Network Readiness Index--U.S. Drops From 1st to 7th

For the better part of a decade local exchange carrier management claimed that regulatory uncertainty and unbundling obligations removed incentives to build next generation networks. Since 2006 the FCC has created an information services "safe harbor" that insulates carriers from having to unbundle, share or interconnect. There is absolutely no common carrier obligation for broadband fiber and greenfield installations.

So it comes as a surprise to me that despite plenty of incentives to invest, including lost market share and revenues for local voice services, the WEF Network Readiness Index shows U.S. carriers as comparatively losing ground: http://www.weforum.org/en/media/Latest%20Press%20Releases/gitr_2007_press_release.

I appreciate that the WEF offers but one measure, but I would place more creditability to this index than say U.S. New and World's Reports' college rankings. Do Verizon and AT&T need more incentives, does the universal service fund need to expand coverage of broadband, is the U.S. suffering from a broadband duopoly regardless of what the FCC says in its zip code based measure of 200 kbps or higher "broadband" competition?

What accounts for a 7th place ranking in network readiness? Hmmm, good question.

I believe our leading telecommunications service providers no longer operate with global best practices. They haven't had to for so long. Even before enactment of the Telecommunications Act of 1996, and certainly since then, the major U.S. carriers have found it easier and more lucrative to compete in the court room instead of the marketplace. It's been too easy to demand and receive incentives to invest in next generation facilities and services.

Carriers such as Verizon and SBC had seats at the tables where the '96 Act was crafted and these carriers agreed to a simple quid pro quo: agree to lose local exchange service market share by cooperating in the introduction of competition and in turn the market access prohibitions contained in the 1956/1982 divestiture of AT&T (know as the Modification of Final Judgment) would evaporate. In other words the Bell Companies had to unbundle their local exchange network and interconnect with the competition at below market rates in exchange for access to long distance markets. As it turned out the long distance market did not prove lucrative enough to satisfy the Bell Companies, so they immediately refused to comply with the deal they cut. Putting it in its best light the Bell Companies tirelessly litigated the meaning of what they had agreed to.

So in a sense the Bell Companies willingly help create the regulatory uncertainty they claimed as foreclosing investment in next gen networks.

There's little regulatory uncertainty now, so I'd appreciate hearing from you the reasons for the decline.