Some Unsolicited Advice for AT&T re Google Voice

The FCC has posed a number of provocative questions to AT&T regarding the fact that iPhone subscribers cannot download and use the Google Voice application. See http://www.nytimes.com/2009/08/01/technology/companies/01google.html AT&T should stifle every motivation to play cute or clever with the FCC. Apple adopted such a strategy when it suggested to the Library of Congress and others that it would be curtains for the free world if iPhone owners could hack, jailbreak, tether, and otherwise use their handsets without fear of violating the prohibition on circumventing copyright laws contained in the Digital Millennium Copyright Act. See http://www.wired.com/threatlevel/2009/07/jailbreak/.
Apparently the ability to treat an iPhone as the equivalent to a mobile computer risks opening the AT&T network to terroristic damage.

AT&T already has implied that it has nothing to do with applications Apple decides to make available, so one could infer that AT&T had nothing to do with the Google Voice decision. Yeah, right. AT&T stands to lose millions of dollars if captive subscribers can avoid paying dollars or tens of cents for calls that Google and Skype otherwise would charge pennies.

This “pass the buck” strategy will come to haunt AT&T if the FCC does its job. By claiming that it has no involvement in content and software decisions AT&T may back itself squarely into wireless common carriage, a regulatory classification that should apply to the company in its capacity as a wireless telephone company, but which typically gets ignored. In its capacity as a provider of wireless radio transmission capacity, AT&T operates as a provider of a regulated telecommunications service.

AT&T usually wants to emphasize its information processing and content access function that deflects its regulated, common carrier status and also positions the company to be more than the purveyor of a commodity: airtime.

When AT&T claims that it operates merely as a neutral conduit, it confers upon Apple the information processing functions leaving AT&T to offer nothing more than the commodity of transmission time.

Revealing the Inner Geek: E Layer Skip

During a tortuous 10 hour family drive the ionosphere sparkled. More specifically a layer of the ionosphere became more agitated and dense than usual—matching my mental state. With density this part of the atmosphere, approximately 65 miles above earth, reflected certain radio signals that normally pass through it.

The FM radio band became active with distant signals coming in strong from up to 1000 miles away. Normally FM radio signals dissipate quickly making it possible for reuse of the same frequency only a few dozen miles away. As I drove through central Pennsylvania I heard signals from Nebraska, Kansas, Minnesota and Iowa. Utter magic for me.

When I explained this phenomenon to my kids, I received the “big woop” response.

The Google Telephone Company?

Google has undertaken a beta-test of a telephony platform that includes the opportunity to route incoming calls to multiple devices and telephone numbers as well as free domestic long distance service. See http://www.google.com/googlevoice/about.html.

Google offers a service that fits somewhere between computer-to-computer, Internet telephony and Voice over the Internet Protocol telephony with access to and from the public switched telephone network. These service categories present polar opposites for U.S. regulatory purposes. The FCC’s Declaratory Ruling in Pulver.com clearly states that computer-mediated voice communications constitutes a largely unregulated information service. Without stating that PSTN accessible VoIP constitutes a regulated telecommunications service, the FCC has increasingly treated is as such. Using its elastic “ancillary jurisdiction,” provided under Title I of the Communications Act, the Commission has opted to apply Title II, common carrier duties on PSTN accessible VoIP service providers. These duties reduce the competitive advantages of VoIP as they impose significant costs including: financial contributions to universal service funding, wiretapping cooperation with law enforcement officials, emergency 911access, number portability to and from VoIP telephone numbers, and accessibility for people with disabilities.

Most recently the FCC specified that interconnected VoIP service providers must comply with Sec. 214 of the Communications Act that requires common carriers to file applications with the FCC and state public utility commissions before discontinuing any service. See IP Enabled Services, Report and Order, WC Dkt 04-36 (FCC 09-40 May 13, 2009); available at http://www.qsiconsulting.com/pdf/FCC_VoIP_order_5-13-09.pdf.

Does the launch of Google Voice create the potential for the company to become a major regulated telephone company? On one hand, the service clearly provides access to and from the PSTN. But on the other hand, Google Voice requires subscribers to launch an Internet browser and to enter instructions using a Web interface. Does computer-initiated voice communications migrate the service into the “computer-to-computer” Internet telephony classification, despite the PSTN link? Eventually at stake will be millions and possibly billions of dollars in revenues and universal service funding.

Response to Questions from Senator Udall

Following up on the Senate Commerce Committee's hearing on wireless handset policy, Senator Tom Udall posed additional questions. My answers are available at: http://www.personal.psu.edu/faculty/r/m/rmf5/ (in the section entitled Testimony on the Consumer Wireless Experience).

Why Is Your Smart Phone Is So Stupid?

Brian Caulfield of Forbes magazine wrote a short piece posing the question: Why Is Your Smart Phone Is So Stupid? See http://www.forbes.com/2009/07/08/iphone-ericsson-mobile-intelligent-technology-iphone.html?partner=telecom_newsletter. He answers the question by reporting that the carriers disable the handsets in an attempt to prevent revenue drainage which would occur, for example, if iPhone subscribers could use Skype outside of the islands of Wi-Fi access.

Mr. Caulfield also suggests that handset lock downs and lock outs constitute the price we pay for subsidized handsets. Okay so far. But he concludes with the view that consumers simply will not pay for unsubsidized handsets and as a result insufficient numbers of such devices exist to encourage applications engineers to write programs for them.

First, make no mistake about it: wireless subscribers surely do pay for their handsets. Wireless carriers do not operate as charities and price their services so that they recoup the subsidy. As I have noted previously, one cannot get discounted service even when using unsubsidized handsets. Second, wireless carriers recognize that they can reduce churn and price sensitivity when they lock subscribers in for two years by offering a “sweet” deal for the latest and greatest handset. Better yet, these new devices have features that might generate additional revenues.

At best wireless carriers are co-dependent, facilitators of Mr. Caulfield’s observation that no one will pay “full price” for a smart phone. At worse, these carriers deliberately dumb down the wireless experience to reduce expectations of what such networks can offer and what handsets can do.

Anyone who has traveled to Asia marvels at the digital divide in handset functionality. Might the lack of features and functionality adversely affect national productivity, or are we just better off for not having many of the standard features Asian handsets offer?

WSJ Editorial on Wireless Handset Exclusivity

The Wall Street Journal has extended its record for knee jerk corporate boosterism and extreme snarkiness, this time rejecting any need to scrutinize the wireless industry. See
http://online.wsj.com/article/SB124692981354203419.html. The Journal waxes poetic about the competitiveness and innovativeness of the industry, but surprisingly reports in its editorial that the top four wireless carriers in the U.S. control 87.4% of the market.

Down here at the consumer level, we know that the Big Four mimic each other in prices, terms, conditions, and even in their advertisements. As the wireless market reaches maturity, the carriers still pitch how reliable their service has become and the niftiness of their exclusive handsets.

Innovative? The Big Four—and for that matter the entire industry, except for resellers-- apply a single business model that ties wireless service with subsidized wireless handset sales. Consumers may think they are getting a great deal, but in reality they pay more for the handset through higher monthly rates than if they simply had bought the handset without the subsidy. No carrier offers lower rates for new or existing subscribers who use unsubsidized handsets. The handset tie-in reduces churn and guarantees the subsidy pay back and more thanks to the two year service lock in.

What I do not understand is why consumers do not push back more strongly. On the front page of the Journal was an article about how a teenage has hacked the iPhone 3GS to accept unauthorized software. So some consumers can resort to self help. For everyone else, the allure of 30,000—count ‘em—software applications appears plenty. But if I asked most personal computer users if they would tolerate Dell or Comcast specifying the type and number of applications consumers could download, I think the response would be different. Smartphones have become handheld personal computers. Users of wireless handsets should have the same freedom to access software and services, limited only by a “harm to the network” and technical compatibility standard.

Currently, wireless manufacturers, such as Nokia, only have two major sales outlets: 1) the wireless carriers, which sell 60+% of all handsets; and 2) Big Box stores such as Best Buy and Walmart, which sell about 25% of all handsets. Think of the incentives to innovate and diversify if consumers could buy wireless devices through the many different channels available for wirebased devices. When the FCC forty years ago decoupled wireline services from handsets, a substantial boost in innovation and consumer choice arose.

Response to Questions From Senator Snowe

Following up on the Senate Commerce Committee's hearing on wireless handset policy, Senator Olympia Snowe posed additional questions. My answers are available at: http://www.personal.psu.edu/faculty/r/m/rmf5/ (in the section entitled Testimony on the Consumer Wireless Experience).

New Work in Progress

I have completed a draft of a paper that examines how Internet Service Providers claim First Amendment speaker rights even as they also claim to operate as neutral conduits. By claiming to operate as conduits, ISPs can secure “safe harbor” exemption from tort and copyright liability.

I argue that current media models provide inconsistent and incomplete direction on how to consider ISPs’ joint provision of conduit and content. The paper provides insights on how a hybrid model can address media convergence, and promote First Amendment values while imposing reasonable nondiscrimination responsibilities on ISPs.

Here's the abstract:

Much of the policy debate and scholarly literature on network neutrality has addressed whether the Federal Communications Commission (“FCC”) has statutory authority to require Internet Service Providers (“ISPs”) to operate in a nondiscriminatory manner. Such analysis largely focuses on questions about jurisdiction, the scope of lawful regulation, and the balance of power between stakeholders, generally adverse to government oversight, and government agencies, apparently willing to overcome the same inclination. The public policy debate primarily considers micro-level issues, without much consideration of broader concerns such as First Amendment values.

While professing to support marketplace resource allocation and a regulation-free Internet, the FCC has selectively imposed compulsory duties on ISPs who qualify for classification as largely unregulated information service providers. Such regulation can tilt the competitive playing field, possibly favoring some First Amendment speakers to the detriment of others. Yet the FCC has summarily dismissed any concerns that the Commission’s regulatory regime inhibits First Amendment protected expression.

For their part, ISPs have evidenced inconsistency in how seriously they value and exercise their First Amendment speaker rights. Such reticence stems, in part, from the fact that ISPs combine the provision of conduits, using telecommunications transmission capacity, with content. While not operating as regulated common carriers, the traditional classification of conduit-only providers, ISPs can avoid tort and copyright liability when they refrain from operating as speakers and editors of content. In other instances, the same enterprise becomes an aggressive advocate for First Amendment speaker rights when selecting content, packaging it into a easily accessible and user friendly “walled garden,” and employing increasingly sophisticated information processing techniques to filter, prioritize and inspect digital packets.

Technological and marketplace convergence creates the ability and incentive for ISPs to operate as publishers, editors, content aggregators, and non-neutral conduit providers. No single First Amendment media model (print, broadcast, cable television and telephone), or legislative definition of service (telecommunications, telecommunications service and information service) cover every ISP activity. Despite the lack of single applicable model and the fact that ISPs provide different services, the FCC continues to apply a single, least regulated classification. The inclination to classify everything that an ISPs does into one category promotes administrative convenience, but ignores the complex nature of ISP services and the potential for to harm individuals, groups and First Amendment values absent government oversight. For example, the information service classification enables ISPs to engage in price and quality of service discrimination that network neutrality advocates worry will distort a free marketplace of ideas.

This paper will examine the different First Amendment rights and responsibilities borne by ISPs when they claim to operate solely as conduits and when they combine conduit and content. The paper will show that ISPs face conflicting motivations with light FCC regulation favoring diversification into content management services, like that provided by editors and cable television operators, but with legislatively conferred exemptions from liability available when ISPs avoid managing content. The paper concludes that current media models provide inconsistent and incomplete direction on how to consider ISPs’ joint provision of conduit and content. The paper provides insights on how a hybrid model can address media convergence, and promote First Amendment values while imposing reasonable nondiscrimination responsibilities on ISPs.

You can access the paper at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928, and http://works.bepress.com/robert_frieden/

Testimony on the Consumer Wireless Experience

The Senate Commerce Committee held a hearing that examined wireless handset exclusivity, as well as limitations on consumers' access to functions available from wireless devices, and downloadable software applications. While no one disputed the likelihood that smart phones will increasingly operate like small personal computers. However, wireless subscribers do not have the same freedom to attach to networks as they do for televisions, conventional personal computers and devices attached to the wired network.

The Apple Apps store current offers 30,000 choices compared to the millions available via the web. Major wireless carriers, such as AT&T and Verizon, claim handset exclusivity and access limitations are necessary business decisions that do not harm consumers. I disagree, and in testimony explain how an emphasis on recouping handset subsidies reduces innovation for devices that will become increasingly essential "third screen" alternatives to televisions and larger computers.

My written testimony and a two page summary is available at: http://www.personal.psu.edu/faculty/r/m/rmf5/.

The Commerce Committee link to the Hearing is available at: http://commerce.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=03b81ffd-ba9f-42e6-8331-7c28f6d112b0

Another Work in Progress--Lock Down on the Third Screen: How Wireless Carriers Evade Regulation of Their Video Services

Set out below is the abstract for another work in progress that considers whether wireless carriers should evade regulation of their "third screen" video services. The paper will appear in a future edition of the Berkeley Technology Law Journal; a darft version is available at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928

Wireless handsets increasingly offer subscribers a new optionfor accessing the Internet and video programming. The converging technologies and markets that make this possible present a major regulatory quandary, because the Federal Communications Commission (“FCC” or “Commission”) seeks to maintain mutual exclusivity between regulated telecommunications services and largely unregulated information services.

Many existing and emerging services do not easily fit into one or the other regulatory classification, nor can the FCC determine the appropriate classification by extrapolating from the regulatory model applied to existing or discontinued services. By failing to specify what model applies to services appearing on cellphone screens, the FCC has failed to remove regulatory uncertainty. Cellular telephone service providers may infer from the Commission’s inaction that any convergent service eventually will qualify for the unregulated information service “safe harbor” despite plausible arguments that government oversight remains essential to achieve consumer protection, national security, fair trade practice, and other safeguards.

This article will examine the regulatory status of wireless carrier-delivered video content with an eye toward determining the necessary scope and nature of government oversight. The article reports on instances where the FCC deemed it necessary to promote video programming competition and subscriber access to wired cable television content, and concludes that wireless subscribers deserve similar efforts in light of wireless carriers’ incentives and abilities to blunt competition. The article concludes that the FCC must balance the carriers’ interests in finding new revenue centers to pay for next generation network upgrades with subscribers’ interests in maximizing their freedom to use handsets they own.

Work in Progress-Lies, Damn Lies and Statistics: Developing a Clearer Assessmentof Market Penetration and Broadband Competition in the United States

Set out below is the abstract for a current work in progress on the dodgy world of broadband market penetration data collection. The work will appear in an upcoming edition of the Virginia Journal of Law and Technology. A current draft is available at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928

Depending on the source one can conclude that United States consumers enjoy access to a robustly competitive and nearly ubiquitous marketplace for inexpensive broadband Internet access, or they suffer the consequences of a tightly concentrated industry offering inferior service at high rates. On one hand, the Federal Communications Commission (“FCC”), the National Telecommunications and Information Administration (“NTIA”) and some sponsored researchers offer a quite sanguine outlook, possibly influenced by their appreciation for the political and public relations dividends in compiling positive results.

On the other hand, other statistical compilations and interpretations show the U.S. behind in terms of market penetration and price, even trailing some nations that have similarly unfavorable geographical and demographic characteristics. In the light of the extraordinary global success achieved by domestic ventures in information and communications technology (“ICT”), it would appear counterintuitive for some current broadband statistics to show the United States lagging other nations in terms of favorable access to next generation networks.

The FCC has used evidence of robust market penetration and competition in broadband markets to support an aggressive deregulatory campaign. Advocates for even more deregulation regularly cite the Commission’s statistics as evidence that the unfettered marketplace can achieve broadband access and affordability goals. Both the Commission and many stakeholders assume the frequently cited statistics present a true picture of the marketplace. A recent NTIA document concludes that the United States has achieved the goal of “universal, affordable access for broadband technology by the year 2007” articulated by President Bush in 2004.

This paper will examine the United States broadband penetration and pricing statistics with a critical eye, in light of other contradictory compilations by credible organizations including the International Telecommunication Union and the Organization for Economic Cooperation and Development. Additionally the paper will compare and contrast the FCC’s identification of broadband options in the author’s home zip code with what actual options the author could identify.

The paper concludes that the FCC and NTIA have overstated broadband penetration and affordability by using an overly generous and unrealistic definition of what qualifies as broadband service, by using zip codes as the primary geographic unit of measure and by misinterpreting available statistics. Additionally the FCC includes as competition services lacking any true cross-elasticity with other services based on substantial price differences.
The paper concludes that credible calculations, using better calibrated measures, show a mixed outcome based on different geographical focus. Some U.S. residents, particularly in urban locales, enjoy comparatively excellent broadband service, while rural residents may have ample access options, albeit at comparatively high prices in light of limited price competition. The paper concludes that the absence of robust price competition among many facilities-based broadband operators in many areas of the nation challenges many of the assumptions built into recent FCC policy initiatives that seek to abandon consumer safeguards. The paper also concludes that a statutory mandate to promote universal access to advanced telecommunications capability requires the FCC to collect and disseminate credible statistics on next generation network deployment.

Distance Is Not Dead or Cost Free

In 1997, Frances Cairncross wrote a book entitled The Death of Distance (Harvard Business School Press) that heralded the Internet’s ability to transcend and mitigate much of the financial and logistical challenges posed by geography. Certainly the Internet enhances productivity and opportunities, particularly for people in remote places. But what make distance less significant is the product of cost allocation and cost recovery policies and not some new transcendental notion that it has become easier, cheaper or more efficient to serve rural areas.

Professor Michael Katz angered some rural advocates when he articulated this concept, perhaps more bluntly: “The notion that we should be helping people who live in rural areas avoid the costs that they impose on society … is misguided from an efficiency point of view and an equity one.” See Howard Berkes, Stimulus Stirs Debate Over Rural Broadband Access, National Public Radio, Morning Edition (Feb. 19, 2009); available at: http://www.npr.org/templates/story/story.php?storyId=100739283.

Professor Katz is quite right that because rural areas have a diffuse, spread out population, the cost of installing a distribution infrastructure is higher than the cost of serving the same number of people located more close together. If government decides to bridge this cost differential—as it did expressly in the Telecommunications Act of 1996—one could infer that universal service has a comparatively high public policy priority. Professor Katz might favor government spending less on broadband and more on subsidizing infant immunizations, but note that the issue becomes one of whether and how to compensate for cost differentials, not that technology somehow has eliminated them.

Rural residents have qualified for a number of public policy initiatives aiming to defray the cost of living in remote locales. “Keeping them happy down on the farm” may have national security benefits, and perhaps the United States does not differ much from China insofar as the consequences of mass migration from rural to urban areas and the congestion costs that would generate.

From my perspective distance surely does matter, both in terms of my out of pocket costs and more broadly “opportunity costs,” i.e., the time, money, effort and foregone options resulting from my residency in a rural locale. While I can blog to my heart’s content and achieve parity with an urban blogger, being out of sight and not a frequent attendee at various Washington, D.C. political/social/educational events means that I am not going to be on decision makers’ radar screens for conference invitations, new employment and life time achievement awards to name a few.

In my case, rural residency came with the decision to accept an academic appointment. Perhaps I could have held out for an urban posting, but it did not turn out that way. Thanks to cost averaging decisions and “All You Can Eat” unmetered monthly Internet access subscriptions—itself another inefficient artifact of the Internet’s long past promotional phase—I can try to compensate for my location. But being “centrally located in the middle of nowhere” has costs that government cannot offset.

Carriers That Can Say No

Recently several press accounts reported that AT&T will allow iPhone subscribers to access Skype’s Voice Over the Internet Protocol (“VoIP”) telephone service via wi-fi, but not using the AT&T wireless network. See, e.g., http://www.usatoday.com/tech/news/2009-04-01-att-skype-iphone_N.htm. Unlike some carriers that disable wi-fi access via cellphones, AT&T could not block Apple’s interest in making handsets operate more like wireless computers. But the financial stakes were too high for AT&T to allow its subscribers to substitute cheap Skype international long distance minutes for quite expensive and quite lucrative AT&T minutes.

Apparently few seem troubled by AT&T’s unilateral decision about what subscribers can and cannot do with their handsets. (But see Skype’s concern: http://digg.com/d1ntP3) So we a carrier that can say no to subscribers when a proposed use threatened revenues despite no credible evidence that such use would cause technical harm to the AT&T network. Perhaps AT&T can base the restriction on contract law and the carrier’s need to recoup the cost of its subsidy for below cost access to the iPhone. However, AT&T retains the restriction even for iPhone subscribers after their two year service term and for subscribers who do not trigger a subsidy in the first place.

The FCC’s passive acceptance of AT&T’s blanket freedom to impose a walled garden access to telephone services, contrasts with what the Commission did when a wireline telephone company blocked DSL access to Skype. Why should this be? If a wire-based telephone company ostensibly provides an information service when provisioning DSL access to the Internet, arguably the FCC has no jurisdiction to mandate interconnection with Skype, or to impose a monetary forfeiture. Yet that is exactly what the Commission did when a rural North Carolina telephone company (Madison River) blocked access to Skype. Now the FCC does nothing when a wireless telephone company, ostensibly providing a similar information service, broadband Internet access, block subscribers from using the carrier’s network.

Can anyone make legal or public policy sense out of this inconsistency?

Skype Jailbreak and the Unholy Alliance of Wireless Handset Makers and Carriers

News of conditional iPhone Skype access has arrived; see http://gadgetwise.blogs.nytimes.com/2009/01/09/fring-for-the-iphone-all-skype-no-gripe/?pagemode=print. I use the word conditional, because iPhone users can access the service only via a Wi-Fi connection and not via the AT&T network.

This announcement provides both good and bad news. On one hand, Apple the computer manufacturer recognizes the user benefit in constructing a handset that can incorporate many applications, including ones that the wireless carrier may not be thrilled to support. On the other hand, both Apple and AT&T have absolutely no interest in considering the iPhone property owned and controlled by consumers. This means that Apple does not protest when AT&T limits Skype access to Wi-Fi islands of connectivity. Because iPhone users frequently use their phone while moving, AT&T can tolerate the loss of some revenue in the limited instances where non-moving subscribers make Skype calls.

Many iPhone users have undertaken the warranty violating exercise of “jailbreaking” their handsets to add an “illegal” application, i.e., software either Apple or AT&T do not want users to have. Clever users will find ways to make Skype useable over the AT&T networks, but I wonder why handset manufacturers and wireless carriers have the power to condemn such user options as illegal hacking. Surely after paying rates that recoup the handset subsidy don’t iPhone users own their phone?

In a number of different forums and writings I have argued for a wireless Carterfone policy that recognizes the lawfulness of using handsets to access any service, application, software or carrier provided such access causes no technical harm. We expect such attachment freedom when using handsets attached to wired networks, as well as television sets and personal computers. But apparently in our delight with a working wireless connection we accept limitations on handset attachment freedom. Some wireless carriers disable handset Wi-Fi access, so Apple must come across as a consumer advocate of sorts.

Wireless carriers do not have to comply with the wireless Carterfone policy in part because handset manufacturers carriers do not vigorously contest handset limitations imposed by wireless carriers. With only four major carriers controlling most of the market, and locking most subscribers into two year service agreements, in exchange for the privilege to buy a subsidized handset, no handset manufacturer cares to risk its good standing with the carriers. If Nokia had more ways to sell handsets—as occurs in most parts of the world outside the U.S.—it would have far less tolerance for carriers disabling consumer welfare enhancing features like Wi-Fi access.

U.S. wireless carriers have cowed handset manufacturers into submission. With such an unholy alliance limited Wi-Fi-based iPhone access to Skype looks generous.

Unbundling in Canada

It appears that the incumbent wireline carriers in Canda use the same strategy as incumbent carriers in the U.S., i.e., play the investment disincentive card by threatening to delay or abandon infrastructure investment, coupled with a Constitutional claim of property confiscation. The current economic crisis supports an additional adverse impact to employment gambit. See Telecom TV, Can't share. Won't share. Bell Canada has hissy fit (March 18, 2009); available at: http://web20.telecomtv.com/pages/?newsid=44661&id=e9381817-0593-417a-8639-c4c53e2a2a10.

I marvel at how quickly incumbent carriers play the property confiscation argument even as they got billions of dollars in free rights of way. Do these former public utilities have any public interest obligations--no matter how market countervailing--in light of their free access to public and often private property?

Supreme Court Further Limits Antitrust Remedies for Carrier Pricing Complaints

By a unanimous ruling, the Supreme Court has further reduced the opportunity for a carrier competitor of an incumbent to seek an FCC or judicial remedy to pricing strategies arguably designed to eliminate competition by offering wholesale prices below that charged to competitors for similar services. [1] In 2003 several Internet Service Providers (“ISPs”) filed suit against Pacific Bell Telephone Co., contending that this incumbent carrier attempted to monopolized the market for Digital Subscriber Link (“DSL”) broadband Internet access by creating a price squeeze with ISP competitors obligated to pay a higher wholesale price than what Pacific Bell offered on a retail basis.

Both the District Court and the Ninth Circuit Court of Appeals agreed that the ISPs could present their price squeeze claim, despite the Supreme Court Ruling in Verizon Communications, Inc. v. Law Office of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) that limits antitrust claims against common carrier, telecommunications service providers and further restricts what remedies a court can provide in lieu of what rights the Telecommunications Act of 1996 provides market entrants.

The Court assumed that Pacific Bell had no antitrust duty to deal with any ISPs based on the FCC’s premise that ample facilities-based competition exists. [2] Curiously, Court does not mention that Pacific Bell could avoid a unilateral duty to deal with ISPs based on the FCC’s classification that DSL and presumably its component parts constitute information services and not common carrier-provided telecommunications services.

But for a voluntary concession to secure the FCC’s approval of AT&T’s acquisition of BellSouth the Court noted that Pacific Bell would not even have a duty to provide ISPs with wholesale service. The Court granted certiori to resolve the question whether ISP plaintiffs can bring a price-squeeze claim under Section 2 of the Sherman Act when the defendant carrier has no antitrust-mandated duty to deal with the plaintiffs. The lower courts concluded that the Trinko precedent did not bar such a claim, but the Supreme Court reversed this holding.

On procedural grounds, the Court’s decision chided the ISP plaintiffs for changing the nature of their claim from a price squeeze to one characterizing Pacific Bell’s tactics as predatory pricing. On substantive grounds, the Court noted that a new emphasis on predatory pricing would have require determination whether the retail price was set below cost, [3] a claim the ISPs did not make.

The Court determined that the case did not become moot, because of the change in economic and antitrust arguments. However the decision evidences great skepticism whether the ISPs have any basis for a claim, because in the Court’s reasoning the ISPs failed to make a claim that Pacific Bell’s retail DSL prices were predatory, and the ISPs also failed to refute the Court’s conclusion that Pacific Bell had no duty to deal with the ISPs, i.e., to provide wholesale service. [4]

The Court apparently can ignore the voluntary concession AT&T made that created a duty to deal, because that concession may trigger FCC oversight, but it does not change whether an antitrust duty to deal arises. The Court reads the Trinko case as foreclosing any antitrust claim if no antitrust duty to deal exists. [5]

The Court remanded the case to the District Court to determine whether the ISP plaintiffs have any viable predatory pricing claim. The Court expressed the need for clear antitrust rules and apparently views consumer access to low retail prices—predatory or not—as sufficient reason for courts to refrain from intervening. Remarkably, the Court does not seem troubled even if all ISPs competitors exited the market, an event that surely would the surviving incumbent carrier to raise rates:

For if AT&T can bankrupt the plaintiffs by refusing to deal altogether, the plaintiffs must demonstrate why the law prevents AT&T from putting them out of business by pricing them out of the market. [6]

This case evidences a strong reluctance on the part of the Supreme Court to approve of any sort of judicial review over the pricing strategies of carriers. Presumably the plaintiffs could have petitioned the FCC to review the wholesale prices, but the Commission might just as well have claimed that even the sub-elements of DSL service constitute information services not subject to Title II pricing and nondiscrimination requirements.

[1] Pacific Bell Telephone Co., v. Linkline Communications, Inc., slip op. 555 U.S. ___
(rel. Feb. 25, 1009); available at: http://www.supremecourtus.gov/opinions/08pdf/07-512.pdf.

[2] “DSL now faces robust competition from cable companies and wireless and satellite services.” Id. at 2; see also, id. at 8, n.2.
[3] The Court referenced Brook Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) that supports the inference that a predatory pricing claim can be established only with proof of below cost pricing coupled with evidence that the defendant can subsequently recoup any lost profits. Id. at 4.

[4] “The challenge here focuses on retail prices—where there is no predatory pricing—and terms of dealing where there is no duty to deal.” Id. at 8. “If there is no duty to deal at the wholesale level and no predatory pricing at the retail level, then a firm is certainly not required to price both of these services in a manner that preserves its rivals’ margins.” Id. at 12.

[5] “In this case, as in Trinko, the defendant has no antitrust duty to deal with its rivals at wholesale; any such duty arises only from FCC regulations, not from the Sherman Act.” Id. at 9.

[6] Id. at 16-17.

Can Common Carrier Regulated Telephone Companies Limit Service Plans to Bundled Subscribers?

Several press outlets have disclosed that Verizon may offer very low cost telephone service options available only to subscribers who already have Verizon-provided Internet access. See http://uk.reuters.com/article/rbssTechMediaTelecomNews/idUKN1735246920090217.
One $5 plan would limit outbound calling to 911 emergency and Verizon customer service, while a $10 plan would include some regular outbound calls.

The last time I checked Verizon remained a common carrier telecommunications service provider obligated to file local telephone service tariffs and subject to non-discrimination requirements contained in Title II of the Communications Act. I do not believe Verizon can lawfully offer a telecommunications service limited to a select group of customers who “qualify” to take this service if and only if they also buy Internet access from Verizon.

Perhaps this low cost Verizon service is not circuit switched telephone service, but Voice over the Internet Protocol (“VoIP”) service instead. Arguably Verizon would have no tariff filing obligation, or nondiscrimination obligation for VoIP if classified as an information service. However if the FCC allows Verizon to offer this sort of pre-qualified customer access to VoIP service, the Commission may in effect validate the view that VoIP is not a telecommunications service, something Comcast recently emphasized in response to an FCC letter inquiring whether the company was favoring its VoIP service by exempting it from network management functions that could throttle VoIP offered by competitors. See Letter from Dana R. Shafer, Chief Wireline Competition Bureau and Matthew Berry, General Counsel to Katheryn A. Zachem, Vice President Regulatory Affairs, Comcast Corp. (Jan. 18, 2009); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-288047A1.pdf;
Comcast’s response is available at: http://gullfoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6520194593.

Heretofore the FCC has managed to avoid having to make an either/or (telecommunications service vs. information service) classification for retail VoIP. Verizon may not even have anticipated that a marketing tactic to stave off complete wireline customer migration may force the FCC to make an important regulatory call.

The Non-Lesson From Telecom Frauds

Does anyone remember how Worldcom, Qwest, 360 Communications and other telecommunications carriers overstated revenues by booking capacity swaps as current income? Like their Enron counterparts, telecom managers came to understand that there was more bonus money and stock appreciation in creating esoteric capacity swaps then in stimulating demand through enhanced service.

History repeats itself as though we learned nothing from previous frauds. It appears that little difference exists between a creative financial “instrument” that repackages real estate debt and one that repackages telecommunications capacity swaps. The underlying financial transaction—to fund a telecommunications transmission facility such as an overseas fiber optic cable, or to fund home purchases—becomes a long embedded element to a more recent repackaged or re-sliced financial instrument. With such repackaging ventures can prime their financial pumps and profit statements by recycling and reselling.

To my mind little difference exists between the false stimulus of buying, repackaging and reselling real estate debt and telecommunications transmission capacity debt. With each reprocessing of the properties, processors can expand the debt load based on the artificial increase in apparent demand for the financial instruments, never mind that demand for the underlying property may not have changed, or may have been goosed upward on fraudulent grounds.

The non-lesson: if smart people can artificially inflate demand for telecommunications transmission capacity and debt instruments, the same or similarly smart people can do the same thing for real estate.

Regulatory Status of Wireless Information Appliances

News of a slimmed down Amazon Kindle electronic book has triggered this question: what regulatory status applies to devices that use wireless capacity purchased by the appliance vendor and bundled into the cost of both the appliance and downloads? In the United States the FCC has exempted bundlers of telecommunications capacity on grounds that they do not retail a telecommunications service.

But in light of the willingness of the FCC and other national regulatory agencies to oversee some times of information services, might network neutrality and other concepts of nondiscrimination apply? Bear in mind that Kindle buyers apparently do not receive a subsidy that reduces the cost of the information appliance in exchange for locking out competing content and applications. Still the FCC has shown no interest in forcing wireless carriers or manufacturers to comply with the so-called Carterfone nondiscrimination requirements applicable to wireline handsets and carriers. Carterfone requires carriers to interconnect with other carriers and to accept subscriber chosen and loaded applications.

Apple makes great self-congratulatory statements about the wide and open applications available for downloading, but note that the FCC does not require at&t to accept any non-Apple approved and marketed applications, nor does the Commission prohibit Apple from blocking and disabling applications that it unilaterally decides subscribers should not use. So if the FCC could not be bothered with wireless common carriers operating in a discriminatory manner then the Commission probably will have no concerns about a "locked down" Kindle. In light of the Supreme Court's deference to the FCC's "expertise" in the Brand X decision, it appears that the FCC could ignore information appliance discrimination entirely.

Comcast Letter Hints at the Potential Common Carrier Regulation of VoIP Service

While the FCC has classified cable modem and DSL Internet access an information services, the Commission has not specified whether VoIP similarly qualifies. On one hand software applications, riding along a cable modem or DSL link, create VoIPs services. But on the other hand high level FCC managers recently noted that when an Internet Service Provider markets VoIP as a facilities-based service separate from Internet access the service constitutes a common carrier, regulated telecommunications service. [1]

The FCC managers made this nonbinding and nonenforceable conclusion in a letter to Comcast Corporation primarily inquiring about potential discriminatory treatment of competitors’ VoIP services vis a vis Comcast’s offering and the apparent nonpayment of interconnection fees to other telecommunications service providers. Having noted violations of its 2005 Internet Policy Statement, [2] the Commission had required Comcast to file a document showing how the company would comply with the duty to operate in a nondiscriminatory manner. [3] In its response Comcast reported that a subscriber would experience a noticeable deterioration in service, including VoIP service not provided by Comcast whenever a subscriber uses 70% of his or her “provisioned bandwidth” for 15 minutes or more when such use causes congestion in the vicinity, labeled as the Cable Modem Termination System Node by Comcast, for more than 15 minutes. Because Comcast separately provisions its VoIP service, a congestion causing subscriber of Comcast’s cable modem service, who also subscribers to Comcast’s VoIP service, would not experience any degradation of the Comcast VoIP service.

The letter to Comcast seeks an explanation for the disparate treatment of VoIP services, particularly in light of Comcast’s assertion that its VoIP service is “facilities-based.” The letter appears to infer that facilities-based means that Comcast physically partitions its data bandwidth, thereby creating for its VoIP service stand alone links. The letter infers that when Comcast by provisions its VoIP service, separate and apart from broadband access, Comcast may be offering a regulated, retail telecommunications service and a largely unregulated information service. [4] In The Letter requests that Comcast explain why it should be regulated as a telephone company and bear conventional common carrier responsibilities including the duty to compensate other carriers for terminating Comcast generated VoIP traffic.

Most analysts have concentrated on the potential that Comcast may not have fully remedied all instances of Internet access discrimination and whether the company may use network management features to create incentives for subscribers to use Comcast VoIP services over competitors. But perhaps more important is the interpretation whether and how a largely unregulated information service provider triggers conventional common carrier telecommunications service regulation when offering a VoIP service.

[1] Letter from Dana R. Shafer, Chief Wireline Competition Bureau and Matthew Berry, General Counsel to Katheryn A. Zachem, Vice President Regulatory Affairs, Comcast Corp. (Jan. 18, 2009); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-288047A1.pdf [hereinafter cited as Comcast VoIP Letter].

[2] Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Docket No. 02-33, Policy Statement, 20 FCC Rcd. 14986 (2005).

[3] See Formal Complaint of Free Press and Public Knowledge Against Comcast Corporation for Secretly Degrading Peer-to-Peer Applications, File No. EB-08-IH-1518, Memorandum Opinion and Order, FCC 08-183 (rel. Aug. 20, 2008); available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-183A1.doc.

[4] “Given that Comcast apparently is maintaining that its VoIP service is a ‘separate facilities-based’ telephone service that is distinct from its broadband service and differs from the service offered by [competing] ‘VoIP providers that reply on delivering calls over the public Internet’ . . . it would appear that Comcast’s VoIP service is a telecommunications service subject to regulation under Title II of the Communications Act of 1934, as amended.” Comcast VoIP Letter at 2.

Top Ten List of FCC Regulatory Reforms—Part Two

4) Fairly Report the State of an Industry When Reporting to Congress

Federal legislation regularly requires the FCC to provide Congress with annual updates on the health and competitiveness of various market sectors. FCC management has assumed the responsibility to provide Congress with the best possible assessment of marketplace conditions as opposed to a realistic one. For example, in the Commission’s assessment of the Commercial Mobile Radio Service, i.e., cellular telephony, the most recent Report to Congress disingenuously identifies a number of spectrum allocations possibly useable by new competitors to the four carriers that control 90+% of the market. Of course the Commission does not acknowledge that such spectrum currently provides no actual competition, nor does the Report notify Congress that incumbents would use litigation, lobbying and other strategies to prevent such possible competition.

The FCC should use Congressional reporting requirements to identify both successes and failures under the currently applicable laws. Arguably Congress should pass legislation more regularly instead of grand, “soup to nuts” reforms that typically need revision soon after enactment.


3) Put an End to Results-Driven Decision Making

Too often an informed observer of the FCC’s machinations can detect exactly where Commission management, or at least the Chairman, wants to go in a notice of inquiry or rulemaking. Under such conditions the Commission simply goes through the motions, ostensibly to promote procedural and substantive due process. The FCC document may contain dozens of questions, but most stakeholders refrain from providing answers (as opposed to assertions) and the Commission’s final policy making document never gets around to examining the questions it previously posed.

Rather than start with an end conclusion firmly in mind, the FCC should start with the humble acknowledgement that maybe—just maybe—it does not know what would serve the public interest. Fair and lawful notice and comment proceedings requires the FCC to create a factual record, by encouraging all interested parties to participate, and to fully and fairly consider that record.

2) Use Peer Review

In the academic world, peer review provides essential quality control by subjecting research and other contributions to close scrutiny by unbiased and unknown outsiders. When I write an academic paper, typically several reviewers consider the rigorousness, legitimacy and significance of my work. Neither author nor reviewer know of the other’s identity.

The FCC rarely uses peer review to subject its work product to outsider review, nor does the Commission use authentic, peer-reviewed research from academics, or consulting firms. The notice and comment pleading process does allow stakeholders to criticize each other’s work, but the material filed with the Commission would never pass muster with peer review in light of financial sponsorship that obligates the creation of a biased document in the first place.

The FCC should finance peer reviewed work to augment its in-house expertise and to provide an unbiased alternative perspective on the biased assertions of stakeholders.

1) Be Skeptical of Stakeholder Assertions of Facts and Findings

Absent peer review, a full opportunity to consider the views of the general public and general open mindedness, the FCC regularly relies on the biased filings of stakeholders. The Commission regularly accepts as the gospel truth nothing more than assertions. If stakeholders make these assertions long enough and finance “rock star” academics to embrace these assertions, then it becomes quite easy for the FCC to accept assertions as fact.

Economists use this process with great success, because they can create unimpeachable “rules” and use math to support them. In telecommunications policy sponsored economics professors have stated with a straight face that regulation constitutes a confiscation of property, that carriers providing interconnection are entitled to retail price compensation including all “opportunity costs,” that just about every telecommunications market sector is robustly competitive and deserving of deregulation and that every merger or acquisition will promote even more competition. In conjunction with results-driven decision making such “research” provides cover and support for the FCC to conclude that the public interest coincides with the assertions of particular stakeholders.

The FCC should have a healthy skepticism that what’s good for a specific stakeholder is also good for the public in general. It might or might not. To determine the truth, the FCC needs to do its homework.

Top Ten List of FCC Regulatory Reforms—Part One

10) Honesty is the best policy.

At the risk of anthromorphizing a regulatory agency, at the very least the FCC has not told the complete truth, or put itself in a position not to know the truth. The FCC has contributed to debates about what constitutes credible facts and statistics, and what this data means. For example, soon-to-be former FCC Chairman Kevin Martin asserted as the gospel truth his factual conclusion that cable television operators collectively have a 70% market share of the total video program distribution business, a trigger point for more regulation. His expert regulatory agency did not reach this conclusion, so Chairman Martin had to resort to the finding of a commercial venture which itself doubted whether such market share remained sustainable.

The FCC should acknowledge that it may not know all the facts.

9) Use the “Notice and Comment” process to augment the fact finding process rather than control it.

While FCC managers have done just about everything they can do to encourage a brain drain, there remain plenty of staff resources capable of finding the truth. Instead FCC management has demonstrated an inordinate reliance on the filings made by stakeholders, and their sponsored researchers, for the formulations of decisions and policies. The FCC assumes as facts what stakeholders present as assertions. Without in-house analysis, and better yet independent peer review, the conclusions of interested parties, are nothing more than unproven assertions.

8) Stop using politics and economic doctrine as a template to manipulate the facts.

Without a doubt, the FCC has engaged in results-driven decision making. Managers reach a conclusion and work back from that conclusion. In other words if the Chairman thinks the Commission should approve a merger, he directs the staff to come up with rationales supporting the merger. Political and economic doctrine rather than facts have driven decisions, rather than empirical data.

7) Stop imposing conditions on mergers that perhaps should apply industry-wide.

Because of the drive to approve any and all mergers and acquisitions, FCC Commissioners use their vote as leverage for the imposition of company-specific conditions, or the solicitation of “voluntary” concessions by the acquiring company. This brokering occurs behind the scenes in manner that violates both procedural due process and expectations of government in the sunshine. The FCC should decide if the conditions, so necessary for an acquiring company, are appropriate industry wide, e.g., AT&T’s “voluntary” agreement for conditional and time limited compliance of network neutrality principles to secure approval of its acquisition of BellSouth.

6) In a deregulatory environment reporting requirements become increasingly important.

The FCC seems to think that it should eliminate reporting requirements in tandem with the onset of deregulatory initiatives. The Commission has a greater need for data when it increasingly relies on anticipated market self-regulation. For example, the FCC should require lightly regulated Internet Service Providers to report on network use, outages, and congestion episodes, with an eye toward seeing whether price and quality of service tiering initiatives end up hurting consumers. Network neutrality opponents claim no need for regulatory intervention, but only with honest reporting requirements can the FCC determine whether certain types of price and service discrimination are not collectively harmful.

5) Determining the public interest requires listening to the public.

I am pretty sure at least half of the current FCC commissioners loathed having to take a road trip to hear the irrational and emotional opinions of the common man and woman. Even with Comcast allegedly paying homeless people to wait in line for seating, the Commissioners got an earful from people who clearly did not see the world in the same way. Maybe the unwashed public collectively has wisdom and insights unavailable from the currently closed process used to make decisions. The Commission should make more road trips, encourage public participation and actually listen to what indirect public stakeholders have to say.

Universal Service Reform

An increasing number of players—including the incoming Administration—have expressed interest in reforming the process by which the federal government seeks to promote wider and more affordable access to telecommunications services. Currently wireline, wireless and now many Internet telephone subscribers contribute over $7 billion annually to universal service funding, most of which goes to incumbent wireline carriers. The process is quite flawed and vulnerable to arbitrage. For example, a rural wireline telephone company in Iowa offers “free” teleconferencing (previously “free” calls to European locations) just by calling into their switch. For wireless callers with “unlimited nights and weekends” the additional out of pocket cost is zero, even though the carrier making the inbound call incurs charges of several cents per minute instead of the thousands of one cent typically charged by so-called “terminating carriers.”

I have written extensively on the subject of universal service reform and suggest the following “best practices”:

• True technology neutrality coupled with a willingness to fund well articulated and community-supported projects rather than limit support to a fixed list of existing carrier services;

• Capping government project funding to a percentage of total cost, thereby requiring project advocates to seek financial support from other grantors, or from bank loans;

• Emphasizing one-time project funding rather than recurring discounts;

• Creating incentives for demand aggregation among government and private users, particularly for broadband and data services;

• Promoting innovation and creativity in projects, including technologies that provide greater efficiency and lower recurring costs;

• Encouraging competition among universal service providers by auctioning off subsidy access; and

• Blending government stewardship and vision with incentives for private stakeholders to pursue infrastructure investments.

Analog Videophiles

Just as some audiophiles swear by the virtues of analog audio, I think we soon will have millions of analog videophiles. Despite all the preparation for the compulsory migration to digital broadcast television, it appears only now has someone in authority—or soon to have authority—recognized a technological characteristic of digital video transmissions: there is no gradual signal attenuation. Either you receive a digital signal, or you do not.

In the analog world, a significant portion of the 20 or so million broadcast television viewers, received signals in or beyond the so-called B-contour. In other words, a lot of exurban and rural broadcast television viewers received a somewhat snowy, somewhat inferior signal, but a viewable signal nonetheless. These satisfied or tolerant viewers will likely receive nothing in February and the folks in Washington have begun to consider the political consequences.

One of the earliest commercial slogans for the music video network MTV was simply: “I want my MTV.” Absent a delay and some quick promotion of multiple broadcast transmitters and repeaters, throughout places like Pennsylvania, we soon will hear lots of folks saying: “I want my old tv!”

Wireless Economies of Scale at the Price of Diminished Competition

In 2001 the FCC eliminated a cap on the amount of bandwidth a single wireless carrier could control. With nothing coming close to quantifiable or empirical evidence, the Commission simply bought the assertion of incumbent carriers that the public interest would benefit when incumbent carriers can achieve better scale economies to serve a growing subscriber base. The FCC made no credible assessment whether larger scale would preempt market entry and reduce the potential for more facilities-based competition.

Since 2001 incumbent carriers have dominated the wireless marketplace in the United States, building on the FCC’s decision in the early 1980s to award incumbent wireline carriers the first of two licenses. Currently four national carriers control 90% of the market and their primary advertising message emphasizes how well their networks work. In other words price competition rarely appears while the carriers engage in what antitrust lawyers and economists term “conscious parallelism” conduct. If one carrier raises text messaging rates from ten to twenty cents, then the other three matches the increase. Once in a while the weakest carrier Sprint, comes up with a pricing initiative matched by the other three, but all four carriers offer few differentiating price options, e.g., a discount to subscribers with used handsets that the carrier does not have to subsidize.

What if the FCC had retained a 45 MHz or 55 MHz spectrum cap? The possibility exists that a fifth or sixth national carrier might have evolved as well as several more regional carriers. If the number of carriers increases beyond four, the potential increases for one of the carriers to conclude that a pricing initiative will capture more subscribers and revenues than sticking to parallel pricing. As well it would not take a venture with incredibly deep pockets to enter the market.

In the latest auction of spectrum, the choice 700 MHz band, Verizon, AT&T, Sprint and T-Mobile dominated and even Google opted eventually not to challenge the incumbents. The incumbent carriers now so dominate that absent affirmative legislative or regulatory efforts, the market appears likely to remain static.

How can creative destruction and competition thrive when precious little spectrum remains available? The national treasury perhaps received more money from incumbents keen on warehousing spectrum and preempting market entry. But these carriers get to amortize their spectrum investment which reduces future tax liability. As well the public probably has fewer choices and a profitable surplus accrues to carriers able to avoid sleepless afternoons competing.

Fuzzy Math in Calculating the Cost and Profit in Wireless Text Messaging

The New York Times recently addressed the issue of wireless texting cost and strongly implied that carriers make a lot of money from this service that costs them little to provide. See http://www.nytimes.com/2008/12/28/business/28digi.html?_r=2&partner=rss&emc=rss. Of course wireless carriers quickly will respond that consumers (can) get an incredible bargain by subscribing to an all you can eat (“AYCE”) rate plan. If you apply the typical non-rate plan of twenty cents per text message, you can conclude the carriers are gouging, but if you use a $10.00 per month rate, coupled with lots of usage, the per message cost drops substantially.

Texting provides a helpful case study for assessing the competitiveness of the wireless marketplace and the value proposition presented. First, we should appreciate that the wireless infrastructure has substantial upfront, sunk costs, e.g., the need for carriers to competitively bid for spectrum, construct towers and install other facilities before accruing the first dollar in revenues. However, once having sunk this substantial investment, the incremental cost of providing an additional minute of service approaches zero absent network congestion. For text messaging, the additional or “marginal” cost of providing service surely approaches zero, because carriers can load text traffic onto control channels already installed for a different purpose, to set up calls. See http://www.privateline.com/mt_cellbasics/2006/01/channel_names_and_functions.html.

One could argue that charging twenty cents for something that costs next to nothing constitutes a major rip off. However, you do have to keep in mind the substantial start up costs the carriers incurred and the need to recoup that investment from any and all services. On the other hand, even when offering texting at AYCE rates the carriers can generate ample profits.

So if texting is so popular and profitable why don’t wireless carriers compete on price? Good question. In a robustly competitive market price becomes a major factor, yet for wireless the carriers’ advertisements almost exclusively tout reliability and they match each other’s texting prices. Additionally carriers, their trade associations, and the FCC regularly emphasize the rate plan per text message or per minute talk time rate to show how competitive the wireless marketplace is and what great consumer surpluses subscribers accrue.

In reality not all wireless subscribers enroll in a text messaging plan, nor do all subscribers come close to using all their monthly allotments of use. For the high volume user, rate plans help reduce per minute costs, just as buffet restaurants reduce patrons costs per once of consumption. A big gap exists between metered and AYCE per minute costs, but to make the best claim of marketplace competitiveness one has to work with AYCE plans, or ones offering large buckets of minutes.

U.S. wireless carriers currently offer some of the most expensive and cheapest rates for texting and telephoning. Of course it makes sense for subcribers to enroll in rate plans, but only if they accept the reality that low cost results only from large usage.

Deconstructing AT&T’s Claims About the iPhone

Unlike the other wireless carriers, which primarily use advertisements to claim how well their networks work, AT&T pitches both reliability and speed. AT&T claims to operate the nation’s fastest 3G network. See http://www.wireless.att.com/cell-phone-service/specials/iPhone.jsp?WT.srch=1. The carrier claims the following bit rate delivery speeds: “typical download speeds of 700 Kbps—1.7 Mbps;” and “typical upload speeds of 500 Kbps—1.2 Mbps.” See http://www.wireless.att.com/learn/why/technology/3g-umts.jsp.

AT&T’s claims about transmission speeds remind me of the claimed distance coverage of Family Radio Service transceivers, the next generation of Citizens Band radios. Uniden claims my transceivers will provide service for “up to twelve miles.” Yeah, right. I am lucky to get one and one-half miles.

So what bitrates do AT&T 3G subscribers actually get? Wall Street Journal columnist Wall Mossberg measured the 3G iPhone bitrates at not terribly blazing 200-500 kbps.
See http://ptech.allthingsd.com/20080708/newer-faster-cheaper-iphone-3g/.

The good news about AT&T’s suspect bitrates claim lies in the apparent strategy to pitch something more than service reliability. The bad news lies in the overstatement and the reality that U.S. wireless carriers comparatively lag carriers in many other nations. But of course that would require consumers, regulators and legislatures to question the claims of carriers, something "obviously" best left to the marketplace.

Do Transparency and Non-Discrimination Requirements Impose De facto Common Carriage Duties?

Birtelcom has asked whether a Network Neutrality requirement of transparency and nondiscrimination in effect imposes a common carrier responsibility on ISPs serving Goggle to provide edge caching. Fair question.

As Information Service providers, not subject to Title II telecommunications service regulation of the Communications Act, ISPs do not have to provide any service they do not care to offer. This means that any ISP can elect not to offer edge caching, or any form of premium, better than best efforts routing. An ISP serving Goggle can decline to offer Google what it wants—as ill-advised as that would appear.

A Title I (ancillary jurisdiction) requirement of transparency and nondiscrimination would require any ISP, voluntarily electing to provide edge caching service, to do so in such as a way as to provide any similarly situated client the option of taking the premium service. This requirement does not impose common carriage and tariff filing duties. It only would prohibit ISPs from cutting exclusive, “most favored customer” arrangements that no other client would know about and have an opportunity to take.

ISPs should have the opportunity to offer tiered services that offer different levels of service. But in doing so, ISPs should not have the option of making exclusive deals, obscured by nondisclosure agreements.

Quality of service and price differentiation can provide legitimate and lawful discrimination, subject to conditions and sanctions. ISPs would trigger sanctions for engaging in unfair trade practices by degrading service, e.g., dropping packets, to non-premium customers in the absence of severe congestion, and by deliberately partitioning their networks so that best efforts routing options are guaranteed to achieve unacceptably inferior service.

Wall Street Journal 100% Record Sustained—Deliberately Getting it Wrong on Network Neutrality

Month after month the Wall Street Journal (“WSJ”) pursues what appears to be a deliberate strategy of misinformation on the issue of Network Neutrality. The latest installment appears in Dec. 23rd editorial written by Gordon Crovitz who attempts to equate Google’s enhanced use of edge caching as evidence that the entire matter of Network Neutrality has been much ado about nothing. See http://online.wsj.com/article/SB122990349014725127.html.

Mr. Crovitz starts by referring to a widely discredited WSJ article that reported on Google’s edge caching strategy and implied that such a strategy would violate Network Neutrality principles and evidences Google’s abandonment of advocacy for such principles. I would think the WSJ would applaud Google’s apparent change of heart from free rider of Internet resources to conscientious underwriter of the links that take content from the Googleplex to various servers closer to people making Internet searches. Instead Mr. Crovitz reiterates the red herring that companies like Goggle, Yahoo and Microsoft (key Network Neutrality advocates) “don’t want to have to pay tolls to the companies that provide the Web infrastructure.”

Does anyone see the irony in this statement? Goggle intends on paying more than it previously has paid for what I call “better than best efforts” routing of traffic. The existing traffic routing (“peering”) arrangements of the Internet Service Providers (“ISPs”) that carry Google’s traffic on a plain vanilla, “best efforts” basis do not include premium service. So Google will have to pay for superior distribution of the most commonly searched for results, just as CBS pays for ISPs to deliver “mission critical” bits corresponding to webcasts of March Madness college tournament basketball games.

Previously Google was pilloried for allegedly not paying for any access to consumers, a falsity that many believed despite the fact that Goggle does pay its ISPs and apparently has expressed a willingness to pay more. By the way, the downstream ISPs that also handle Google traffic also have received payment, directly from subscribers and also through barter agreements where ISPs offer access to their networks in lieu of direct payments.

As I have written in my blog, (see http://telefrieden.blogspot.com/2008/12/edge-caching-and-better-than-best.html) premium routing of content does not violate my sense of Network Neutrality, provided ISPs offer such service in a transparent and nondiscriminatory manner. My sense of Network Neutrality would only require ISPs not to drop packets deliberately as a ruse to force either end users or content providers to trade up in service, or to so partition their networks to all but guarantee that plain vanilla, regular service (best efforts routing ) becomes inadequate.

No fair minded advocate for Network Neutrality has rejected reasonable efforts by ISPs to manage their networks, nor does Network Neutrality somehow convert ISPs from information service providers into common carrier, public utilities as Mr. Crovitz alleges. He also makes the bold assertion that the United States’ poor standing in terms of broadband access directly results from Network Neutrality advocacy that creates disincentives for ISPs to invest in infrastructure.

Surely Mr. Crovitz knows that the FCC does not treat ISPs as telephone companies. Likewise neither the FCC nor any reasonable interpretation of its Internet policies foreclose ISPs from providing tiered services, or from accruing triple digit rates of return for Internet access, a reality some of the WSJ’s buy side stock analysts could confirm.

Perhaps Mr. Crovitz sees common carrier regulation in the manner in which the FCC responded to complaints about how Comcast throttled peer-to-peer traffic. Of course the FCC did not mandate common carrier nondiscrimination. The Commission did state that an ISP cannot use software that deliberately drops packets and thwarts delivery of traffic all the time without regard to whether actual network congestion exists. It strains credulity to characterize Comcast’s tactics as nothing more than ensuring that non peer-to-peer traffic “could move more smoothly,” unless Mr. Crovitz has some new evidence to prove that if Comcast did not resort to traffic throttling its network would perform in an inferior manner.

Lastly Mr. Crovitz appears to dismiss the Network Neutrality as nothing more than a tactical strategy by major content providers to avoid having to pay their fair share of the costs ISPs incur to provide Internet access. Like other opponents of Network Neutrality he ignores the major investments Google and other content providers have made to create compelling content which provide reasons for consumers to pay sizeable rates for Internet access. He conveniently ignores that the ISPs providing content delivery offer reciprocal access in lieu of cash payment, or perhaps he has bought into the notion that somehow Goggle and other content providers have managed to cheat ISPs of the right to charge both end user subscribers and upstream content providers.

Unlike telephone networks, the Internet seamlessly combines telecommunications bit delivery with access to content. Monthly Internet access subscriptions amply compensate ISPs and one would think Mr. Crovitz and the WSJ would use their bully pulpit to praise Google and others for providing new revenue streams for incumbent telephone and cable companies.

No Way to Put the Public Back in Public Utilities?

Several years ago many state legislatures embraced the concept that technological innovations would stimulate robust competition in previously monopolized industries such as electricity, gas and telecommunications. The legislatures so bought into the certainty of competition that laws created a glide path to deregulation and the near complete elimination of consumer safeguards. The legislature accepted the premise of lobbyists and sponsored academic researchers that public utilities should qualify for treatment as competitive businesses surely entitled to cut off services to nonpaying customers, an outcome that has contributed to 81 deaths in Pennsylvania. See http://www.centredaily.com/329/story/1026815.html.

With the passage of time, it has become quite clear that infrastructure industries with substantial investment needs do not typically have many facilities-based competitors, especially for the last mile of service to residential and small business consumers. Yet most state legislatures have not revise their laws, even after the Enron debacle showed how crafty public utility employees could exploit their less regulated status to create expensive, but artificial bottlenecks, congestion and shortages of power.

Having cut a deal based on the certain expectation of competition, state legislatures did not think to condition deregulation on confirmation that the competition arrived and flourished. Without such a safeguard, deregulated public utilities surely will claim that they relied on the promise of deregulation and any revision would unfairly and unlawfully confiscate their financial resources. So public utility consumers in many states have the worst of all worlds: deregulation based on competition that did not arrive and apparently no remedy for resumption of consumer safeguards in the absence of a self-regulating marketplace.

Apple iPhone Apps Store—Refreshing Openness or Walled Garden?

Apple Computer has received high praise for the diversity of applications available for the iPhone. The company shows great willingness to accept third party software innovations. But Apple also solely decides whether to accept and make available any application. Rejected software vendors for the most part do not exist if they do not have shelf space at the Apple store. The possibility exists that iPhone users can download and install non-Apple endorsed software, but more likely Apple could reject any third party application when users download next generation Apple operating system software.

Apple serves as a bellwether for openness and innovation even as it appears to treats users’ screens as Apple property for a “walled garden” of its choosing. Consider this scenario: Apple cuts an exclusive deal with Exxon-Mobil for a GPS-based locator for nearby Exxon-Mobile gas stations. A new startup venture Cheapgas, Inc. has devised a GPS-based locators for all nearby gas stations, coupled with user reports on the per gallon rates for most of the listed stations. Exxon-Mobile invokes the exclusivity clause in its contract with Apple forcing Apple to reject the Cheapgas proposal for inclusion in the IPhone Apps Store. Cheapgas may try to find ways for iPhone owners to download the software, but even if this alternative is possible, far fewer downloads likely will result as users do not risk “bricking” their phone, or they simply take the path of least resistance and stick with the easy app download process offered by Apple.

Does Apple’s walled garden strategy violate a fair-minded concept of network neutrality? Does Apple rightly control what can appear on iPhone screens? Do exclusivity contracts, like that negotiated between DirecTV and Dish Network satellite operators, promote diversity and innovation?

Edge Caching and Better Than Best Efforts Routing

A recent WSJ article has caused a tempest in a teapot over the possibility that standard bearers for network neutrality, such as Google, have gone over to the dark side in favor of something akin to “better than best efforts” routing. See http://online.wsj.com/article/SB122929270127905065.html; Others dispute this; see http://www.circleid.com/posts/google_seeking_preferential_treatment_isps/. In reality, Google seeks to pay a premium for distributing most likely to be requested search answers to proxy servers closer to the search initiator.

I do not see how this violates network neutrality, because Google seeks only the very same sort of expedited delivery of “mission critical” packets as CBS would for its coverage of March Madness basketball and Victoria’s Secret for its webcasted fashion shows. Better than best efforts routing, like that offered by Akamai, reduces the number of routers and the potential for lost packets and latency. Both subscribers downstream from content and upstream content providers should have the opportunity to pay for better than best efforts, plain vanilla packet routing. But network neutrality concerns weigh in when and if ISPs deliberately drop packets as a ruse to force either end users or content providers to trade up in service, or when ISPs so partition their networks to all but guarantee that best efforts routing will result in inadequate service.

The Downsides in Maximizing Spectrum Auction Proceeds

My classical economics training suggests that when governments maximize spectrum auctions—or the award of any franchise—the nation “wins” by awarding a public resource to the party most willing and able to maximize the value reflected by the asset. Surely a venture willing to part with the most money has maximum motivation to operate efficiently and to offer consumers what they want.

But might there exist long term downsides when the process extracts maximum value for the treasury? I think so, particularly in light of recent suggestions from economists that any condition on spectrum use, or any restriction on who qualifies to bid, simply reduces what the government will reap without any public benefit.

Most recently some economists grew apoplectic at the FCC’s small endorsement of wireless Carterfone principles and somewhat more open spectrum access to the C Block of the 700 MHz spectrum auction. True enough somewhat greater access translates into somewhat less revenue to the treasury, but might long standing public benefits compensate for this shortfall? I believe so, in light of how greater accessibility typically triggers greater competition, more robust and diverse applications and uses for spectrum and opportunities for spectrum users to customize their services. The wired Carterfone policy triggered competition in the market for handsets as well as uses for basic telecommunications line transport.

I will go one step farther and suggest that had the FCC maintained a cap on the amount of aggregate spectrum any single venture could control, the ensuring competition generated by market entrants would have forced incumbent carriers, such as Verizon and AT&T to compete more aggressively on price and perhaps even on network accessibility. One cannot readily quantify the downstream financial benefits when a nation establishes policies that in the short term lower auction proceeds, but surely enhances spectrum consumer welfare in the long term.

There certainly is one financial impact no one seems to consider when national treasuries reap billions in auction proceeds: the treasury probably will not receive much in the way of future tax proceeds from ventures able to spread its auction bid amount as an offset against current revenues.

Lessons From the Hawaii Telcom Bankruptcy

Hawaii Telcom, the incumbent local exchange telephone company, has filed for bankruptcy protection. Press accounts attribute this outcome to increased competition, the company’s struggle to finance capital spending while making debt payments, a significant downturn in the economy, as well as the difficulties in the transition following the leveraged buyout of the company from Verizon Communications Inc. See http://www.starbulletin.com/news/bulletin/35318244.html.

I have a few other bogus and credible explanations that may offer greater insights. When something like this happens, it seems too easy for the culprits to evade responsibility by invoking the “perfect storm” explanation as appeared in the press account above. No person or group bears any specific responsibility. Bad things happen like the breaching of flood gates and levees in New Orleans. The perfect storm defense does not just shift the blame, it deflects the responsibility and accountability issue by claiming something akin to force majeure, an unavoidable event, or series of unfortunate events.

Another bogus defense invokes the “destructive” aspect of capitalism and competition. Joseph Schumpeter, an Austrian economist coined the phrase “creative destruction” in the early 1900s to refer to the long run creative and production benefits accruing when new firms replace failing firms. Some economists consider competition destructive if after a short period of low prices, competitors exit the market and consumers end up worse off by having fewer choices as surviving firms raise prices to recoup previous losses.

In HawTel’s case the firm’s troubles have not resulted primarily from macro-level assaults on its bottom line by the business cycle, VoIP and the cost of capital. As to destructive competition, few if any informed industry observers would declare local exchange telephony a natural monopoly, entitled to insulation from competition presumably in exchange for rigorous rate of return, public utility regulation.

The massive fees extracted from the leveraged buyout of HawTel, coupled with a vastly greater debt burden, sank the firm. Time after time state and federal regulators accept the pitch that a merger or acquisition will serve the public interest by “promoting competition” and “enhancing productivity and efficiency.” In reality some leveraged buyouts make the deal makers rich and the public worse off. A firm saddled with far greater debt may not have the wherewithal to handle its vastly higher debt load. The so called efficiency gains result by firing workers and cutting corners on customer service, maintenance and infrastructure upgrades. In HawTel’s case the house of cards fell down, and it may appear that the Carlyle Group, the private equity firm buyer of HawTel, ends up with a losing investment. I suspect that with close forensic scrutiny of the deal, the Carlyle Group, was able to extract ample upfront fees to abate if not eliminate the financial harm resulting from HawTel’s bankruptcy. Hawaiian wireline telephone subscribers probably will not end up harm free.

Demand Elasticity for ICE Services

The Wall Street Journal today reported that many electricity utilities in the United States have experienced an unexpected decline in demand, particularly from residential users. It comes as no surprise to me that even essential public utility services have some demand elasticity, i.e., consumption declines when consumers feel financially strapped. When one worries about job stability, or in my case coming up with a Cornell tuition, electricity consumption becomes one of many costs subject to greater scrutiny and conservation.

Does heightened scrutiny extend to information, communications and entertainment expenses particularly as companies providing these services experiment with new ways to extract greater compensation from high volume users? I think so, particularly for consumers being weaned off “all you can eat” unmetered service which has served as the predominant pricing model for Internet access.

In economics a concept called the “fallacy of consumption” warns that if many consumers start to reduce consumption service providers and consumers can become worse off. Internet service providers, keen on extracting surcharges from power users, have to consider the consequences that heavy volume users decide to throttle down on their consumption rather than pay more.

Similarly, it may come to pass that even recession resistant industries such as cable television and mobile telephony, may have to confront the possibility that they cannot raise rates without a reduction in subscribership or shift in service tiers. That said, this week I received a bill from my wireline local exchange carrier that noted a minor rate increase. One would think that wireline telephone companies, facing the triple threat of competition from cable operators, churn to wireless options and the poor economy would not opt to raise rates. Perhaps this telephone company banks on plenty of users displaying inelastic demand for such a traditional service.

Voodoo Economic Modeling and Telecom Policy

In my capacity as a university professor, one of the ways I serve “the academy” involves blind peer review of journal manuscripts. I also have the opportunity to read the academic literature. I marvel at the number of instances where someone—typically holding a PhD in economics—uses a model to rationalize a regulatory agency decision, or to quantify the harm resulting from an ill-advised initiative. The use of complex equations, complete with Greek symbols, attempts to legitimize any sort of bogus conclusion. Worse yet, far too many of these models did not arise out of an academic’s intellectually curious mind, but instead provides some scientific basis for a public policy outcome sought by a specific stakeholder who has financially sponsored the research.

This constitutes a corruption of academic research. The sponsored researcher does not disclose the direct sponsorship, e.g. payment, or the indirect process where a foundation, institute, or think tank receives funding that flows through to the researcher. In far too many instances notwithstanding some impressive math, the sponsored researcher concludes that a merger or acquisition will serve the public interest by “promoting competition.” Other researchers quantify the financial harm to the public or national treasury should the FCC do something or refrain from doing something.

Recently I have reviewed work that purports to quantify how much wireless subscribers benefit from access to subsidized handsets. I also have read a study that purports to quantify how much application of the wireless Carterfone policy would reduce carrier revenues, create disincentives for investment in new wireless infrastructure, promote further industry consolidation and reduce carrier profitability. Wow! Such big numbers all from a policy that I enthusiastically endorse, because it promotes competition among wireless carriers who cannot easily lock subscribers into a two year service commitment, and who cannot block subscribers from accessing content and software that competes with offerings of the carrier or a favored affiliate.

Both studies conveniently ignore counter arguments to their sponsor’s objective. In the case of subsidized handsets, seeing that wireless carriers do not operate as charities, might the carriers fully recoup the subsidy through the two year service commitment and the ability to charge rates in excess of what they would be if customers could more readily change carriers? In terms of the harm to the national treasury, carriers, and “innovation” the research conveniently ignores the public interest and individual consumer benefit in having access to more and different content, not just what the carrier’s “walled garden” offers. Might a substantial consumer welfare gain accrue when wireless consumers can buy cheaper and even used handsets and possibly force wireless carriers to offer cheaper service options for subscribers who trigger no handset subsidy obligation?

It has become painfully clear to me that if you see though the math equations, the sponsored researcher know what buttons to push a public policy initiative. These include:

Quantification of how many jobs a sought after initiative will create;

Estimates of how much money a change in regulatory policy will cost consumers;

Quantified claims that a change in policy will create disincentives for investment in $x billions; extra points for using the non-word incentivize; and

Estimates of how much money regulation will cost the sponsor, with no offsetting estimate of what consumer savings will accrue from more competition.

Let’s hope a new FCC will rely less on bogus, sponsored research to legitimize an preordained policy outcome.

Unlicensed White Space Use as an Airwave “Freeze”

Professors Tom Hazlett and Vernon Smith have an op ed piece in the Oct. 3rd edition of the Wall Street Journal entitled “Don’t Let Google Freeze the Airwaves.” Apparently advocacy by Google, Microsoft, the New America Foundation and others in favor of unlicensed access to unused broadcast television channels freezes out even better reallocation of spectrum that could eventually be auctioned off for highly efficient private use.

Professors Hazlett and Smith appear to think private, unlicensed use could not possibly be as efficient as the command and control provided by a single owner keen on recouping its investments. Using the Professors’ rationale, would unlicensed Wi-Fi home network operators be better off if a single venture secured the 2.4 GHz band and packaged innovative home networking “solutions”? Not for me. I’m doing just fine managing spectrum quite efficiently using a device whose manufacturer bore no great burden proving to the FCC that the device would not cause harmful interference. Millions of Wi-Fi network operators do not have to pay a dime for the privilege of using spectrum and they surely do not need a spectrum owner to restrict their freedom and charge them for the privilege of using public spectrum.


The same principle applies to the millions of cordless telephone users. Should we have to pay a fee to the telephone company, or whoever acquired the cordless telephone frequencies for the privilege of using cordless handsets? Of course not. There are plenty of instances where spectrum use does not have to be coordinated, managed and priced by a single licensee.

Consider all the innovations and consumer friendly applications that entrepreneurs have developed for unlicensed spectrum. One upcoming application, using low powered “femtocells” makes it possible to extend licensed cellular telephone service and signal penetration into homes and offices. Some femtocells use the unlicensed Wi-Fi frequency band while others transmit on licensed cellular radio frequencies. In either case, consumers benefit equally. However, if the Wi-Fi spectrum became inventory held by a venture other than a cellular company, we could expect the Wi-Fi spectrum owner to demand gatekeeper or bottleneck compensation, or at least to delay and complicate the beneficial extension of cellular telephone service inside buildings.

I share with Professors Hazlett and Smith antipathy toward maintaining status quo spectrum allocations that favor incumbent users and ignore technological innovations. However I part company with them in their apparently absolute dismissal of the spectrum sharing between incumbents and new users. The Professors’ model replaces one incumbent with superior, but unjustified, access rights for another who paid for the right. In both instances incumbency works against free, shared use by unlicensed operators who surely can exploit technological innovations that provide innovative and entrepreneurial ways to satisfy telecommunications and information processing requirements.