U.S. Wireless: Cutting Edge or Inferior?

The FCC’s 12th Annual Report to Congress on the Commercial Mobile Radio Service offers an unconditionally upbeat assessment of the wireless marketplace in the United States. See http://wireless.fcc.gov/index.htm?job=cmrs_reports#d36e145. From start to finish, the Report contains summary conclusions that leave no doubt that “U.S. consumers continue to reap significant benefits – including low prices, new technologies, improved service quality, and choice among providers” (¶1) and they “continue to benefit from effective competition in the CMRS marketplace.” (¶290).

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

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

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

PITY us poor mobile-phone users in America. While the rest of the world enjoys network speeds that let people watch television on the move, surf the mobile web in its living glory, download videos in a trice, or exchange video messages with one another, we celebrate Apple’s launch of its iPhone 3G today as if were some great leap for mankind. (available at: http://www.economist.com/research/articlesbysubject/displaystory.cfm?subjectid=7933610&story_id=11700916)

The Economist article mentions that the iPhone offers bitrate speeds in the 400-700 kilobits per second (“kbps”) range, throughput that hardly constitutes broadband except in the United States where the FCC still uses a 200 kbps threshold. Wall Street Journal columnist Walt Mossburg calculated the 3G iPhone bitrates at not terribly blazing 200-500 kbps, still an improvement over 70-150 kbps on AT&T’s old EDGE network.. See http://ptech.allthingsd.com/20080708/newer-faster-cheaper-iphone-3g/

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

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

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

Consequences of Opt-in Better Than Best Efforts Internet Routing

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

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

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

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

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

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

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

New Journalism Vocabulary Words: Newsprint Trims and Access Points

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

So I am paying the same $160 a year for a newspaper subscription that provides me with access to a newsletter in lieu of a newspaper. One would think that declining circulation would motivate a newspaper to enhance rather than reduce the value proposition. The Orlando Sentinel appears to embrace this strategy despite the fact that its new owner Sam Zell seems intent on economizing; see http://online.wsj.com/public/article/SB121417869098295551.html.

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

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

Maybe We All Should Be Economists

I recently had the opportunity to attend the 17th biannual conference of the International Telecommunications Society; see http://www.itsworld.org/Montreal2008/. The conference attracts academics, practitioners and consultants, with economists predominating.
Attending a conference of this sort showcases the strengths and weaknesses of economists. I marvel at their confidence. Perhaps that comes from their mastery of math, statistics and the Greek alphabet. Or maybe it stems from the fact that many of the ITS attendees get paid handsome hourly rates to offer expert opinions.

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

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

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

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

Any Link Between Telecom Capacity Swaps and Flipping Oil Contracts?

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

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

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

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

Grieving Loss of the Filed Rate Doctrine

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

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

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

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

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

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

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

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

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

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

Just who wins in a merger like this?

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

Verizon benefits big time. It can claim market leadership, reduce its rural roaming costs and raise the roaming costs of competitors, Sprint in particular. Verizon reduces competition now and in the future. The wireless market grows increasingly concentrated despite the bogus claim by the FCC that there are hundreds of megaHertz available for competitive services (see the FCC’s 12th Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile Services; available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-28A1.doc.

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

Who loses in a merger like this?

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

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

The Front and Back End of a Two Year Wireless Subscription

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

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

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

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

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

Stealth Deregulation

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

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

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

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

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

Wireless Carterfone is Not Overbearing Regulation

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

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

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

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

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

Who Makes the Any Apps Any Handset Call?

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

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

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

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

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

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

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

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

What Consultants Generally Do

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

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

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

The solution: discredit a consultant’s report, despite an extensive history of hook, line and sinker buying consultants’ vision of reality, because they jibe with the Commission’s objectives. In a relatively short period of time the FCC’s goals changed, so it had to discredit that pesky “research” that it had relied upon in a Report to Congress. Compare FCC, Report on the Packaging & Sale of Video Programming Servs. to the Pub. (2004), http://www.ncta.com/ContentView.aspx?hiddenavlink=true&type=reltyp1&contentid=401 with FCC, Further Report on the Packaging & Sale of Video Programming Servs. to the Pub. (2006), http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-263740A1.pdf.

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

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

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

AT&T and Verizon now have plenty of warehoused bandwidth to add to their considerable market share. The top four cellular telephone carriers in the United States have a combined market share of 88.1 percent . See Leslie Cauley, AT&T eager to wield its iWeapon, USA TODAY May 21, 2007)(displaying statistics compiled by Forrester Research); available at: http://www.usatoday.com/tech/wireless/2007-05-21-at&t-iphone_N.htm. With Sprint/Nextel a likely acquisition target, look for the next generation network of choice to become almost as tightly controlled as when benevolent Ma Bell dominated.

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

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

Former FCC Chairman Reed Hundt says it succinctly:
“[The U.S.] is the last market in the world that people choose to bring a new wireless product to. Not second or third--the absolute last. Right now the policy of the FCC has been to encourage AT&T and Verizon to become the twin Bells that dominate the wireless business. They’re allowed to buy all the spectrum they can find. The antitrust laws are waived and ignored every time they appear to be a problem. The FCC is the only spectrum auction entity in the world that does not carve out spectrum for new entrants. They do it in Mexico, Canada, the U.K., China and Japan. Only here does the new entrant not get much of a chance. This is the only country in the world where the rule is the big guys can buy all of it. When you consolidate service providers, just like in the old days, when there was not two Bells like today but one, everybody knows what happens. It’s very hard for innovators to get into the market, in terms of content or software or hardware.” Reed Hundt, Interview with Ed Gubbins, Telephony Online, Feb 28, 2008; available at: http://telephonyonline.com/broadband/news/reed-hundt-auction-0228/.

Slightly Less Deceptive FCC Broadband Statistics Forthcoming

Recognizing the need for better calibrated broadband statistics, which more closely tracks actual choices available to consumers, the FCC has made improvements designed to increase the precision and quality of broadband subscribership data collected. Rather than generally report on market penetration by any broadband service that offers 200 kilobits per second in one direction, the FCC has expanded the number of broadband reporting speed tiers to capture more precise information about upload and download broadband speeds. The Commission also will require broadband providers to report numbers of broadband subscribers by census tract, broken down by speed tier and technology type, instead of the much geographical region represented by a zip code. Additionally the Commission expects to improve the accuracy of information it gathers about mobile wireless broadband deployment.

Now the not so good news: achieving better broadband penetration in the United States increasingly is a matter of cost, not availability. One would think that with all the in-house and sponsored researcher economic help available the FCC would happen across the concept of CROSS-ELASTICITY, i.e., apples to apples comparison of similarly priced options. Put simply in the current broadband marketplace there are some options that offer comparatively slower bit rates at higher prices, e.g., wireless satellite and terrestrial options. Consumers opt for these services when they so value mobility that they are willing to make bitrate and price tradeoffs, or when they have no better options.

The FCC will still count broadband options regardless of price, so the bad news remains that the Commission’s statistics will overstate what options exist within the same price points.

Usage-Based Pricing and a Potential Unanticipated Consequence

Some Internet Service Providers have begun to experiment with usage-based pricing in lieu of a one-size fits all pricing model. This makes sense and few, if any, network neutrality advocates would take issue. Price discrimination based on usage has plenty of efficiency and fairness justifications. As a moderate user I do not particularly want to subsidize the gluttonous throughput consumption of gamers, P2P file sharers and full motion video consumers.

But I can anticipate a problem if Web browsers begin to pay closer attention to the meter. Much of the content Web browsers access comes with a heretofore minor burden—the obligation to download more throughput than the desired content. In a throughput capped pricing environment, consumers will have to estimate the impact of unsolicited and possibly unblockable advertising downloads that accompany desired content. There are plenty of scenarios where a quite small uploaded request for content triggers a substantial cascade of both desired content and possibly substantial bandwidth and throughput consuming advertising content, e.g., the 30 section full motion video advertising that precedes the streaming of desired content.

Advertiser largely support much of the desired content web browsers can access. This bargain made absolute sense when all we had to give was possibly our attention. In the future we may to part with a portion of our monthly throughput quota, a possibly harder deal to accept, unless advertisers agree to subsidize both the content and the conduit that delivers it.

Information Service Telecommunications Service Mutual Exclusivity

The FCC surely has a hard time dealing with convergence and in particular a firm that offers both telecommunications services and information services, e.g., wireline and wireless telephone companies. The Commission perceives the statutory duty to establish bright line, mutual exclusivity between the two categories:

The FCC interprets the Telecommunications Act of 1996 to create mutually exclusivity between telecommunications services, subject to Title II common carrier regulation, and information services, subject to limited regulation available under Title I. “Congress intended the categories of ‘telecommunications service’ and ‘information service’ to be mutually exclusive.” Federal-State Joint Board On Universal Service, CC Docket No. 96-45, Report to Congress, 13 FCC Rcd. 11501, 13 FCC Rcd. 11830, n. 79 (1998). “Based on our analysis of the statutory definitions, we conclude that an approach in which “telecommunications” and “information service” are mutually exclusive categories is most faithful to both the 1996 Act and the policy goals of competition, deregulation, and universal service.” Id. 13FCC Rcd. at 11530 (1998).

So does this mean that the FCC has no statutorily appropriate means to subject a single firm to two different regulatory regimes?

Network Neutrality Unneeded in a Competitive Broadband Marketplace

In the Feb 25th edition of the Wall Street Journal former hedge fund manager Andy Kessler strongly suggests that competition would solve any calamity that network neutrality rules would (hamhandedly) attempt to remedy. See http://online.wsj.com/article/SB120390160543089503.html?mod=todays_us_opinion.
Mr. Kessler suggests the need for legislation to promote broadband competition, a Bandwidth Competition Act of 2008. Regretably, he offers few specific recommendations.
I heartily agree that in a perfect world facilities-based competition would enable consumers to “vote with their dollars” and punish any ISP foolish enough to handicap, delay, drop or otherwise meddle with their traffic. If I had a number of competitors from which to choose perhaps I could find a rate plans that provides a better fit than the current “one size fits all” model that motivates Comcast and other ISPs to rein in heavy users.
If only we had such competition. If only we had a legislature that would pay enough attention to the problem to direct the FCC and a Federal-State Joint Board to revamp efforts to jump start broadband deployment through a variety of strategies, including financial cross-subsidies.
Sponsored researchers will tell you that sufficient competition already exists thereby obviating both the need for network neutrality rules and legislation, unless of course the legislation steers money their clients’ way. According to the FCC’s latest statistics my rural zip code now has 11 broadband options, up from 9 last time. Accepting this number for the sake of discussion I still can conclude that robust facilities-based competition does not exist in my neck of the woods. Put another way access to $100 a month satellite semi-broadband and $60 a month cable broadband will not jump start broadband adoption. Nor will it create the critical mass we both agree would—if it existed—that would provide consumers and suppliers to come to terms on price and quality of service tiers.
Legislators and the FCC have to consider network neutrality rules in the absence of competition and diverging price points for broadband access.

Bulls, Bears and Greed

As a regular telecommunications conference attendee I marvel at the ability of the hospitality industry to calibrate prices right to the brink of “what the market will bear.” Economists, such as Ramsey, have come up with supporting rationale for linking price with elasticity of demand, so of course what occurs couldn’t be deemed gouging. Or could it?
I wonder how my economist friends would react, when a “just say no” consumer revolt occurs. Outlandish greed on the part of the Geneva, Switzerland hospitality industry resulted in a one time relocation of the International Telecommunication Union’s major trade show and policy conference that occurs once every four years. An apparent miscalculated attempt to extract (extort?) more sponsorship and meeting fees for the Global Traffic Meeting by Intelsat has triggered major attendees, such as AT&T, British Telecom, Tata Group and Deutsche Telekom, to support a separate event scheduled for the same time at a hotel conveniently located two kilometers from the GTM conference hotel.
Conference attendance triggers a difficult cost/benefit analysis, because of high and increasing costs—regardless of the greed factor—with benefits sometimes not easily quantifiable. Some conference stimulate interest simply because a firm might be “conspicuous in its absence” suggesting all sorts of questions about financial or creative wellbeing.
On the other hand conference organizers need to find ways to extract income from hosting a must attend forum, particularly from attendees who find ways to exploit access to existing and prospective customers and partners without registering for the conference. For example, the annual conference of the Pacific Telecommunications Council, which occurs in January, attracts far more “free riders” than conference attendees. But if PTC were to overplay its hand—as Intelsat apparently has—thousands of visitors to Honolulu would change their travel plans perhaps irrevocably.

When the Web Is Not Faster, Better, Smarter …

It never fails to amaze me that print media subscriptions take three to five weeks to get “processed.” The Internet apparently provides no means to short cut the time, and I have seen no difference between instances where I dead directly with the publisher in lieu of a subscription broker.

What do newspaper and magazine companies do during these several weeks? You would think that the Web could live up to its credo of “faster, better, smarter, cheaper and more convenient.

Not in this case. My credit card get duly debited in an matter of hours, but the product does not arrive until well after you think some bogus company has absconded with both credit card account number of cash.

My latest challenge: convincing the Wall Street Journal to follow through on a reactivated print and online subscription . Repeated telephone calls and online messages generate unhelpful, wrong “canned responses.” They know how to process payment, but apparently take weeks to deliver the quo to my quid.

So much for living in Internet time.

The Internet’s Weakest Link—Submarine Cableheads

This week two major transoceanic cables experienced outages that may last several days. See http://www.lightreading.com/document.asp?doc_id=144672. The outages provide a reminder that several Internet bottlenecks exist where these cables make landfall.

When one thinks of bottlenecks in telecommunications the first and last mile come to mind. Yet equally vulnerable are the last few 1000 feet of submarine cable links. While most cables have “armor” to guard against breaks, a misplaced anchor still can cut the cord as apparently occurred in Egyptian waters.

On a global basis redundancy and alternate routes do exist, as well as the typically more expensive satellite option. But contrary to the conventional wisdom the Internet did not appear to route around the breaks with sufficient speed to prevent service outages. Two nearly simultaneous cable breaks provide a reminder of the Internet’s vulnerability.

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.

Recent Presentation and Paper on Wireless Carterfone

Belatedly the network neutrality debate has begun to address the extent to which wireless subscribers can use their handsets to access any content, including software. In 1968 the Federal Communications Commission's Carterfone policy required wireline telephone companies to decouple telecommunications service from the installation and maintenance of inside wiring and the lease or sale of telephones.

Decades later the FCC may consider what rights wireless subscribers have to attach devices and access content of their choosing. I have written a paper supporting wireless Carterfone for the New America Foundation; see http://www.newamerica.net/publications/policy/wireless_cartefone.

Some slides outlining the paper are available at: http://www.personal.psu.edu/faculty/r/m/rmf5/New%20America%20Foundation%20Free%20My%20Phone.ppt.

Anyone interested in a longer, heavily footnoted piece can access it at: http://www.personal.psu.edu/faculty/r/m/rmf5/HoldthePhone.pdf.

Despite promising words from Verizon and other wireless carriers, wireless Carterfone policy does not currently exist. The fact that a significant percentage of Apple iPhone owners would risk "bricking" their phone (rendering the device inoperable) attests to the growing desire to be free of handset restrictions.

At a Congressional briefing hosted by the New America foundation Wall Street Journal opinion columnist Walt Mossberg reiterated his view that wireless carriers operate as "Soviet Ministries." Whether these carriers embrace wireless Carterfone will depend on future initiatives that offer discounts for service to subscribers with unsubsidized handsets, speedy access to subscribers by third party (unaffiliated) software, applications and content providers and a whether a level competitive playing field exists between carrier affiliated handset and content providers and unaffiliated ventures.

What to Do With Heavy Internet Users?

Comcast’s heavy handed treatment of its peer-to-peer networking customers made me wonder if these customers deserve to expulsion or a fruit basket. In other words do heavy users present an opportunity or a threat to network managers?

ISPs, like airlines, only make money when customers use their services. Airlines and many other businesses typically reward heavy users with rewards. Other ventures can use data mining to determine the profitability of any particular heavy user. So I readily agree that that not all heavy users are desirable.

The problem with Comcast’s approach appears to be that the company assumed any peer-to-peer user is a problem customer deserving degraded service, rather than a candidate for upselling. Comcast should offer more expensive service to the power user who needs better than best efforts traffic routing. I do not consider this a violation of network neutrality. My beef with Comcast or any ISP lies in instances where the carrier without disclosure or reasonable explanation drops packets and otherwise degrades service, or vice versa.

For me network neutrality is primarily about transparency in a transaction that increasingly presents opportunities for mischief. At the WIK conference I recently attended on the European approach to Network Neutrality, there was much discussion on how parties frame the issue. The most common U.S. frame involves a referendum on the virtues of marketplace competition, assumed to exist, versus marketplace failure assumed to exist.

Other alternative frame considers technical standardization of the Internet and whether TCP/IP promotes or retards innovation, i.e., a variation on the dumb versus smart pipe argument. Others in Europe involve consumer protection, contract law and ex ante versus ex post facto regulation.

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.

FCC Chairman Martin A Tireless Consumer Advocate--Who Knew?

In a counter-intuitive move for a Republican free marketeer, FCC Chairman Kevin Martin has sought to impose substantial additional regulations on cable television. Chairman Martin ostensibly can retain his credentials by claiming that a 1984 law requires the FCC to act when cable television systems serve 70% or more of the U.S. population and 70% who can subscribe do so.

A dispute about whether the cable has reached the so-called 70/70 benchmark temporarily has preempted the Chairman's campaign. However the notion of adding regulation to help the consumer intrigues me, particularly in light of countless instances where Chairman Martin all too willingly relies on assumptions about the market and/or questionable statistics to refrain from regulation.

So what is it about cable television that triggers the Chairman's regulatory urges? If cable has such a lock on markets where was the FCC all these many years, particularly now that true facilities-based competition from satellites and telephone companies will help solve the problems belated regulation is supposed to remedy?

I also wonder why Chairman Martin has no interest in regulating other instances where market power and pricing control appears more clearcut, e.g., special access wireline services outside of central business districts and residential broadband Internet access. There is no applicable 70/70 rule and neither service comes close to 70% penetration. Still the regulatory urge does not exist for wireline telecommunications.

Maybe it's "I want my MTV" and I want it cheaper!

Why Thwart Network Usage When the Meter's On?

One of the many disconnects in the network neutrality debate---at least the wireless one-lies in the simple fact that carriers make money primarily when subscribers use the network. Of course ISPs do not want subscribers to use too much of the network, despite having encouraged consumption with so called, but not actual "All You Can Eat" pricing.

So with that in mind why on earth would an ISP drop packets, misrepresent their subscribers or engage in tactics that create disincentives for subscribers to consume? Well it may be a little like the mutual fund that wants to ration customer service representative access as a function of how much a particular customer has invested in the fund. The million dollar investor could have access to a special telephone number that gets answered by a real--and qualified--person while others are left to navigate through a gauntlet designed to migrate them to automated responses. But at least one mutual fund told particularly heavy calling customers with small financial stakes to take their business elsewhere. In practice ISPs are saying the same thing to heavy users and ones that may contribute to network congestion and the possible need for the carrier to upgrade facilities.

Nevertheless ISPs do not want too many subscribers to get frustrated or infer that they ought to take their business elsewhere. Perhaps that explains the announcement by Verizon that it seemingly embraces network neutrality; see Verizon Wireless To Introduce ‘Any Apps, Any Device’ Option For Customers In 2008 New Open Development Initiative Will Accelerate Innovation and Growth, available at:http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/11-27-2007/0004711790&EDATE=

So never mind about all the righteous indignation about how network neutrality would stifle investment, innovation, competition and freedom.

Regardless of the motivation, I am truly pleased to read that a major wireless carrier wants my business.

The Missing Human Link in an Internet Transaction

Over two years ago I had an automobile to sell. I opted for a combination of the conventional--print newspaper--and the relatively new--the Internet. My local newsaper provided the link for both outlets, a convenience that failed.

The newspaper interface offered interaction with a live person, who cheerfully took my ad and credit card number. I had no interaction whatsoever with Cars.com, the Internet sales channel. My newspaper ad terminated on schedule, but the Cars.com ad persists to this day. Worse yet after asking Cars.com via email to discontinue the ad, I received notification that I the car seller had no authority to terminate the ad, only the newspaper. Repeated efforts to contact my local paper have failed. So if you are in the market for an inexpensive 1999 Camry in State College on Cars.com disregard my ad.

The lesson: regardless of the wonderful reach provided via the Internet, a human interface probably remains essential. Should that interface fail, be prepared for more hassle than you might have expected. In my case I have to disappoint callers and emailers that they missed the chance to buy a cheap Camry by about 30 months!

Response to Two Columns on Comcast’s Traffic Management Tactics

Two columnists have offered their perspective on the Comcast peer-to-peer traffic management issue. See Larry Seltzer, eWeek.com, Network Policies Should Be Open, Not Neutral (Nov. 6, 2007) available at: http://www.eweek.com/article2/0,1895,2213092,00.asp and George Ou, ZDNet Blog, A Rational Debate on Comcast Traffic Management (Nov. 6, 2007); available at: http://blogs.zdnet.com/Ou/?p=852,

I agree with much of what they wrote, particularly the view that an ISP has a duty to disclose to subscribers what traffic management tactics the ISP can elect to use. Apparently Comcast and others do not want to commit to disclosing what traffic management tactics it might use ostensibly to preclude the onset of actual congestion. No one has disputed that Comcast forged TCP reset packets even though it appears that Comcast could have handled the actually occurring traffic volume without having to degrade anyone’s traffic.

On the other hand I endorse traffic management tactics that respond to actual congestion. I probably part company with some network neutrality advocates by endorsing an ISP offering premium services at a higher rate to power users, provided the ISP does not deliberately degrade service to standard service subscribers.

Neither of the authors addressed whether the current language, or the likely replacement language in subscription agreements, constitutes full disclosure that is fair. From my perspective ISPs cannot have it both ways by marketing “All You Can Eat” unlimited service and “blazing fast” bit rates only to establish, but not disclose quotas and bit rate throttle scenarios. That comes across as a classic “bait and switch” maneuver. ISPs should not be able to insert binding, “take it leave it” terms and conditions that include reserving the option of using “traffic management, “traffic shaping” and “rate-limiting” without defining the terms. ISPs should have to specify what these terms mean specifically as relates to monthly throughput quotas and bit rate throttling, and when such service degradation kicks in.

As the Internet matures and diversifies ISPs should have the option of targeting different consumer segments. As a light to moderate user of Internet access, I do not want to subsidize heavy users, nor do I want them bogging down the network and adversely impacting my service. But I also do not want a trigger happy ISP ready to punish power users regardless of whether these users have made it impossible or even difficult for the ISP to provide an adequate level of service.

I appreciate that ISPs need to recoup their sizeable network investments that seem to grow as more subscribers access bandwidth intensive services. But forging TCP resend packets comes across as a sneaky way to delay having to upgrade networks, or to establish the need for surcharges or rate increases.

In Praise of Relatively Dumb Pipes

Comcast's furtive and undisclosed traffic manipulation reminds me of a curious, red herring asserted by some incumbent carriers and their sponsored researchers: that without complete freedom to vertically and horizontally integrate the carriers would lose synergies, efficiencies and be relegated to operating "dumb pipes." For example, see Adam Thierer, Are "Dumb Pipe" Mandates Smart Public Policy? Vertical Integration, Net Neutrality, and the Network Layers Model, 3 Journal on Telecommunications & High Technology Law 275 (2005)

Constructing and operating the pipes instead of creating the stuff that traverses them gets a bad rap. It may not be sexy, but it probably has less risk. But of course with less risk comes less reward, and suddenly no one in the telecommunications business is content with that. So incumbent carriers assert that convergence and competitive necessity requires them to add "value" to the pipes.

Put another way, they would assert that any limitation on a carrier's "right" to add value is an unconstitutional taking. Of course we used to have common carriers that operated as neutral conduits carrying the content produced by someone else, but apparently that is an anachronism now.

The dumb pipe argument comes across to me as disingenuous. Would anyone buy an argument from an electricity carrier that it should not have to provide a neutral conduit for the carriage of electricity? It would seem that everyone makes more money and has more fun using the electricity to make something more valuable than just carrying electrons.

So it appears with Comcast. Hellbent to cash in on convergence, or at least generate greater returns for its pipe investment, Comcast wants to operate a non-neutral network with all sorts of intelligent packet sniffers ready to prioritize or degrade traffic. And I thought consumers would beat a path to Comcast instead of Verizon, because Comcast offered faster and better service. Who would want that when they can have a smart pipeline whose genius owners stand ready to delay and drop packets according to some secret and real smart plan?

What Can the FCC Do When ISPs Block or Degrade Certain Types of Traffic?

A group of pro network neutrality advocates have filed a Petition for Declaratory Ruling and Formal Complaint in response to Comcast’s furtive traffic “shaping” and “management” tactics that have the effect of blocking or degrading peer-to-peer traffic. See http://www.freepress.net/docs/fp_et_al_nn_declaratory_ruling.pdf; and http://www.freepress.net/docs/fp_pk_comcast_complaint.pdf.

The group asks the FCC to issue preliminary and permanent injunctions prohibiting Comcast from engaging in such tactics, to fine Comcast and to declare that such tactics violate the Commission’s Policy Statement that establishe network neutrality “principles” (see http://www.publicknowledge.org/pdf/FCC-05-151A1.pdf).

While I endorse the groups’ efforts, I believe the petition and complaint would achieve greater impact had the authors addressed the issue of whether and how the FCC can act in the ways the group proposes. Specifically both the group and the FCC have to examine the breadth of jurisdiction and regulatory options available to the Commission under Title I of the Communications Act.

Both the petitioners and the FCC assume that the Commission can act to enforce the network neutrality principles articulated in a three page Policy Statement that devotes two sentences to the issue:

While acknowledging that it cannot assert conventional, Title II common carrier regulation, because ISPs provide information services and not telecommunications services, the FCC stated summarily that it “has jurisdiction to impose additional regulatory obligations under its Title I ancillary jurisdiction to regulate interstate and foreign communications.” According to the Commission that translates into having “the jurisdiction necessary to ensure that providers of telecommunications for Internet access or Internet Protocol-enabled (IP-enabled) services are operated in a neutral manner.

Also noted by the petitions was a sentence in the FCC’s its order assigning the information service classification to cable modem Internet access where the Commission stated its intent “to take action to address . . . conduct” that violates network neutrality.

I fully expect opponents of the petition and complaint to state that the FCC has neither the jurisdiction nor the intent to impose on ISPs such as Comcast what opponents will frame as common carrier obligations. So the Internet Policy statement has to be interpreted as lawfully imposing responsibilities that serve the public interest without imposing common carrier responsibilities, but which cannot constitute the kind of unlawful expansion of jurisdiction Justice Scalia predicted would occur in his dissent in the Brand X case. I examine the risk of overstating the scope of Title I “ancillary jurisdiction” in What Do Pizza Delivery and Information Services Have in Common? Lessons From Recent Judicial and Regulatory Struggles with Convergence, 32 RUTGERS COMPUTER AND TECHNOLOGY LAW JOURNAL, No. 2, 247-296 (2006).

The FCC has taken great pains to create a deregulatory “safe harbor” for information services providers. The Commission has managed to shoe horn DSL, cable modems, BPL and wireless Internet access into the information services classification which the Commission considers completely separate from regulated telecommunications services. To underscore the absoluteness of this dichotomy the Commission has come up with a tenuous differential based on whether a carrier “offers” telecommunications versus “provides” telecommunications. The former falls into the common carriage telecommunications service category, while the latter qualifies for private carriage of an information service, because the Commission chooses to subordinate the telecommunications component into a minor and integrated activity.

The FCC already has invoked its Title I ancillary authority to impose a number of traditional common carrier duties on Voice over the Internet Protocol (“VoIP”) providers and courts have deferred to the agency’s expertise absent a clear statutory mandate.

But at some point the FCC may go to the Title I well too often. I suspect the FCC will have to flesh out its authority to abrogate contracts between landlords and cable operators, particularly in light of the traction gained over the years by incumbent telephone companies that interconnection regulation, such as unbundling and line sharing, “confiscates” their property. Perhaps also the FCC will have to explain why it and not the Federal Trade Commission should act on what can be deemed a consumer protection matter.

At the very least the FCC will have to do more than unilaterally and summarily state that it has jurisdiction under Title I to impose network neutrality principles. The petitioners could have helped the Commission come up with a compelling rationale.

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.

Property Confiscation is in the Eye of the Beholder

The issue of FCC confiscation of private property has a long and checkered history in academic literature, sponsored research and litigation. In many instances incumbent telephone companies have argued that FCC regulation, which requires the carriers to do something they do not want to do, constitutes a confiscation or "taking" of property. So when the FCC orders an incumbent carrier to interconnect with a competitor--something common carriers have to do--incumbent carriers are quick to play the confiscation card if they do not like the terms and conditions under which they have to provide interconnection.

The incumbent carriers tried the confiscation argument before the Supreme Court claiming that unbundling and other affirmative obligations under the Telecommunications Act of 1996 constitued a taking of property. In Verizon Communications, Inc. v. FCC, 121 S.Ct. 877 (2001)the Court wisely rejected incumbent local exchange carrier arguments that using a theoretical, most efficient cost model, instead of actual historical costs, constituted a taking that violated the Fifth Amendment. See http://telefrieden.blogspot.com/2007/04/revisionism.html.

Nothwithstanding the Court's determination the FCC has methodically dismantled just about all of the line sharing, unbundling and interconnection obligations incumbent carriers must endure. The Commission rationalizes such deregulation on bogus determinations that marketplace self-regulation will suffice because of robust competition.

With this in mind I have some mixed feeling about the Commission's ostensibly procompetitive, pro consumer decision to abrogate exclusive service contracts between apartment owners and cabel television operators. See http://www.nytimes.com/2007/10/29/business/media/29cable.html?_r=1&oref=slogin

While I can appreciate that the initiative should trigger rate reductions for previously captive apartment dwellers, I wonder why similarly captive broadband subscribers do not warrant such aggressive and conscientious regulatory intervention. The FCC no longer requires incumbent local exchange carriers to share bandwidth available in their local loops at fair compensation rates. Bear in mind that these carriers installed such infrastructure and recouped their investment at a time when ratepayers were equally captive.

So once again the FCC can explain an inconsistent and assymetrical regulatory state of play on grounds that robust competition exists in one market and it does not exists in another market.

I cannot help but think that an alternative explanation exists: political expediency warrant accommodating Verizon, AT&T and other incumbent carriers in both instances. Eliminate unbundling, line sharing and now even most aspects of interconection (special access) regulation because the incumbent carriers want it and the FCC can make a claim that competition exists. Abrogate apartment owner-cable television operator contracts because Verizon and AT&T want the FCC to do so and because the Commission can make a claim that competition does not exist.

Well at least on the south facing side of many apartment tenants with access to private outside space, such as a balcony, can and do access Direct Broadcast Satellite television options. But more fundamentally the FCC can play the competition card in whatever way it chooses with impunity.

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/

Empirical Evidence of Net Bias—Now What? (part two)

ISPs now acknowledge that they may meddle with subscribers’ traffic streams, but only to “manage” and “shape” traffic. ISPs typically reserve the option for such meddling in their contract with subscribers. Should you ever take the time to read this document, and a second documents about “Acceptable Use” you will see language that does reserve to the ISP the right to manage their network, ostensibly to optimize it for the benefit of subscribers. The subscriber agreement also attempts to foreclose litigation as an option by stating that subscribers can only seek arbitration to settle any grievance.
In reality the subscriber contract constitutes a unilateral, non-negotiable contract of adhesion, i.e., a “take it or leave” it proposition. In a truly competitive world, disgruntled subscribers could “vote” with their feet and dollars by taking their business elsewhere. But contrary to the FCC’s fantasy statistical reports about double digit service alternatives in most zip codes, consumers have limited options. Taking ones business from DSL to cable modem would not solve the problem if all carriers—through collusion or “conscious parallelism” had the same network management contractual language.
Because the FCC considers ISPs information service providers, the Commission offers no traditional consumer safeguards applicable to telecommunications service providers under Title II of the Communications Act., ISPs must use contracts in lieu of filed tariffs. However, ISP contracts must pass muster with general law and equity principles regarding the fairness of the terms, consumer protection and fraud. In other words, ISPs cannot unilaterally set any terms and conditions and have them stick.
While the FCC may have limited jurisdiction to examine ISP contracts, state and federal courts can lawfully assess whether an ISP has lawfully interpreted the terms of the contract it created and more broadly whether the agreement violates the court’s sense of fairness. In light of the FCC’s deregulation of information service providers, the Commission cannot readily claim that it should preempt judicial review because it still has “primary” jurisdiction to resolve fairness and consumer protection issues.
We may soon see an onslaught of individual and class action law suits against ISPs on grounds that they have not complied with the clear language of their service agreements. For example ISPs have cut off or throttled service to customers for using too much network resources despite an agreement that offers unlimited and unmetered “all you can eat” service. Peer-to-peer customers experience artificial network congestion—a hard thing to prove—may claim that the ISP has violated the service agreement.
A court may serve as the forum for assessing whether an ISP’s reserve right to manage its network includes preemptive strategies that mimic network congestion even when actual traffic conditions do not necessitate network conservation tactics.

Empirical Evidence of Net Bias—Now What?

A widely distributed and unassailable study by the Associated Press (see http://www.forbes.com/feeds/ap/2007/10/19/ap4240786.html) confirms what many Internet Service Provider (“ISP”) industry observers had speculated: some ISPs exploit deliberately ambiguous subscriber contracts to reserve the option for blocking, dropping, and downgrading certain types of traffic even when network conditions do not necessitate such congestion abatement strategies. ISPs frame the issue in terms of their contractual right to “shape traffic.” However such traffic “management” tactics generate false congestion and trigger delayed or dropped packets.

For years ISPs representatives and their snarky, righteously indignant sponsored advocates stated unequivocally that ISPs would never deliberately degrade the Internet access experience for any paying subscriber. See http://www.filmfestivaltoday.com/article_item.asp?ID=853 quoting Verizon CEO Ivan Seidenberg: "We don't block anything…never have, never will." see also, http://commdocs.house.gov/committees/judiciary/hju27225.000/hju27225_0.HTM.

Later they shaped the debate in terms of fair and appropriate allocation of their costs among low and high volume users. Now they consider the issue one of how they manage their network to maximize service to their subscribers.

In fact ISPs have two very key reasons for creating congestion of packets, just like Enron created congestion of electrons:

1) blocking, delaying, and degrading certain types of expensive to handle traffic, such as peer-to-peer file sharing, delays or forecloses the need to invest in costly network upgrades; and

2) blocking, delaying, and degrading certain types of expensive to handle traffic, such as peer-to-peer file sharing, can enable an ISP to create a new customer service tier for unblocked peer-to-peer traffic at premium price.

Heretofore I have stood midway between the groups claiming “no problem”camp and the “curtains for the free world” alarmists. However I have consistent stated that an ISP violates a reasonable sense of network neutrality, appropriate even for private carriers, when an ISP deliberately creates artificial network congestion to achieve an ulterior motive. See http://www.personal.psu.edu/faculty/r/m/rmf5/.

I would support Comcast’s option to create a premium “power user” peer-to-peer network optimized service. But I would equally protest any ISP strategy to extort such payments, or simply to punish peer-to-peer networkers, when the ISP network can easily handle such traffic without degrading service to other subscribers.

In another post I will Comcast examine whether Comcast and other ISPs can lawfully use language in subscriber contracts to degrade peer-to-peer traffic streams regardless of network conditions.

Expanding Pedestals

Telephone and cable companies have expanded their service offerings into a triple- or quadruple play of their core service (telephony or video) plus Internet access, wireless and the other companies' core offering. To deliver this package of service the companies often have to expand bandwidth and install additional equipment at or near consumers' homes.

These companies used to install a small pedestal for the electronics and line splice needed to provide service. The right to install such equipment derived from the rights of way granted by property owners or municipal ordinanaces that convery such rights. Of course these companies qualified for free of charge rights of way based on their "public utility" characteristics. Additionally federal, state and municipal regulations existed to safeguard the public.

Telephone and cable companies have qualified for deregulation particularly based on the determination that they provide information and other non-telecommunications services. Yet these companies continue to use "legacy" rights of ways, based on their prior regulated status. Now these companies are expanding the size and footprint of the pedestals they install on private property.

My cable company attempted to install a small refrigerator-sized device on my property. These device would use electric power surely to provide services other than the core service for which the right of way was granted.

Query: can companies providing largely unregulated information services exploit rights of way granted under the pretext of a public interest need for basic telecommunications and video services? Regardless of the actual legality of doing so telephone and cable companies have expanded the size and footprint of their rights of way use and pedestal installation without having to compensate land owners.

If companies enjoy the benefits of an information services safe harbor from regulation shouldn't they lose free rights of way access? bear in mind these are the very companies that loudly claim "confiscation" when government regulates them.

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.

Nomination for the Worst in Sponsored Research

With so much unsponsored, under-read research in telecommunications policy, I marvel how sponsored research finds its way into hard copy journals. Having read so much solid, thoughful work generated for the Telecommunications Policy Research Conference (see tprc.org) I thought I would nominate the worst in sponsored research I recently discovered.

My nominee: Hal J. Singer's THE COMPETITIVE EFFECTS OF A CABLE TELEVISION OPERATOR'S REFUSAL TO CARRY DSL ADVERTISING, Journal of Competition Law and Economics 2006 2(2):301-33; available at: http://jcle.oxfordjournals.org/cgi/content/abstract/2/2/301?ck=nck.

First of all I know that Dr. Singer can and does generate solid work. However, this piece simply does not match what he can produce and I infer that he may not have come up with this topic on his own accord. In any event the piece suggests that notwithstanding nearly constant efforts by consulting economists to justify the largest possible relevant market to support mega-mergers in the telecom sphere, Dr. Singer concludes that refusals by cable operators to sell advertising space to competiting DSL providers impairs rivals' efficiency and harms consumers by raising the cost of Internet access.

Dr. Singer reaches this conclusion by defining the relevant market as an incredibly small sliver of the information, communications and entertainment marketplace: local television advertising on cable networks. Dr. Singer concludes that DSL providers cannot compete as effectively as they would in the absence of the "ban."

Even if Dr. Singer provided empirical evidence that DSL providers faced an actual boycott of cable television advertising, he could not prove foreclosure of advertising access by companies such as Verizon, AT&T and his benefactor Qwest. Cable television company advertising represents a tiny sliver of the total broadcast and cable television advertising for which no bar on DSL advertising exists. Surely Dr. Singer knows that cable television operators' must carry obligations require them to carry without blockage any and all advertising contained in broadcast television signals.

Practically speaking is there anyone who believes that Verizon, AT&T, and Qwest lack the ability and resources to advertise their DSL product? Does anyone buy Dr. Singer's assertion that "local television advertising on cable networks is the most efficient form of advertising for DSL providers." On my cable system the local advertising inserts made by Comcast--State College include car dealers, restaurants and furniture stores. Even if Dr. Singer were to claim that Comcast forecloses all of its franchise holders from accepting DSL advertising, does anyone think this makes DSL competitively disadvantaged vis a vis cable modem service?

My nomination for first runner up is: J. Gregory Sidak and Hal J. Singer, Überregulation Without Economics: The World Trade Organization’s Decision In The U.S.-Mexico Arbitration On Telecommunications Services, available at: http://law.indiana.edu/fclj/pubs/v57/no1/Sidak.pdf.
In this piece the authors attempt to prove that the World Trade Organization, a treaty-level multilateral organization, illegally regulates telecommunications carriers' rates and practices. Acting on a complaint filed by the United States, the WTO determined that TelMex, the dominant telecommunications service provider in Mexico, imposed impermissibly high interconnection charges. These rates bordered on extortionate and well exceeded benchmarks suggested by the International Telecommunication Union, another one of those runaway multilateral organizations.

Global Best Practices in Telecom Policy

Papers presented at the 35th annual Telecommunications Policy Research Conference http://www.tprc.org/ held last weekend offered more evidence that the United States no longer offers other nations forward looking policy and regulatory models. I dare say the preoccupation with lobbying and litigation has generated an unanticipated extra liability: loss of best practices leadership.

My proof:

Rather than acknowledge that the U.S. lags many other nations in broadband penetration and affordability (see http://www.speedmatters.org/; http://www.benton.org/), representatives of the U.S. government quibble over the veracity of the statistics.

The dominant incumbent telecomms service provider in the U.K., Italy and Australia volunteered to create an access subsidiary to simplify and largely eliminate regulation of corporate activity at higher layers. U.S. carriers and the FCC summarily reject this approach as eliminating synergies, mandating "dumb" pipes and relegating any physical connection operator to perpetually regulated status.

Korea joins the EU in embracing layers/horizontal regulation in lieu of silo-based, media specific vertical regulation. U.SA. carrier reject this model for the same reasonas above.

Canada has largely solved its universal service challenge while U.S. consumers subsidize carriers with most of an annual $7 billion windfall.

Some day soon we in the United States will begin to recognize that expensive, lackluster broadband access and a highly politicized regulator and policy making process knocks off a few tenths of a percent in national productivity.