Telephone and cable companies have expanded their service offerings into a triple- or quadruple play of their core service (telephony or video) plus Internet access, wireless and the other companies' core offering. To deliver this package of service the companies often have to expand bandwidth and install additional equipment at or near consumers' homes.
These companies used to install a small pedestal for the electronics and line splice needed to provide service. The right to install such equipment derived from the rights of way granted by property owners or municipal ordinanaces that convery such rights. Of course these companies qualified for free of charge rights of way based on their "public utility" characteristics. Additionally federal, state and municipal regulations existed to safeguard the public.
Telephone and cable companies have qualified for deregulation particularly based on the determination that they provide information and other non-telecommunications services. Yet these companies continue to use "legacy" rights of ways, based on their prior regulated status. Now these companies are expanding the size and footprint of the pedestals they install on private property.
My cable company attempted to install a small refrigerator-sized device on my property. These device would use electric power surely to provide services other than the core service for which the right of way was granted.
Query: can companies providing largely unregulated information services exploit rights of way granted under the pretext of a public interest need for basic telecommunications and video services? Regardless of the actual legality of doing so telephone and cable companies have expanded the size and footprint of their rights of way use and pedestal installation without having to compensate land owners.
If companies enjoy the benefits of an information services safe harbor from regulation shouldn't they lose free rights of way access? bear in mind these are the very companies that loudly claim "confiscation" when government regulates them.
Thursday, October 11, 2007
Tuesday, October 9, 2007
Consumer Protection for Cable Television But Not the Internet or Cellular Telephony
The FCC recently released an Order that extends until Oct. 2012 a prohibition on exclusive contracting by vertically integrated programmers who deliver video content via satellite. See Implementation of the Cable Television Consumer Protection and Competition Act of 1992, Development of Competition and Diversity in Video Programming Distribution: Section 628(c)(5) of the Communications Act: Sunset of Exclusive Contract Prohibition, MB Docket No. 07-29, Report and Order (rel. Oct. 1, 2007), available at: http://fjallfoss.fcc.gov/edocs_public/attachmatch/FCC-07-169A1.doc.
Section 628(c)(2)(D) of the Communications Act requires the FCC to safeguard consumers and video programming competition from vertically integrated programmers who the Commission determines still have the ability and the incentive to favor the operators with whom they are affiliated over other competitive providers. In light of the FCC’s determination that vertically integrated ventures still control, “must see” content, for which no viable substitute exists, the Commission retained the prohibition against exclusive content distribution contracts from ventures that verticially integrate content production and distribution to consumers.
This order shows the FCC in a curiously pro-consumer, market interventionist mode, quite an opposite posture vis a vis network neutrality and the Commission's typically pro-marketplace mindset. Why is this?
First there is a statutory mandate to assess the market for content by multi-channel video programming distributors. The Commission sees an ongoing market failure even as it nearly always determines that robust competition and a well oiled marketplace exists everywhere else. So a statutory mandate to examine industry conditions typically does not trigger a pro-regulatory oversight outcome.
Second perhaps there is something about television--particularly "must see" television--and voters attitudes that forces the Commission to act. Exclusive access to via cable television of a much loved program surely will trigger consumer outrage particularly if the exclusive supplier charges what an inelastic market will bear.
Third this is an issue about vertical integration by companies consumers and apparently FCC Commissioners love to hate--cable.
So take away an explicit Congressional mandate, address content perhaps even "must see" video and substitute much beloved (or feared) telephone companies and the FCC has no problem with vertical integration, exclusive contracts for content and walled gardens. The market fails for "must see" video via cable television, but the FCC has no problem whatsoever for any exclusive content deal, including video, via the Internet and cellular telephones. IPTV and cellular telephone display of video is not cable television, but it increasingly will compete with it.
Section 628(c)(2)(D) of the Communications Act requires the FCC to safeguard consumers and video programming competition from vertically integrated programmers who the Commission determines still have the ability and the incentive to favor the operators with whom they are affiliated over other competitive providers. In light of the FCC’s determination that vertically integrated ventures still control, “must see” content, for which no viable substitute exists, the Commission retained the prohibition against exclusive content distribution contracts from ventures that verticially integrate content production and distribution to consumers.
This order shows the FCC in a curiously pro-consumer, market interventionist mode, quite an opposite posture vis a vis network neutrality and the Commission's typically pro-marketplace mindset. Why is this?
First there is a statutory mandate to assess the market for content by multi-channel video programming distributors. The Commission sees an ongoing market failure even as it nearly always determines that robust competition and a well oiled marketplace exists everywhere else. So a statutory mandate to examine industry conditions typically does not trigger a pro-regulatory oversight outcome.
Second perhaps there is something about television--particularly "must see" television--and voters attitudes that forces the Commission to act. Exclusive access to via cable television of a much loved program surely will trigger consumer outrage particularly if the exclusive supplier charges what an inelastic market will bear.
Third this is an issue about vertical integration by companies consumers and apparently FCC Commissioners love to hate--cable.
So take away an explicit Congressional mandate, address content perhaps even "must see" video and substitute much beloved (or feared) telephone companies and the FCC has no problem with vertical integration, exclusive contracts for content and walled gardens. The market fails for "must see" video via cable television, but the FCC has no problem whatsoever for any exclusive content deal, including video, via the Internet and cellular telephones. IPTV and cellular telephone display of video is not cable television, but it increasingly will compete with it.
Monday, October 1, 2007
Nomination for the Worst in Sponsored Research
With so much unsponsored, under-read research in telecommunications policy, I marvel how sponsored research finds its way into hard copy journals. Having read so much solid, thoughful work generated for the Telecommunications Policy Research Conference (see tprc.org) I thought I would nominate the worst in sponsored research I recently discovered.
My nominee: Hal J. Singer's THE COMPETITIVE EFFECTS OF A CABLE TELEVISION OPERATOR'S REFUSAL TO CARRY DSL ADVERTISING, Journal of Competition Law and Economics 2006 2(2):301-33; available at: http://jcle.oxfordjournals.org/cgi/content/abstract/2/2/301?ck=nck.
First of all I know that Dr. Singer can and does generate solid work. However, this piece simply does not match what he can produce and I infer that he may not have come up with this topic on his own accord. In any event the piece suggests that notwithstanding nearly constant efforts by consulting economists to justify the largest possible relevant market to support mega-mergers in the telecom sphere, Dr. Singer concludes that refusals by cable operators to sell advertising space to competiting DSL providers impairs rivals' efficiency and harms consumers by raising the cost of Internet access.
Dr. Singer reaches this conclusion by defining the relevant market as an incredibly small sliver of the information, communications and entertainment marketplace: local television advertising on cable networks. Dr. Singer concludes that DSL providers cannot compete as effectively as they would in the absence of the "ban."
Even if Dr. Singer provided empirical evidence that DSL providers faced an actual boycott of cable television advertising, he could not prove foreclosure of advertising access by companies such as Verizon, AT&T and his benefactor Qwest. Cable television company advertising represents a tiny sliver of the total broadcast and cable television advertising for which no bar on DSL advertising exists. Surely Dr. Singer knows that cable television operators' must carry obligations require them to carry without blockage any and all advertising contained in broadcast television signals.
Practically speaking is there anyone who believes that Verizon, AT&T, and Qwest lack the ability and resources to advertise their DSL product? Does anyone buy Dr. Singer's assertion that "local television advertising on cable networks is the most efficient form of advertising for DSL providers." On my cable system the local advertising inserts made by Comcast--State College include car dealers, restaurants and furniture stores. Even if Dr. Singer were to claim that Comcast forecloses all of its franchise holders from accepting DSL advertising, does anyone think this makes DSL competitively disadvantaged vis a vis cable modem service?
My nomination for first runner up is: J. Gregory Sidak and Hal J. Singer, Überregulation Without Economics: The World Trade Organization’s Decision In The U.S.-Mexico Arbitration On Telecommunications Services, available at: http://law.indiana.edu/fclj/pubs/v57/no1/Sidak.pdf.
In this piece the authors attempt to prove that the World Trade Organization, a treaty-level multilateral organization, illegally regulates telecommunications carriers' rates and practices. Acting on a complaint filed by the United States, the WTO determined that TelMex, the dominant telecommunications service provider in Mexico, imposed impermissibly high interconnection charges. These rates bordered on extortionate and well exceeded benchmarks suggested by the International Telecommunication Union, another one of those runaway multilateral organizations.
My nominee: Hal J. Singer's THE COMPETITIVE EFFECTS OF A CABLE TELEVISION OPERATOR'S REFUSAL TO CARRY DSL ADVERTISING, Journal of Competition Law and Economics 2006 2(2):301-33; available at: http://jcle.oxfordjournals.org/cgi/content/abstract/2/2/301?ck=nck.
First of all I know that Dr. Singer can and does generate solid work. However, this piece simply does not match what he can produce and I infer that he may not have come up with this topic on his own accord. In any event the piece suggests that notwithstanding nearly constant efforts by consulting economists to justify the largest possible relevant market to support mega-mergers in the telecom sphere, Dr. Singer concludes that refusals by cable operators to sell advertising space to competiting DSL providers impairs rivals' efficiency and harms consumers by raising the cost of Internet access.
Dr. Singer reaches this conclusion by defining the relevant market as an incredibly small sliver of the information, communications and entertainment marketplace: local television advertising on cable networks. Dr. Singer concludes that DSL providers cannot compete as effectively as they would in the absence of the "ban."
Even if Dr. Singer provided empirical evidence that DSL providers faced an actual boycott of cable television advertising, he could not prove foreclosure of advertising access by companies such as Verizon, AT&T and his benefactor Qwest. Cable television company advertising represents a tiny sliver of the total broadcast and cable television advertising for which no bar on DSL advertising exists. Surely Dr. Singer knows that cable television operators' must carry obligations require them to carry without blockage any and all advertising contained in broadcast television signals.
Practically speaking is there anyone who believes that Verizon, AT&T, and Qwest lack the ability and resources to advertise their DSL product? Does anyone buy Dr. Singer's assertion that "local television advertising on cable networks is the most efficient form of advertising for DSL providers." On my cable system the local advertising inserts made by Comcast--State College include car dealers, restaurants and furniture stores. Even if Dr. Singer were to claim that Comcast forecloses all of its franchise holders from accepting DSL advertising, does anyone think this makes DSL competitively disadvantaged vis a vis cable modem service?
My nomination for first runner up is: J. Gregory Sidak and Hal J. Singer, Überregulation Without Economics: The World Trade Organization’s Decision In The U.S.-Mexico Arbitration On Telecommunications Services, available at: http://law.indiana.edu/fclj/pubs/v57/no1/Sidak.pdf.
In this piece the authors attempt to prove that the World Trade Organization, a treaty-level multilateral organization, illegally regulates telecommunications carriers' rates and practices. Acting on a complaint filed by the United States, the WTO determined that TelMex, the dominant telecommunications service provider in Mexico, imposed impermissibly high interconnection charges. These rates bordered on extortionate and well exceeded benchmarks suggested by the International Telecommunication Union, another one of those runaway multilateral organizations.
Global Best Practices in Telecom Policy
Papers presented at the 35th annual Telecommunications Policy Research Conference http://www.tprc.org/ held last weekend offered more evidence that the United States no longer offers other nations forward looking policy and regulatory models. I dare say the preoccupation with lobbying and litigation has generated an unanticipated extra liability: loss of best practices leadership.
My proof:
Rather than acknowledge that the U.S. lags many other nations in broadband penetration and affordability (see http://www.speedmatters.org/; http://www.benton.org/), representatives of the U.S. government quibble over the veracity of the statistics.
The dominant incumbent telecomms service provider in the U.K., Italy and Australia volunteered to create an access subsidiary to simplify and largely eliminate regulation of corporate activity at higher layers. U.S. carriers and the FCC summarily reject this approach as eliminating synergies, mandating "dumb" pipes and relegating any physical connection operator to perpetually regulated status.
Korea joins the EU in embracing layers/horizontal regulation in lieu of silo-based, media specific vertical regulation. U.SA. carrier reject this model for the same reasonas above.
Canada has largely solved its universal service challenge while U.S. consumers subsidize carriers with most of an annual $7 billion windfall.
Some day soon we in the United States will begin to recognize that expensive, lackluster broadband access and a highly politicized regulator and policy making process knocks off a few tenths of a percent in national productivity.
My proof:
Rather than acknowledge that the U.S. lags many other nations in broadband penetration and affordability (see http://www.speedmatters.org/; http://www.benton.org/), representatives of the U.S. government quibble over the veracity of the statistics.
The dominant incumbent telecomms service provider in the U.K., Italy and Australia volunteered to create an access subsidiary to simplify and largely eliminate regulation of corporate activity at higher layers. U.S. carriers and the FCC summarily reject this approach as eliminating synergies, mandating "dumb" pipes and relegating any physical connection operator to perpetually regulated status.
Korea joins the EU in embracing layers/horizontal regulation in lieu of silo-based, media specific vertical regulation. U.SA. carrier reject this model for the same reasonas above.
Canada has largely solved its universal service challenge while U.S. consumers subsidize carriers with most of an annual $7 billion windfall.
Some day soon we in the United States will begin to recognize that expensive, lackluster broadband access and a highly politicized regulator and policy making process knocks off a few tenths of a percent in national productivity.
Wednesday, September 26, 2007
I-Phone Restrictions Herald the Benefits on Non-Neutral Networks--Not!!
George Mason University Law and Economics Professor Thomas Hazlett has written a short piece in the Financial Times heralding the virtue of closed wireless handsets and the wisdom of markets in lieu of regulation. See http://www.msnbc.msn.com/id/20976213/
He's right that no one put a gun in the ribs of buyers more than willing to tolerate deliberate strategies to limit access to networks, software applications and services. Yes, there surely are instances where consumers face a "take it or leave it" value proposition. But in robustly competitive markets, consumers can vote with their dollars and find alternative service arrangements that offer fewer restrictions.
The increasingly concentrated cellular telephone marketplace in the U.S. offers consumers limited options. Bear in mind that most cellular advertisements claim that the network generally works. Now that's a high bar: we're the network with the fewest dropped calls!
I can agree with Professor Hazlett about the virtues of marketplace competition. But I surely disagree with him that I should ignore locked phones, walled garden access to content, two year subscription lock-ins, the absence of a market for used phones able to access cheaper service, etc. and conclude that the cellular business "is a competitive process in which independent developers, content owners, hardware vendors and networks vie to discover preferred packages and pricing."
Living in Pennsylvania I have one source for wine and spirits, the state Liquor Control Board. This government monopoly regularly hires experts to claim that its absolute monopoly accrues public benefits without any consumer harm. So I am to ignore the extortionate prices, limited customer service and a dearth of choices.
The I-Phone early adopters have to make a similar leap of faith, but I dare suggest no one likes the fact that they could do more more with their I-Phone had Apple embraced an open access environment. Successful market debut of a closed I-Phone parallels the years of marketplace success AOL achieved with its walled garden of content and features. But consumers grew weary of limits on their access and lucky for them had opportunities to find a better value proposition.
Consumers seeking to unlock the I-Phone risk voiding warranties and limited relief in any event. So much for a robustly innovative and competitive cellular marketplace.
He's right that no one put a gun in the ribs of buyers more than willing to tolerate deliberate strategies to limit access to networks, software applications and services. Yes, there surely are instances where consumers face a "take it or leave it" value proposition. But in robustly competitive markets, consumers can vote with their dollars and find alternative service arrangements that offer fewer restrictions.
The increasingly concentrated cellular telephone marketplace in the U.S. offers consumers limited options. Bear in mind that most cellular advertisements claim that the network generally works. Now that's a high bar: we're the network with the fewest dropped calls!
I can agree with Professor Hazlett about the virtues of marketplace competition. But I surely disagree with him that I should ignore locked phones, walled garden access to content, two year subscription lock-ins, the absence of a market for used phones able to access cheaper service, etc. and conclude that the cellular business "is a competitive process in which independent developers, content owners, hardware vendors and networks vie to discover preferred packages and pricing."
Living in Pennsylvania I have one source for wine and spirits, the state Liquor Control Board. This government monopoly regularly hires experts to claim that its absolute monopoly accrues public benefits without any consumer harm. So I am to ignore the extortionate prices, limited customer service and a dearth of choices.
The I-Phone early adopters have to make a similar leap of faith, but I dare suggest no one likes the fact that they could do more more with their I-Phone had Apple embraced an open access environment. Successful market debut of a closed I-Phone parallels the years of marketplace success AOL achieved with its walled garden of content and features. But consumers grew weary of limits on their access and lucky for them had opportunities to find a better value proposition.
Consumers seeking to unlock the I-Phone risk voiding warranties and limited relief in any event. So much for a robustly innovative and competitive cellular marketplace.
Thursday, September 13, 2007
The U.S. Justice Department Opposes Net Neutrality
The Justice Department has filed comments opposing network neutrality with FCC. See http://www.freepress.net/docs/doj225767.pdf. These comments do not respond to a formal request for comments as had occurred previously,
see http://fjallfoss.fcc.gov/edocs_public/attachmatch/FCC-07-31A1.pdf.
Instead they are unsolicited ex parte comments which raises questions why the Justice Department saw the need to weigh just now.
The comments are incredibly simplistic and offer further proof of how sponsored research and questionable statistics become the basis for policy, regulations and law. In a nutshell the Justice Department buys the laissez faire view that the marketplace can resolve all potential problems and no real problem has arisen.
The Justice Department can make its case only by ignoring unsponsored research, that point to real potential for problems, statistical compilations that show the broadband marketplace in the U.S. as comparatively inferior to best practices both in terms of price and quality, and the practical consequence of a cable/telco duopoly in Internet access.
By the Justice Departments reasoning it should follow that because of deregulation and commensurate marketplace competition in the wheeling of electricity and packets there could be no potential market manipulation by any single player or group in either industry. We know that in the electricity marketplace Enron traders managed to create bottlenecks, run up the spot market price and generate false congestion.
I am willing to speculate that Enron-type tactics can occur in the wheeling of packets. The fact that a Title II regulated common carrier, telephone company (Madison River Communications, LLC) could not get away with absolute blocking of packets—without detection and punishment—says nothing about the ability of unregulated or lightly regulated Title I information service providers to engage in harmful and unlawful bit discrimination.
I have stood midway in the debate on network neutrality and have identified plenty of instances where price and QOS discrimination make economic sense and do not violate applicable laws. See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=893649;
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962181. But I cannot buy the Justice Department’s preoccupation with the virtue of discrimination, having absolutely no regard for the real potential for undetected or unremediable discrimination.
I hate to think—as others have—that “the fix is in” and this nation’s Justice Department files paper on behalf of specific stakeholders such as AT&T. But as the Network Neutrality debate plays out I increasingly believe that “Bellhead” investment recovery, pricing and billing mindsets will reshape the Internet to become a hybrid of the Public Switched Telephone Network, an outcome I predicted in 2001; see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=29012.
see http://fjallfoss.fcc.gov/edocs_public/attachmatch/FCC-07-31A1.pdf.
Instead they are unsolicited ex parte comments which raises questions why the Justice Department saw the need to weigh just now.
The comments are incredibly simplistic and offer further proof of how sponsored research and questionable statistics become the basis for policy, regulations and law. In a nutshell the Justice Department buys the laissez faire view that the marketplace can resolve all potential problems and no real problem has arisen.
The Justice Department can make its case only by ignoring unsponsored research, that point to real potential for problems, statistical compilations that show the broadband marketplace in the U.S. as comparatively inferior to best practices both in terms of price and quality, and the practical consequence of a cable/telco duopoly in Internet access.
By the Justice Departments reasoning it should follow that because of deregulation and commensurate marketplace competition in the wheeling of electricity and packets there could be no potential market manipulation by any single player or group in either industry. We know that in the electricity marketplace Enron traders managed to create bottlenecks, run up the spot market price and generate false congestion.
I am willing to speculate that Enron-type tactics can occur in the wheeling of packets. The fact that a Title II regulated common carrier, telephone company (Madison River Communications, LLC) could not get away with absolute blocking of packets—without detection and punishment—says nothing about the ability of unregulated or lightly regulated Title I information service providers to engage in harmful and unlawful bit discrimination.
I have stood midway in the debate on network neutrality and have identified plenty of instances where price and QOS discrimination make economic sense and do not violate applicable laws. See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=893649;
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962181. But I cannot buy the Justice Department’s preoccupation with the virtue of discrimination, having absolutely no regard for the real potential for undetected or unremediable discrimination.
I hate to think—as others have—that “the fix is in” and this nation’s Justice Department files paper on behalf of specific stakeholders such as AT&T. But as the Network Neutrality debate plays out I increasingly believe that “Bellhead” investment recovery, pricing and billing mindsets will reshape the Internet to become a hybrid of the Public Switched Telephone Network, an outcome I predicted in 2001; see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=29012.
Sunday, September 9, 2007
Recommended Reading
I stongly recommend The radio and the Internet written by law Professor Susan Crawford:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1007221.
Professor Crawford skillfully examines how prevailing political motivations, including accommodating incumbent dominant wireless and Internet access carriers, largely dominate how the FCC will auction choice 700 MHz spectrum.
Professor Crawford concludes by stating if the FCC "get[s] this wrong, the consequences will be severe." Regretably I think your last sentence should read "The FCC got this wrong and we will suffer in the competitive global information marketplace."
I can't get over feeling that as usual the fix is in. Sponsored researchers seem to have greater credibility and reach than Professor Crawford and me. They appear to have gained traction in explaining why forcing wireless carriers to accomomdate any handset ("wireless Carterfone policy) is unnecessary, bad policy and illegal. For example, Robert Hahn, Rober Litan and Hal Singer claim that Carterfone made economic sense only in a vertically integrated uncompetitive wireline marketplace, and that it would be ill-advised if not illegal for government to receive auction revenues and impose confiscatory regulatory conditions. See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111.
After I recover from painful knee ligament reconstruction Monday 9/10 I hope to follow up with an explanation why vertical integration was not the primary reason for Carterfone and certainly does not constitute a condition precedent for applying the policy wirelessly. Besides even without strict vertical integration, the wireless oligopoly surely can leverage market power to foreclose a resale/secondary market for handsets by collectively blocking the benefits in refusing to offer lower rates for subscribers who "bring their own phones" and do not receive a handset subsidy.
Professor Crawford skillfully examines how prevailing political motivations, including accommodating incumbent dominant wireless and Internet access carriers, largely dominate how the FCC will auction choice 700 MHz spectrum.
Professor Crawford concludes by stating if the FCC "get[s] this wrong, the consequences will be severe." Regretably I think your last sentence should read "The FCC got this wrong and we will suffer in the competitive global information marketplace."
I can't get over feeling that as usual the fix is in. Sponsored researchers seem to have greater credibility and reach than Professor Crawford and me. They appear to have gained traction in explaining why forcing wireless carriers to accomomdate any handset ("wireless Carterfone policy) is unnecessary, bad policy and illegal. For example, Robert Hahn, Rober Litan and Hal Singer claim that Carterfone made economic sense only in a vertically integrated uncompetitive wireline marketplace, and that it would be ill-advised if not illegal for government to receive auction revenues and impose confiscatory regulatory conditions. See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111.
After I recover from painful knee ligament reconstruction Monday 9/10 I hope to follow up with an explanation why vertical integration was not the primary reason for Carterfone and certainly does not constitute a condition precedent for applying the policy wirelessly. Besides even without strict vertical integration, the wireless oligopoly surely can leverage market power to foreclose a resale/secondary market for handsets by collectively blocking the benefits in refusing to offer lower rates for subscribers who "bring their own phones" and do not receive a handset subsidy.
Thursday, August 30, 2007
Limited Regulatory Relief When ISPs Misbehave
Consumers and the FCC have limited recourse when an Internet Service Provider acts in a fraudulent, discriminatory or abusive manner. ISPs are not common carriers. They are classified as information service providers and do not have to comply with the regulations deriving from Title II of the Communications Act that apply to telecommunications service providers.
The FCC has a back door way to regulate ISPs, something called "ancillary jurisdiction" based on the Commission's general public interest mandate contained in Title I of the Communications Act. The FCC invoked this authority to regulate cable television as potentially harmful to the availability of "free" broadcast television. Recently the FCC has stretched its Title I authority to
impose selective re-regulation of ISPs.
However, the FCC's limited regulation of ISPs will do nothing to prevent the cable modem/DSL duopoly for abusing collective market power. Even as the FCC plays games with broadband statistics to show how advanced we are compared to other nations, the data shows that nationwide over 96% of all broadband services are supplied by two types of ventures: cable television companies typically allocating 6MHz of bandwidth and telephone companies typically expanding the copper wire local loop by 1500 kHz.
By the FCC's self-fulfilling prophesy the broadband marketplace is robustly competitive and any extortionate or draconian ISP action would trigger a mass migration of subscribers. The FCC calculates that I have 9 broadband choices in my zip code, so I should be able to "vote with my dollars." In reality I have one and only one broadband option: $60 cable modem service. I can't get DSL, cellular broadband offers dialup 60-80 kilobits per second and satellite offers slow speed broadband at double the price.
So much for marketplace self-regulation.
The FCC has a back door way to regulate ISPs, something called "ancillary jurisdiction" based on the Commission's general public interest mandate contained in Title I of the Communications Act. The FCC invoked this authority to regulate cable television as potentially harmful to the availability of "free" broadcast television. Recently the FCC has stretched its Title I authority to
impose selective re-regulation of ISPs.
However, the FCC's limited regulation of ISPs will do nothing to prevent the cable modem/DSL duopoly for abusing collective market power. Even as the FCC plays games with broadband statistics to show how advanced we are compared to other nations, the data shows that nationwide over 96% of all broadband services are supplied by two types of ventures: cable television companies typically allocating 6MHz of bandwidth and telephone companies typically expanding the copper wire local loop by 1500 kHz.
By the FCC's self-fulfilling prophesy the broadband marketplace is robustly competitive and any extortionate or draconian ISP action would trigger a mass migration of subscribers. The FCC calculates that I have 9 broadband choices in my zip code, so I should be able to "vote with my dollars." In reality I have one and only one broadband option: $60 cable modem service. I can't get DSL, cellular broadband offers dialup 60-80 kilobits per second and satellite offers slow speed broadband at double the price.
So much for marketplace self-regulation.
Monday, August 20, 2007
The Power of a Slogan or Phrase
Mike Nelson, a former White House technology policy advisor in the Clinton administration now affiliated with IBM, offered the following advice on the Washington political process: distill your message into a slogan or phrase that can fit on a bumper sticker.
Officials in the AT&T Bell System knew this when they sought to prevent the separation of telephone handsets from telephone service. They argued that allowing consumers to own their own phone would violate "systemic integrity" and "harm" employees. In response to proposals to break up the Bell System, they argued "the system is the solution." Who would want to allow competition to harm networks and people?
Responding to consumer dissatisfaction at customer "service" and two year lock in contracts as well as the proposal to allow freer use of handsets, the wireless sloganeers again invoke technical harm as one good reason not to allow handset flexibility.
In the 1970s as now the risk of technical harm can easily be reduced or eliminated. Locking cellphones to one network, disabling handset features and preventing a seocndary market for cheap phones are anticompetitive plain and simple.
Officials in the AT&T Bell System knew this when they sought to prevent the separation of telephone handsets from telephone service. They argued that allowing consumers to own their own phone would violate "systemic integrity" and "harm" employees. In response to proposals to break up the Bell System, they argued "the system is the solution." Who would want to allow competition to harm networks and people?
Responding to consumer dissatisfaction at customer "service" and two year lock in contracts as well as the proposal to allow freer use of handsets, the wireless sloganeers again invoke technical harm as one good reason not to allow handset flexibility.
In the 1970s as now the risk of technical harm can easily be reduced or eliminated. Locking cellphones to one network, disabling handset features and preventing a seocndary market for cheap phones are anticompetitive plain and simple.
Sunday, August 19, 2007
Two Recent Powerpoint Presentations on Net Neutrality and DRM
If your interested in network neutrality my latest thoughts on the subject are available at: http://ijoc.org/ojs/index.php/ijoc/article/view/160/86
and as a powerpoint presentation at: http://www.personal.psu.edu/faculty/r/m/rmf5/AEJMC%202007.ppt.
I also examine net neutrality in the context of Digital Rights Management achieved through deep packet inspection: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=995273; powerpoint presentation at: http://www.personal.psu.edu/faculty/r/m/rmf5/IPSC%202007%20Frieden.ppt.
I always appreciate thoughtful questions and comments.
and as a powerpoint presentation at: http://www.personal.psu.edu/faculty/r/m/rmf5/AEJMC%202007.ppt.
I also examine net neutrality in the context of Digital Rights Management achieved through deep packet inspection: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=995273; powerpoint presentation at: http://www.personal.psu.edu/faculty/r/m/rmf5/IPSC%202007%20Frieden.ppt.
I always appreciate thoughtful questions and comments.
Monday, August 6, 2007
Protecting the Wireless Crown Jewel
The incumbent wireline telephone companies increasingly rely on wireless service revenues to generate growth and upward trajectory in their stock. Accordingly it should come as no surprise that they would gear up their formidable public policy/sponsored research machinery to oppose any initiative that would generate more competition, enhance consumer welfare and possibly reduce profit.
That explains the noisy, but largely bogus explanations why it makes no sense to allow consumers to access any cellular network with any cellular telephone. A high ranking official at Verizon opposes the applying Carterfone principles to wireless on three grounds: 1) separating handsets from service was necessary for a monopoly, but not a competitive market; 2) separation would involve “sweeping government intervention;” and 3) an any handset rule would risk harm to wireless networks. see Link Hoewing, The Hype in the Skype Petition; available at http://policyblog.verizon.com/PolicyBlog/Blogs/policyblog/LinkHoewing9/294/The-Hype-in-the-Skype-Petition.aspx.
Ouch. These rationales come across as rehashed Bell System doctrine that made no sense in the 1970s and surely makes no sense now. Separating handsets from service is a smart regulatory remedy regardless of the market structure of the wireless business. The FCC would unleash billions of dollars in savings to consumers simply by allowing them to extend the usable lives of existing handsets and allow cheapskakes like me to activate the $1 handset I can buy at garage sales. Indeed some of the savings would flow to cellular operators who would have fewer handsets to subsidize. Of course the operators are not balking at having to subsidize handset sales. They want to preserve the two year lock in that the subsidy supports, limit customer churn and reduce price competition.
If consumers could bring their own phone to a new service arrangement, cellular operators might have to offer lower service rates, because they would have no subsidy obligation. Cellphone operators claim to allow consumers to use a “compatible” phone, but consumers receive no benefit through lower rates. U.S. cellphone operators do not want you to know that in other places in the world consumers have access to both cheap prepaid service, using calling cards, as well as cheap almost “throwaway” handsets geared to the prepaid services. These arrangements have no lock in and offer a far better value proposition than what Virgin and other so call mobile virtual network operators offer in the U.S.
I do not see how government sweeps in and pervasively regulates the commercial mobile radio service simply by requiring the unbundling of service and handset sales. If anything government remedies a market failure. When over 60% of all handset sales occur at cellphone company stores and another 30+% from a handful of Big Box stores, such as Best Buy, Circuit City and Walmart, I believe that the carriers have blocked the development of a secondary and resale market for handsets. According to the MIT Dictionary of Modern Economics market failure occurs as a result of the “inability of a system of private markets to provide certain goods either at all or at the most desirable or ‘optima’ level.” Safeguarding 95% to a captive, single distribution chain strikes me as viciously anticompetitive.
The harm to the network argument reminds me of the Bell System claim that attaching a non-Western Electric handset would “violate systemic integrity.” Of course systemic integrity had nothing to do with potential or real technical harm. The FCC established a lab certification and common interface requirement and the rest is history. The same could be done for wireless handsets.
Mr. Hoewing claims unbundling has not generated any major innovations in telephone handsets, but that misses the point in two ways. First he ignores that separating handsets from the network forced the network to remain largely neutral and accessible by any device and for any services. This did not relegate underlying carriers to operating “dumb” networks in perpetuity, but it did allow end users to inject network management functions at the edge instead of having to pay for a finite set of centralized options available from the carrier. Second, Mr. Hoewing ignores the widespread proliferation of handset types available in a competitive marketplace.
On the other hand what great innovations have the U.S. cellphone carriers provided consumers? Ringtones, short messaging and slow speed Internet access comes to mind. Compare that level of progress with the scope of innovation in the Internet.
That explains the noisy, but largely bogus explanations why it makes no sense to allow consumers to access any cellular network with any cellular telephone. A high ranking official at Verizon opposes the applying Carterfone principles to wireless on three grounds: 1) separating handsets from service was necessary for a monopoly, but not a competitive market; 2) separation would involve “sweeping government intervention;” and 3) an any handset rule would risk harm to wireless networks. see Link Hoewing, The Hype in the Skype Petition; available at http://policyblog.verizon.com/PolicyBlog/Blogs/policyblog/LinkHoewing9/294/The-Hype-in-the-Skype-Petition.aspx.
Ouch. These rationales come across as rehashed Bell System doctrine that made no sense in the 1970s and surely makes no sense now. Separating handsets from service is a smart regulatory remedy regardless of the market structure of the wireless business. The FCC would unleash billions of dollars in savings to consumers simply by allowing them to extend the usable lives of existing handsets and allow cheapskakes like me to activate the $1 handset I can buy at garage sales. Indeed some of the savings would flow to cellular operators who would have fewer handsets to subsidize. Of course the operators are not balking at having to subsidize handset sales. They want to preserve the two year lock in that the subsidy supports, limit customer churn and reduce price competition.
If consumers could bring their own phone to a new service arrangement, cellular operators might have to offer lower service rates, because they would have no subsidy obligation. Cellphone operators claim to allow consumers to use a “compatible” phone, but consumers receive no benefit through lower rates. U.S. cellphone operators do not want you to know that in other places in the world consumers have access to both cheap prepaid service, using calling cards, as well as cheap almost “throwaway” handsets geared to the prepaid services. These arrangements have no lock in and offer a far better value proposition than what Virgin and other so call mobile virtual network operators offer in the U.S.
I do not see how government sweeps in and pervasively regulates the commercial mobile radio service simply by requiring the unbundling of service and handset sales. If anything government remedies a market failure. When over 60% of all handset sales occur at cellphone company stores and another 30+% from a handful of Big Box stores, such as Best Buy, Circuit City and Walmart, I believe that the carriers have blocked the development of a secondary and resale market for handsets. According to the MIT Dictionary of Modern Economics market failure occurs as a result of the “inability of a system of private markets to provide certain goods either at all or at the most desirable or ‘optima’ level.” Safeguarding 95% to a captive, single distribution chain strikes me as viciously anticompetitive.
The harm to the network argument reminds me of the Bell System claim that attaching a non-Western Electric handset would “violate systemic integrity.” Of course systemic integrity had nothing to do with potential or real technical harm. The FCC established a lab certification and common interface requirement and the rest is history. The same could be done for wireless handsets.
Mr. Hoewing claims unbundling has not generated any major innovations in telephone handsets, but that misses the point in two ways. First he ignores that separating handsets from the network forced the network to remain largely neutral and accessible by any device and for any services. This did not relegate underlying carriers to operating “dumb” networks in perpetuity, but it did allow end users to inject network management functions at the edge instead of having to pay for a finite set of centralized options available from the carrier. Second, Mr. Hoewing ignores the widespread proliferation of handset types available in a competitive marketplace.
On the other hand what great innovations have the U.S. cellphone carriers provided consumers? Ringtones, short messaging and slow speed Internet access comes to mind. Compare that level of progress with the scope of innovation in the Internet.
Monday, July 30, 2007
Wireless State of Play: When Good Enough is the Enemy of Greatness
I marvel at the creativeness in the opposition to policy initiatives that I believe would confer ample consumer benefits by imposing lawful interconnection and accessibility requirements. You should consider reading closely the rationales proposed by Robert Hahn, Robert Litan and Hal Singer, The Economics of 'Wireless Net Neutrality' http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111
for objecting to rules that would force wireless carriers to comply with regulations long since applied to wireline carriers with great consumer benefits.
Professor Tim Wu proposed that wireless carriers comply with rules that would force them to decouple service from the sale of handsets and to comply with network neutrality principles. See Wireless Net Neutrality: Cellular Carterfone on Mobile Networks, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962027.
Opponents to the Wu proposal offer a glowing endorsement of how good the wireless infrastructure has become in the U.S. presumably because of light regulation and robust marketplace competition. Messrs Hahn, Litan and Singer would put the burden of proving market failure on Professor Wu in light of the wonderful output of self-regulation and competition. In other words regulatory safeguards, like the ones suggested by Professor Wu, are unnecessary and were applied when a vertically integrated monopolist operated.
First of all I marvel at how quickly opponents of wireless regulation ignore the still applicable common carrier requirements. Cellular carriers are subject to Title II of the Communications Act, including compulsory interconnection in a fair and nondiscriminatory manner. When 95% of all cellphones are sold at the time the cellular operator initiates service, I know there is an interconnection issue and a bundling problem. The cellular operator does not want anyone to buy a $2 phone at a garage sale, because a secondary market for handsets would prevent carriers from locking in consumers to 2 year service “commitments.” Additionally the carriers would lose any argument that they need two years of service to recoup the subsidy they paid to sell a $400 phone for much less. Yes the cellular carrier might reluctantly agree to interconnect and provide service to the used phone, but the consumer would have to pay rates as though the carrier supplied an expensive new phone.
So opponents to wireless net neutrality ignore the rents carriers capture when consumers can’t engage in a transaction that involves cellular service only. When wireline telephone service subscribers got the “right” to “own their own phone” telephone service rates dropped significantly because the carrier no longer could bundle the lease rate for the phone along with various maintenance fees.
Fair interconnection terms are needed for wireless carriers regardless of whether they are vertically integrated with a handset manufacturer and whether they operate as a monopoly. The integration allows any carrier to capture revenues well in excess of the handset subsidy. Indeed Iphone customers seem to be paying full price for the handset and cellular service rates as though a handset subsidy existed. Even in the absence of a monopoly the handful of cellphone service options available to consumers does not include lower cost bring your own handset rates.
I also take issue with the self-congratulatory assessment of the cellphone industry in the U.S. Contrary to what Messrs. Han, Litan and Singer would have you believe the U.S. does not come anywhere close to best practices in wireless in terms of throughout, cost, features, and even market penetration. The ITU ranks the U.S. at 63rd in wireless penetration. See http://www.itu.int/osg/spu/publications/digitalife/;
See also, http://www.itu.int/ITU-D/icteye/Reporting/ShowReportFrame.aspx?ReportName=/WTI/CellularSubscribersPublic&RP_intYear=2005&RP_intLanguageID=1;
High speed, broadband service is nothing like that available in Europe and Asia in terms of accessibility and price. The ITU reports that broadband access costs 49 cents per 100 kilobits per second in the U.S. versus 7 cents in Japan and 8 cents in Korea. See http://www.itu.int/osg/spu/publications/digitalife/statisticalhighlights.html.
Of course when statistics do not support the party line and display inconvenient truths, stakeholders shoot the messenger and challenge the veracity of the statistics. In the wireless arena mediocre to good performance provides the basis for rejecting initiatives that would force carriers to become better.
for objecting to rules that would force wireless carriers to comply with regulations long since applied to wireline carriers with great consumer benefits.
Professor Tim Wu proposed that wireless carriers comply with rules that would force them to decouple service from the sale of handsets and to comply with network neutrality principles. See Wireless Net Neutrality: Cellular Carterfone on Mobile Networks, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962027.
Opponents to the Wu proposal offer a glowing endorsement of how good the wireless infrastructure has become in the U.S. presumably because of light regulation and robust marketplace competition. Messrs Hahn, Litan and Singer would put the burden of proving market failure on Professor Wu in light of the wonderful output of self-regulation and competition. In other words regulatory safeguards, like the ones suggested by Professor Wu, are unnecessary and were applied when a vertically integrated monopolist operated.
First of all I marvel at how quickly opponents of wireless regulation ignore the still applicable common carrier requirements. Cellular carriers are subject to Title II of the Communications Act, including compulsory interconnection in a fair and nondiscriminatory manner. When 95% of all cellphones are sold at the time the cellular operator initiates service, I know there is an interconnection issue and a bundling problem. The cellular operator does not want anyone to buy a $2 phone at a garage sale, because a secondary market for handsets would prevent carriers from locking in consumers to 2 year service “commitments.” Additionally the carriers would lose any argument that they need two years of service to recoup the subsidy they paid to sell a $400 phone for much less. Yes the cellular carrier might reluctantly agree to interconnect and provide service to the used phone, but the consumer would have to pay rates as though the carrier supplied an expensive new phone.
So opponents to wireless net neutrality ignore the rents carriers capture when consumers can’t engage in a transaction that involves cellular service only. When wireline telephone service subscribers got the “right” to “own their own phone” telephone service rates dropped significantly because the carrier no longer could bundle the lease rate for the phone along with various maintenance fees.
Fair interconnection terms are needed for wireless carriers regardless of whether they are vertically integrated with a handset manufacturer and whether they operate as a monopoly. The integration allows any carrier to capture revenues well in excess of the handset subsidy. Indeed Iphone customers seem to be paying full price for the handset and cellular service rates as though a handset subsidy existed. Even in the absence of a monopoly the handful of cellphone service options available to consumers does not include lower cost bring your own handset rates.
I also take issue with the self-congratulatory assessment of the cellphone industry in the U.S. Contrary to what Messrs. Han, Litan and Singer would have you believe the U.S. does not come anywhere close to best practices in wireless in terms of throughout, cost, features, and even market penetration. The ITU ranks the U.S. at 63rd in wireless penetration. See http://www.itu.int/osg/spu/publications/digitalife/;
See also, http://www.itu.int/ITU-D/icteye/Reporting/ShowReportFrame.aspx?ReportName=/WTI/CellularSubscribersPublic&RP_intYear=2005&RP_intLanguageID=1;
High speed, broadband service is nothing like that available in Europe and Asia in terms of accessibility and price. The ITU reports that broadband access costs 49 cents per 100 kilobits per second in the U.S. versus 7 cents in Japan and 8 cents in Korea. See http://www.itu.int/osg/spu/publications/digitalife/statisticalhighlights.html.
Of course when statistics do not support the party line and display inconvenient truths, stakeholders shoot the messenger and challenge the veracity of the statistics. In the wireless arena mediocre to good performance provides the basis for rejecting initiatives that would force carriers to become better.
Friday, July 6, 2007
How Many Broadband Providers Does Your Zipcode Have?
For grins--or groans--I researched the FCC's broadband statistics to find out how many broadband providers my 16870 zip code has. Nine! See http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/hzip0606.pdf
I live in a mostly suburban/rural area about six miles from Penn State University. Verizon cannot or will not offer DSL to me, but they apparently serve someone--perhaps a school or library. I can get cable modem service and the FCC must also have counted cellular even though the promised 60-80 kilobits per second does not meet the low bar of 200 kbps established by the FCC. Add satellite service so I guess it's possible that we can get to 9.
The problem with this figure is that one might infer a vigorous facilities-based competitive marketplace exists in my hinterland locale.
No way.
I live in a mostly suburban/rural area about six miles from Penn State University. Verizon cannot or will not offer DSL to me, but they apparently serve someone--perhaps a school or library. I can get cable modem service and the FCC must also have counted cellular even though the promised 60-80 kilobits per second does not meet the low bar of 200 kbps established by the FCC. Add satellite service so I guess it's possible that we can get to 9.
The problem with this figure is that one might infer a vigorous facilities-based competitive marketplace exists in my hinterland locale.
No way.
Confiscation of ILEC Property?
The Telecommunications Act of 1996 ordered incumbent local exchange carriers to unbundle their networks as one of their common carrier interconnection responsibilities. Specifically Section 251 establishes “the duty to provide, to any requesting telecommunications carrier for the provision of a telecommunications service, nondiscriminatory access to network elements on an unbundled basis at any technically feasible point on rates, terms, and conditions that are just, reasonable, and nondiscriminatory in accordance with the terms and conditions of the agreement and the requirements of this section and section 252. An incumbent local exchange carrier shall provide such unbundled network elements in a manner that allows requesting carriers to combine such elements in order to provide such telecommunications service.”
Incumbent carriers have claimed that the FCC’s implementation of this requirement resulted in a taking or confiscation of their property. In a previous post I reported that the Supreme Court validated the general implementation plan of the FCC even as lower courts rejected specific elements of the plan.
I’m trying to delve more deeply into whether and how an interconnection responsibility of a telecommunications common carrier might violate their property rights. An argument could be made if the interconnecting carrier ended up having to invest in more facilities to accommodate the aggregate demands of carriers requesting interconnection using unbundled network elements. Likewise an argument could be made that interconnection foreclosed other more profitable undertakings, a type of opportunity cost.
But neither worst case scenario ever occurred. Using the FCC’s statistics, at the high point of having to accommodate competitive local exchange carrier unbundling requirements the incumbent carriers had to release 13.5% of their lines to competitors. See http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-270133A1.pdf, Table 4. The most recent figure is 9.3%.
Bear in mind the incumbent carriers received compensation for leasing lines. They dispute the rate of compensation, because pricing using forward looking, replacement costs or the long run incremental cost falls below—possibly well below—what the incumbent carrier would demand in commercial negotiations or what it would file as a tariff rate at the FCC.
Accepting the argument that unbundled network elements were provided at less than fully compensatory rates, the incumbent carriers surely had ample capacity to satisfy a lawful mandate while also seeking higher profits from their own retail and wholesale customers.
How could allocating no more than 13.5% of inventory, available at compulsorily "promotional" rates, constitute a taking?
Incumbent carriers have claimed that the FCC’s implementation of this requirement resulted in a taking or confiscation of their property. In a previous post I reported that the Supreme Court validated the general implementation plan of the FCC even as lower courts rejected specific elements of the plan.
I’m trying to delve more deeply into whether and how an interconnection responsibility of a telecommunications common carrier might violate their property rights. An argument could be made if the interconnecting carrier ended up having to invest in more facilities to accommodate the aggregate demands of carriers requesting interconnection using unbundled network elements. Likewise an argument could be made that interconnection foreclosed other more profitable undertakings, a type of opportunity cost.
But neither worst case scenario ever occurred. Using the FCC’s statistics, at the high point of having to accommodate competitive local exchange carrier unbundling requirements the incumbent carriers had to release 13.5% of their lines to competitors. See http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-270133A1.pdf, Table 4. The most recent figure is 9.3%.
Bear in mind the incumbent carriers received compensation for leasing lines. They dispute the rate of compensation, because pricing using forward looking, replacement costs or the long run incremental cost falls below—possibly well below—what the incumbent carrier would demand in commercial negotiations or what it would file as a tariff rate at the FCC.
Accepting the argument that unbundled network elements were provided at less than fully compensatory rates, the incumbent carriers surely had ample capacity to satisfy a lawful mandate while also seeking higher profits from their own retail and wholesale customers.
How could allocating no more than 13.5% of inventory, available at compulsorily "promotional" rates, constitute a taking?
Friday, June 29, 2007
FCC Makes the Right Call
The FCC today issued a Declaratory Ruling stating that "that no carriers, including interexchange carriers, may block, choke, reduce or restrict traffic in any way."
available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-07-2863A1.doc. I trust that statement is clear enough for the wireline and wireless carriers who decided they could serve as judge, jury and executioner when one of their telecom brethren gamed the system.
Several major carriers decided not to complete calls to clever independent local exchange carriers who pump up call volume and access charge interconnection payments by offering "free" conference and international calling. Ample FCC and case law precedent conclusively states that telecommunications service providers operate as common carriers. Likewise the "Filed Rate Doctrine" binds both carriers and end users to pay tariffed rates. If the blocking carriers did not like the access charge rate of compensation--and they surely should not like 7 or cents per minute rates--then they can contest the tariff when filed.
Remarkably the FCC made the right call.
available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-07-2863A1.doc. I trust that statement is clear enough for the wireline and wireless carriers who decided they could serve as judge, jury and executioner when one of their telecom brethren gamed the system.
Several major carriers decided not to complete calls to clever independent local exchange carriers who pump up call volume and access charge interconnection payments by offering "free" conference and international calling. Ample FCC and case law precedent conclusively states that telecommunications service providers operate as common carriers. Likewise the "Filed Rate Doctrine" binds both carriers and end users to pay tariffed rates. If the blocking carriers did not like the access charge rate of compensation--and they surely should not like 7 or cents per minute rates--then they can contest the tariff when filed.
Remarkably the FCC made the right call.
Wednesday, June 20, 2007
Network Neutrality and Packet Sniffing
I have just completed the draft of a paper on the impact of deep packet inspection on the Network Neutrality debate and digital rights management. It's available on my web site: http://www.personal.psu.edu/faculty/r/m/rmf5/
and in a day or two in pdf. at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928.
In a nutshell I sugest that sniffing packet headers may disqualify ISPs from safe harbor copyright liability exemptions, because the ISP will have every opportunity to read (and comply with) DRM instructions. The potential disqualification raises some of the costs an ISP might have to incur in its quest to operate non-neutral networks, i.e., neterworks that use deep packet inspection to tier services by prices and QOS.
I would appreciate your thoughts on this paper.
and in a day or two in pdf. at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=102928.
In a nutshell I sugest that sniffing packet headers may disqualify ISPs from safe harbor copyright liability exemptions, because the ISP will have every opportunity to read (and comply with) DRM instructions. The potential disqualification raises some of the costs an ISP might have to incur in its quest to operate non-neutral networks, i.e., neterworks that use deep packet inspection to tier services by prices and QOS.
I would appreciate your thoughts on this paper.
Thursday, June 14, 2007
Spam Filter Drives Wedge in Marriage
All of a sudden I lost email communications with my wife, another Penn State employee. I could send and receive emails with the rest of the world, but not my wife. Could this be an omen: do I need to pay greater attention to spousal communications? Might someone have the sick idea of meddling with my marriage?
It took hours of forensic examination by IT professionals at Penn State to find the answer. Blame it on Blogspot! My wife's mail server contains a potent spam filter that in its infinite wisdom determined that any REFERENCE to blogspot constituted probable cause to DELETE the message.
I had proudly added on my email signature a reference to Telefrieden thereby triggering the spam filter at my wife's Penn State server.
What can we learn from this unfortunate episode? Filters may be under- and over-inclusive, for sure. Might the spam filter software company render itself liable for damages by being overinclusive?
My remedy to the problem: eliminate the blogspot reference in my email signature. So even fewer people will know about TeleFrieden. Please tell your friends about this site as my email signature no longer can.
It took hours of forensic examination by IT professionals at Penn State to find the answer. Blame it on Blogspot! My wife's mail server contains a potent spam filter that in its infinite wisdom determined that any REFERENCE to blogspot constituted probable cause to DELETE the message.
I had proudly added on my email signature a reference to Telefrieden thereby triggering the spam filter at my wife's Penn State server.
What can we learn from this unfortunate episode? Filters may be under- and over-inclusive, for sure. Might the spam filter software company render itself liable for damages by being overinclusive?
My remedy to the problem: eliminate the blogspot reference in my email signature. So even fewer people will know about TeleFrieden. Please tell your friends about this site as my email signature no longer can.
Monday, June 11, 2007
Separating Cellular Service From Handsets
You may know that Skype has proposed the unbundling of cellular service from the sale of handsets; see http://svartifoss2.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=6518909730. The FCC started the wireline equivalent of this in 1968, so why has it not occurred in the wireless arena?
One would think market separation as an option would serve the public interest and save money for consumers and possibly cellular operators as well. If you don't need the latest and greatest handset you could pick up a perfectly good handset for a couple of dollars. The cellular operator could activate service perhaps at a lower monthly rate and certainly without a 1-2 year lock-in period, becuase customer acquisition costs would near zero. There would be no handset to subsidize. But of course the handset provides the means (and justification) for the lock-in in the first place.
Cellular operators must have reached the conclusion that they have more to gain by locking in consumers to a 2 year service commitment, coupled with $175 early termination charges, than they lose in having to subsidize the cost of a handset. As usual there are plenty of hired scholars willing to ignore this simple fact and come up with spurious reasons why wireless unbundling is a bad idea and has no parallel to the successful wireline unbundling. For example, see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111.
Much of the opposition to wireless unbundling hypes the competitiveness and innovativeness of the industry and the fact that wireline unbundling occurred in a monopolized and vertically integrated environment. Fair enough, but what about the lost consumer welfare for people like me who want a month to month contract and the flexibility to vote with my feet to a better deal? If I can make do with a $5 garage sale handset, why shouldn't I get a cheaper rate plan?
BTW all cellular subscribers have paid hundreds of millions for number portability--the ability to migrate carriers while retaining an existing telephone number. The two year lock ins and the absence of a market for used handsets limits our ability to available ourselves of number portability.
One would think market separation as an option would serve the public interest and save money for consumers and possibly cellular operators as well. If you don't need the latest and greatest handset you could pick up a perfectly good handset for a couple of dollars. The cellular operator could activate service perhaps at a lower monthly rate and certainly without a 1-2 year lock-in period, becuase customer acquisition costs would near zero. There would be no handset to subsidize. But of course the handset provides the means (and justification) for the lock-in in the first place.
Cellular operators must have reached the conclusion that they have more to gain by locking in consumers to a 2 year service commitment, coupled with $175 early termination charges, than they lose in having to subsidize the cost of a handset. As usual there are plenty of hired scholars willing to ignore this simple fact and come up with spurious reasons why wireless unbundling is a bad idea and has no parallel to the successful wireline unbundling. For example, see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983111.
Much of the opposition to wireless unbundling hypes the competitiveness and innovativeness of the industry and the fact that wireline unbundling occurred in a monopolized and vertically integrated environment. Fair enough, but what about the lost consumer welfare for people like me who want a month to month contract and the flexibility to vote with my feet to a better deal? If I can make do with a $5 garage sale handset, why shouldn't I get a cheaper rate plan?
BTW all cellular subscribers have paid hundreds of millions for number portability--the ability to migrate carriers while retaining an existing telephone number. The two year lock ins and the absence of a market for used handsets limits our ability to available ourselves of number portability.
Wednesday, May 23, 2007
Capitol Hill Briefing on Universal Service
Several of my Penn State colleagues and I briefed Senate and House staffers on universal service reform. Some of our papers are available at: http://www.benton.org/index.php?q=broadband_benefits.
It's been quite some time since I last made the rounds on Capitol Hill, but remarkably the process and the environment have changed little. The staffers are remarkably young and typically are both earnest and qualified. They welcomed our viewpoints, in part because we have the luxury of being able to answer their questions without a fixed party line. Having limited financial sponsorship--with no strings attached--appears to be the exception.
Additionally the staffer had a keen interest in hearing from anyone other than the telephone companies, their trade associations and their sponsored academic researchers. Several staffers mentioned how carpet bombing the Hill can work against stakeholders' interests. On the other hand an issue such as universal service has a substantial political and employment component.
Staffers want to find a way to avoid stranding sunk wireline telco investment, but also transition to an environment that recognizes voice telephony as a software application typically available at little cost.
It's been quite some time since I last made the rounds on Capitol Hill, but remarkably the process and the environment have changed little. The staffers are remarkably young and typically are both earnest and qualified. They welcomed our viewpoints, in part because we have the luxury of being able to answer their questions without a fixed party line. Having limited financial sponsorship--with no strings attached--appears to be the exception.
Additionally the staffer had a keen interest in hearing from anyone other than the telephone companies, their trade associations and their sponsored academic researchers. Several staffers mentioned how carpet bombing the Hill can work against stakeholders' interests. On the other hand an issue such as universal service has a substantial political and employment component.
Staffers want to find a way to avoid stranding sunk wireline telco investment, but also transition to an environment that recognizes voice telephony as a software application typically available at little cost.
Thursday, May 17, 2007
The State of Telecom Policy Discourse in Washington
This week I accepted an invitation of Educause to appear on a panel discussing network neutrality. See http://www.educause.edu/about. As in my writing I try to offer an unbiased perspective that can see both sides particularly in light of the fact that I avoid financial sponsorship of my academic work.
Scott Cleland, a paid network neutrality opponent and agent provocateur attended and had particularly obnoxious and inappropriate comments about my presentation. See http://www.precursorblog.com/node/397. In a nutshell Scott could not come up with anything substantively incorrect about my presentation so he dissed it by writing that he could not understand it and that it offered nothing substantive.
I soon will post the presentation on my web site at:http://www.personal.psu.edu/faculty/r/m/rmf5/. Additionally I wrote Scott the following:
Hello Scott:You are sorely mistaken if you think I am an "ardent" supporter of net neutrality.As a matter of fact you know damn well I expressed clear support for most types of price and service discrimination and that my point of view does not jibe 100% with the net neutrality folks. Did you not hear me characterize the save the net folks as viewing change as "curtains for the free world."?
I know it does not make good copy to give me some credit for a fair and balanced perspective, but that is exactly what I offer as an unsponsored and unbiased observer.It is both unfair and obnoxious to deem my presentation and thoughtful commentary on network neutrality as nothing you can understand. Why not review the presentation and paper substantively and in the true spirit of peer review get back to me on areas with which you have a problem. I will need your email address to send you the presentation, but in the event I never hear from you I'll attach it here in any event.
Two papers I have written on the subject that quite frankly lies midway between Mssrs. Wu and Yoo are available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=893649 andhttp://www.personal.psu.edu/faculty/r/m/rmf5/Internet3.htm.
So here's the state of play in D.C.: hire a junkyard dog to spew vitriol and personal attacks. Is there any wonder why the level of discourse and analysis is so low? I take time out to prepare a fair and balanced point of view that Scott from his bully pulpit deems as echoing the collective brilliance and moral superiority of the panel. Ouch. I like to come across as self-effacing.
Scott Cleland, a paid network neutrality opponent and agent provocateur attended and had particularly obnoxious and inappropriate comments about my presentation. See http://www.precursorblog.com/node/397. In a nutshell Scott could not come up with anything substantively incorrect about my presentation so he dissed it by writing that he could not understand it and that it offered nothing substantive.
I soon will post the presentation on my web site at:http://www.personal.psu.edu/faculty/r/m/rmf5/. Additionally I wrote Scott the following:
Hello Scott:You are sorely mistaken if you think I am an "ardent" supporter of net neutrality.As a matter of fact you know damn well I expressed clear support for most types of price and service discrimination and that my point of view does not jibe 100% with the net neutrality folks. Did you not hear me characterize the save the net folks as viewing change as "curtains for the free world."?
I know it does not make good copy to give me some credit for a fair and balanced perspective, but that is exactly what I offer as an unsponsored and unbiased observer.It is both unfair and obnoxious to deem my presentation and thoughtful commentary on network neutrality as nothing you can understand. Why not review the presentation and paper substantively and in the true spirit of peer review get back to me on areas with which you have a problem. I will need your email address to send you the presentation, but in the event I never hear from you I'll attach it here in any event.
Two papers I have written on the subject that quite frankly lies midway between Mssrs. Wu and Yoo are available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=893649 andhttp://www.personal.psu.edu/faculty/r/m/rmf5/Internet3.htm.
So here's the state of play in D.C.: hire a junkyard dog to spew vitriol and personal attacks. Is there any wonder why the level of discourse and analysis is so low? I take time out to prepare a fair and balanced point of view that Scott from his bully pulpit deems as echoing the collective brilliance and moral superiority of the panel. Ouch. I like to come across as self-effacing.
Tuesday, May 15, 2007
Does Video Have a Long Tail?
During one of the plenary sessions at the National Cable and Telecommunications Association annual conference a content supplier executive cut the tail off of video. He claimed that video content, such as movies and television, does not exhibit the same market characteristics as music and books.
A long tail for movies and books means that small, ideosyncratic demand can support the availability of diverse content, because suppliers can fill web shelf space that they know will trigger few sales. Itunes can offer consumers countless songs and Amazon can arrange the delivery for millions of books.
Presumably cable television operators could fill terabytes of storage with millions of movies and television shows, but perhaps they don't have to. When I visit Blockbuster I typically head to the most recent releases, despite having access to thousands of older movies at a substantial discount. My book library visits do not always focus on the new releases.
I am wondering what the implications of a shorter tail for video may be. Perhaps vertically integrated content plus distribution companies can leverage access to recent video releases to secure a competitive advantage. If so cable wins.
A long tail for movies and books means that small, ideosyncratic demand can support the availability of diverse content, because suppliers can fill web shelf space that they know will trigger few sales. Itunes can offer consumers countless songs and Amazon can arrange the delivery for millions of books.
Presumably cable television operators could fill terabytes of storage with millions of movies and television shows, but perhaps they don't have to. When I visit Blockbuster I typically head to the most recent releases, despite having access to thousands of older movies at a substantial discount. My book library visits do not always focus on the new releases.
I am wondering what the implications of a shorter tail for video may be. Perhaps vertically integrated content plus distribution companies can leverage access to recent video releases to secure a competitive advantage. If so cable wins.
Friday, May 11, 2007
Insights From the National Cable Show
I had the opportunity to attend the National Cable and Telecommunications annual convention in Las Vegas. This show offers me an opportunity to kick the tires of new technology and get a sense of where the industry is headed. It also helps me replenish the cache of swag I use as door prizes in my classes at Penn State.
Here are the key take aways I got from the show:
Cable can more easily enhance its broadband platform than telcos simply by bonding about 12 MHz to the existing 6MHz (one anbalog television channel) currently allocated for broadband. I saw how cable can offer best practices 120+ megabits per second throughput using the DOCSIS 3.0 standard. This confirms what a transitional and inferior technology the telcos offers with DSL.
In a quasi-public session I swear I heard a senior officer of a major cable Multiple System Operator mention that broadband offers margins in the 98% range.
Cable managers understand full well that consumers expect to have access to compelling content anytime, anywhere and via any device. The operators expect new content access opportunities to be "additive," i.e., leading to more consumption rather than cannibalizing revenue streams.
Cable executives believe it will be easier for them to generate positive cash flow from non-video markets than it will be for telcos to master the content business.
Having not visited Las Vegas in 10+ years I enjoyed the people watching even as I marveled at the tawdriness of the place.
Here are the key take aways I got from the show:
Cable can more easily enhance its broadband platform than telcos simply by bonding about 12 MHz to the existing 6MHz (one anbalog television channel) currently allocated for broadband. I saw how cable can offer best practices 120+ megabits per second throughput using the DOCSIS 3.0 standard. This confirms what a transitional and inferior technology the telcos offers with DSL.
In a quasi-public session I swear I heard a senior officer of a major cable Multiple System Operator mention that broadband offers margins in the 98% range.
Cable managers understand full well that consumers expect to have access to compelling content anytime, anywhere and via any device. The operators expect new content access opportunities to be "additive," i.e., leading to more consumption rather than cannibalizing revenue streams.
Cable executives believe it will be easier for them to generate positive cash flow from non-video markets than it will be for telcos to master the content business.
Having not visited Las Vegas in 10+ years I enjoyed the people watching even as I marveled at the tawdriness of the place.
Saturday, May 5, 2007
Monthly $2 Charge for Not Making Calls and How to Avoid It
My monthly Verizon landline bill arrived with a new $2.00 (plus 11% Universal Service Fund contribution) for not making any long distance calls. Like many consumers I have migrated most long distance calls to my cellphone and know the "casual calling" or "dial around" 10XXX option to make inexpensive toll calls.
I thought I had found a rate plan (at 40 cents a minute) that had no minimum and no charge to activate the presubscription when I departed from another company that had a monthly minimum. Verizon offered a rate plan I would never use, but one that could offer Verizon the chance to offer bundled services and other inducements.
Now Verizon has a $2.00 minimum and apparently no way of knowing that I am paying an affiliate of the company a cool $120 a month. So wireline Verizon treats me like a low tier non-revenue enhancer not worth the bother.
With an approach like that maybe I should join my college students in cutting the wireline cord and go wireless entirely. Something called the Missoula Plan (telcos like to name rate restructuring deals after the place the deal was first conceived) soon will cost wireline telephone subscribers $10 a month even before paying for a subscription.
The good news for me was a quite pleasant Verizon Customer Service Supervisor who waived the $2.19 and allowed me to eliminate Verizon as my presubscribed long distance carrier without having to pay about $6 for the privilege. I can still access long distance carriers, but not with the convenience of 1+ dialing.
I thought I had found a rate plan (at 40 cents a minute) that had no minimum and no charge to activate the presubscription when I departed from another company that had a monthly minimum. Verizon offered a rate plan I would never use, but one that could offer Verizon the chance to offer bundled services and other inducements.
Now Verizon has a $2.00 minimum and apparently no way of knowing that I am paying an affiliate of the company a cool $120 a month. So wireline Verizon treats me like a low tier non-revenue enhancer not worth the bother.
With an approach like that maybe I should join my college students in cutting the wireline cord and go wireless entirely. Something called the Missoula Plan (telcos like to name rate restructuring deals after the place the deal was first conceived) soon will cost wireline telephone subscribers $10 a month even before paying for a subscription.
The good news for me was a quite pleasant Verizon Customer Service Supervisor who waived the $2.19 and allowed me to eliminate Verizon as my presubscribed long distance carrier without having to pay about $6 for the privilege. I can still access long distance carriers, but not with the convenience of 1+ dialing.
Monday, April 30, 2007
Lies, Damn Lies and Broadband Statistics
For the better part of a decade, the United States lagged in broadband development largely because stakeholders invested in long haul capacity and failed local loop alternatives. Incumbent telephone company managers have emphasized regulatory uncertainty and “confiscatory” FCC sharing requirements, but the fact of the matter is that over $1 trillion was invested in the dotcom boom, a significant portion of which targeted burgeoning demand for local and long haul bandwidth.
Now that regulatory uncertainty provides no explanation for the United State’s comparatively poor performance in broadband market penetration the federal government has started to shoot the messenger reporting continuing poor penetration rates. Both the National Telecommunications and Information Administration and the State Department are challenging the statistics compiled by the Organization for Economic Cooperation and Development that ranks the U.S. 15th globally in broadband subscribers per 100 inhabitants (down from 12th last year). See
http://www.oecd.org/document/7/0,2340,en_2649_34223_38446855_1_1_1_1,00.html.
The State Department has made the issue something of a diplomatic affront to the U.S. See http://www.ntia.doc.gov/ntiahome/press/2007/State_OECD_042407.pdf NTIA offers explanations why scope of broadband access in places such as government offices and coffee shops means that the OECD ranking underestimates market penetration. See http://www.ntia.doc.gov/ntiahome/press/2007/ICTleader_042407.html.
So first stakeholders could blame the government for mandating common carriage facilities unbundling and interconnection. Now the government can blame outside data collectors as underestimating the kind of success the FCC found when it used zip codes as the relevant market penetration metric.
I am confident U.S. broadband penetration statistics will improve, but the initial “success” will occur in urban areas with greater likelihood for more than two facilities-based carriers offering true broadband at rates below $60 a month.
I fear the Digital Divide increasingly with cleve between cities and the hinterland.
Now that regulatory uncertainty provides no explanation for the United State’s comparatively poor performance in broadband market penetration the federal government has started to shoot the messenger reporting continuing poor penetration rates. Both the National Telecommunications and Information Administration and the State Department are challenging the statistics compiled by the Organization for Economic Cooperation and Development that ranks the U.S. 15th globally in broadband subscribers per 100 inhabitants (down from 12th last year). See
http://www.oecd.org/document/7/0,2340,en_2649_34223_38446855_1_1_1_1,00.html.
The State Department has made the issue something of a diplomatic affront to the U.S. See http://www.ntia.doc.gov/ntiahome/press/2007/State_OECD_042407.pdf NTIA offers explanations why scope of broadband access in places such as government offices and coffee shops means that the OECD ranking underestimates market penetration. See http://www.ntia.doc.gov/ntiahome/press/2007/ICTleader_042407.html.
So first stakeholders could blame the government for mandating common carriage facilities unbundling and interconnection. Now the government can blame outside data collectors as underestimating the kind of success the FCC found when it used zip codes as the relevant market penetration metric.
I am confident U.S. broadband penetration statistics will improve, but the initial “success” will occur in urban areas with greater likelihood for more than two facilities-based carriers offering true broadband at rates below $60 a month.
I fear the Digital Divide increasingly with cleve between cities and the hinterland.
Wednesday, April 25, 2007
The Dark Side of Incentive Creation
Much of the debate about broadband and next generation network development focuses on the alleged need for government to create incentives for carriers to invest. Ironically much of the excuses given for the disinclination to have invested emphasizes how government created disincentives, marketplace distortion and regulatory uncertainty.
So let me get this straight. The same person or corporation, with libertarian/deregulatory instincts, rails against government intervention as likely to fail even as they assert the need for incentive creation with a straight (if not disingenuous) face.
Let’s examine incentive creation, a government activity that has become so important that we now have a new word for it: incentivize, as in the FCC needs to incentivize broadband development in rural areas by expanding the universal service program.
With all this incentivization going on it’s no wonder that arbitrage and gaming opportunities abound. The most recent example lies in the realization by rural wireline telephone companies, particularly those entrepreneurial independent telephone companies in Iowa (see http://www.techdirt.com/articles/20070315/193857.shtml) that they can convert the universal service mission into cold cash. Because Congress and the FCC have created incentives for rural phone companies to wire up the hinterland, the crafty beneficiary of such incentives can earn extra cash by stimulating inbound traffic to the hinterland.
Brilliant! Funds designed to encourage telephone companies to serve expensive remote areas now flow more robustly into the coffers of the more creative incentive exploiters who offer outbound international long distance and conference calling all for the cost of the inbound call to rural Iowa. Wireless subscribers incur no additional charges for such calls made at nights and on weekends and cheap “postalized” long distance plans and calling cards offer 3-5 cents per minute calling any time of the day. The carriers handling the Iowa-bound call end up paying the Iowa telephone company as much as 7 cents a minute to terminate the call. Of course the call does not end ringing the telephone of some rural farmer in Iowa. It routes to a switch that provides second dial tone for outbound calling.
This clever money maker exploits the incentive to build out networks into the hinterland. Some of the outbound calling carriers, such as AT&T, have unilaterally decided to refuse to complete such calls. Unilaterally acting as judge, jury and executioner violates these carriers’ common carrier legal responsibilities. It also shows these carriers as asleep at the switch when the Iowa telephone company tariffed the extortionate 7 cent rate.
But most importantly the Iowa gambit shows that incentive creation has the very same potential to distort the marketplace and favor one group of stakeholders over others as the much more discussed disincentive creation.
So let me get this straight. The same person or corporation, with libertarian/deregulatory instincts, rails against government intervention as likely to fail even as they assert the need for incentive creation with a straight (if not disingenuous) face.
Let’s examine incentive creation, a government activity that has become so important that we now have a new word for it: incentivize, as in the FCC needs to incentivize broadband development in rural areas by expanding the universal service program.
With all this incentivization going on it’s no wonder that arbitrage and gaming opportunities abound. The most recent example lies in the realization by rural wireline telephone companies, particularly those entrepreneurial independent telephone companies in Iowa (see http://www.techdirt.com/articles/20070315/193857.shtml) that they can convert the universal service mission into cold cash. Because Congress and the FCC have created incentives for rural phone companies to wire up the hinterland, the crafty beneficiary of such incentives can earn extra cash by stimulating inbound traffic to the hinterland.
Brilliant! Funds designed to encourage telephone companies to serve expensive remote areas now flow more robustly into the coffers of the more creative incentive exploiters who offer outbound international long distance and conference calling all for the cost of the inbound call to rural Iowa. Wireless subscribers incur no additional charges for such calls made at nights and on weekends and cheap “postalized” long distance plans and calling cards offer 3-5 cents per minute calling any time of the day. The carriers handling the Iowa-bound call end up paying the Iowa telephone company as much as 7 cents a minute to terminate the call. Of course the call does not end ringing the telephone of some rural farmer in Iowa. It routes to a switch that provides second dial tone for outbound calling.
This clever money maker exploits the incentive to build out networks into the hinterland. Some of the outbound calling carriers, such as AT&T, have unilaterally decided to refuse to complete such calls. Unilaterally acting as judge, jury and executioner violates these carriers’ common carrier legal responsibilities. It also shows these carriers as asleep at the switch when the Iowa telephone company tariffed the extortionate 7 cent rate.
But most importantly the Iowa gambit shows that incentive creation has the very same potential to distort the marketplace and favor one group of stakeholders over others as the much more discussed disincentive creation.
Monday, April 23, 2007
Sponsored But Undisclosed "Research"
You might say fuzzy science made me blog. I decided to create this blog in part because of proliferating undisclosed, sponsored research. Far too many academics and think tank affiliates “contribute” to a public policy debate thanks to an undisclosed benefactor who surely expects something back for the hundreds of thousands invested.
Thanks to that wonderful concept of plausible deniability the sponsored researcher can state with a straight face that he or she does not receive any direct financial support for the White Paper, law review article or legislative testimony that just happens to offer unqualified support for a particular stakeholder or group viewpoint.
The money gets laundered. A stakeholder supports a think tank’s general mission with a sizeable grant. In turn the think tank’s staff or affiliates just happens to come up—unsolicited for sure—with creative thinking about a public policy issue that resonates with the stakeholder’s political and public relations agenda. The stakeholder’s grant helps pay for the employees’ or affiliates’ income, albeit indirectly. Hence no direct quid pro quo. How convenient.
I refuse to believe that so many public policy initiatives in telecommunications policy, first announced through the writing of an academic or think tank affiliate, arose completely unsolicited. We can thank undisclosed, but sponsored research for such innovative rethinking of economics and the law as the Efficient Components Pricing “Rule” and the view that the Telecommunications Act of 1996, as implemented by the FCC, “confiscated” incumbent carrier property.
Research also can pursue a specific and narrow agenda, e.g., attempting to discredit the lawfulness and accuracy of work conducted in official forums such as the World Trade Organization. See Sidak and Singer, Überregulation without Economics: The World Trade Organization’s Decision in the U.S.-Mexico Arbitration on Telecommunications Services; http://law.indiana.edu/fclj/pubs/v57/no1/Sidak.pdf. The piece contained a disclaimer that the American Enterprise Institute takes no position on specific legislative, regulatory, adjudicatory, or executive matters. But the reader gets no disclosure whether or not TelMex provided AEI any funding before or after this legal scholarship made its way into print.
Thanks to that wonderful concept of plausible deniability the sponsored researcher can state with a straight face that he or she does not receive any direct financial support for the White Paper, law review article or legislative testimony that just happens to offer unqualified support for a particular stakeholder or group viewpoint.
The money gets laundered. A stakeholder supports a think tank’s general mission with a sizeable grant. In turn the think tank’s staff or affiliates just happens to come up—unsolicited for sure—with creative thinking about a public policy issue that resonates with the stakeholder’s political and public relations agenda. The stakeholder’s grant helps pay for the employees’ or affiliates’ income, albeit indirectly. Hence no direct quid pro quo. How convenient.
I refuse to believe that so many public policy initiatives in telecommunications policy, first announced through the writing of an academic or think tank affiliate, arose completely unsolicited. We can thank undisclosed, but sponsored research for such innovative rethinking of economics and the law as the Efficient Components Pricing “Rule” and the view that the Telecommunications Act of 1996, as implemented by the FCC, “confiscated” incumbent carrier property.
Research also can pursue a specific and narrow agenda, e.g., attempting to discredit the lawfulness and accuracy of work conducted in official forums such as the World Trade Organization. See Sidak and Singer, Überregulation without Economics: The World Trade Organization’s Decision in the U.S.-Mexico Arbitration on Telecommunications Services; http://law.indiana.edu/fclj/pubs/v57/no1/Sidak.pdf. The piece contained a disclaimer that the American Enterprise Institute takes no position on specific legislative, regulatory, adjudicatory, or executive matters. But the reader gets no disclosure whether or not TelMex provided AEI any funding before or after this legal scholarship made its way into print.
Thursday, April 19, 2007
Government Rent Seeking Versus Commercial Profit Seeking
Managers of commercial ventures invariably have to decide the proper balance of profit seeking investments and efforts versus seeking benefits (rents) from various government programs. For example, a professional sports team might leverage the possibility of leaving a city if the local or state taxpayers do not underwrite construction of a new stadium.
In telecommunications incumbent carriers have engaged in similar leverage: limiting investment in next generation networks unless and until government creates financial incentives or other inducements, e.g., removing “regulatory uncertainty” which might just mean unfavorable and costly regulatory obligations. For example, a telephone company might not build a fiber optic network capable of providing video competition with incumbent cable television ventures in a particular state or region unless and until the newcomer can avoid having to secure operating authority (a franchise) from each and every municipality within which the newcomer wants to operate. I understand that CEO of one major telephone company opted to “punish” the state of Illinois by targeting other states for new technology trials.
The tension between rent seeking and profit seeking has adversely affected the pace of next generation network deployment. Too many actual or prospective investors recognize the benefits in seeking government-generated incentives to invest. It becomes difficult to determine when competitive necessity would have forced an investment without government assistance and when incentive creation was necessary.
The recent substantial infusion of capital investment by incumbent carriers into next generation networks may evidence a healthy response to the elimination of unbundling and below market access pricing regulations. But it just as readily may evidence the fact that incumbent ventures, cable television and telephone companies alike, could not longer rely on core and previously captive revenues streams.
How much longer could the incumbent local exchange telephone companies see declining local voice service revenues, before they had to find and serve new profit centers? When stakeholders demand government incentives, it probably makes sense to ask whether the stakeholders would make the investment and take the risk without special accommodations.
In telecommunications incumbent carriers have engaged in similar leverage: limiting investment in next generation networks unless and until government creates financial incentives or other inducements, e.g., removing “regulatory uncertainty” which might just mean unfavorable and costly regulatory obligations. For example, a telephone company might not build a fiber optic network capable of providing video competition with incumbent cable television ventures in a particular state or region unless and until the newcomer can avoid having to secure operating authority (a franchise) from each and every municipality within which the newcomer wants to operate. I understand that CEO of one major telephone company opted to “punish” the state of Illinois by targeting other states for new technology trials.
The tension between rent seeking and profit seeking has adversely affected the pace of next generation network deployment. Too many actual or prospective investors recognize the benefits in seeking government-generated incentives to invest. It becomes difficult to determine when competitive necessity would have forced an investment without government assistance and when incentive creation was necessary.
The recent substantial infusion of capital investment by incumbent carriers into next generation networks may evidence a healthy response to the elimination of unbundling and below market access pricing regulations. But it just as readily may evidence the fact that incumbent ventures, cable television and telephone companies alike, could not longer rely on core and previously captive revenues streams.
How much longer could the incumbent local exchange telephone companies see declining local voice service revenues, before they had to find and serve new profit centers? When stakeholders demand government incentives, it probably makes sense to ask whether the stakeholders would make the investment and take the risk without special accommodations.
Wednesday, April 18, 2007
Bandwidth and Throughput Math
Part of my current research agenda involves a comparative assessment of U.S. broadband market penetration and next generation network deployment. I am glad to note that the incumbent wireline carriers, such as Verizon, belatedly have invested billions of dollars. But on the other hand, because I live in the hinterlands I can get broadband at staggeringly high rates compared to what other consumers play in U.S. cities and in other nations. So I see a mixed bag corroborated by the relatively poor comparative performance of the U.S. in unbiased measurements of market penetration, digital opportunity and network readiness conducted by the International Telecommunication Union, see http://www.itu.int/osg/spu/newslog/CategoryView,category,Broadband.aspx; the Organization for Economic Cooperation and Development, see http://www.oecd.org/document/9/0,2340,en_2649_34223_37529673_1_1_1_1,00.html#Data2005; and http://www.websiteoptimization.com/bw/0510/; and the World Economic Forum, discussed in a previous blog entry.
Part of the challenge in this research lies in normalizing the data, i.e., comparing apples to apples, and deciding what constitutes success. The data compilations consider most helpful identify the number of subscribers per 100 residents, a broadband measure of “teledensity,” and the cost per 100 kilobits per month. See the ITU’s Digital Life Internet Report, http://www.itu.int/osg/spu/publications/digitalife/.
But even before one looks at the data, it makes sense to achieve consensus on the definition of terms such as bandwidth and throughput. Ironically the much maligned Senator Stevens from Alaska got it right: the Internet is a bunch of tubes or pipes. For the Digital Literacy course I teach at Penn State I analogize bandwidth as the size of the pipe, e.g., half-inch bathroom pipe versus 12 inch water main pipes. For throughput the pipe analogy considers the number of gallons that flow through the pipes per minute.
I am trying to consider the value proposition of broadband access in terms of available bandwidth (dedicated or shared), the likely throughput and aggregate usage per month. This is where the math and the value proposition get curious. You might not know that cable systems typically allocate only 6 MegaHertz of bandwidth for shared Ethernet-type access to the Internet. So if I am sharing 6MHz or less with hundreds of other subscribers, my virtual bandwidth allocation is quite small, even though I get multi-Megabit per second throughput and “All You Can Eat” uncapped access. Bear in mind that dial-up Internet access derives about 50,000 bits per second (50kbps) from an allocated bandwidth of 3-4 kiloHertz. For DSL, the dedicated copper local loop bandwidth expands by about 1.25 MHz. See http://electronics.howstuffworks.com/dsl2.htm.
Internet access subscribers actually care little about bandwidth except for its impact on about throughput, the number of downloadable and uploadable bits per second. But getting back to the value proposition, the ITU (in the Digital Life publication) ranked the U.S. 10th globally in terms of prices per 100 kilobits per second for 2006 using a $20.00 monthly subscription. Because I pay double the imputed rate, my value proposition would rank about 18th globally. Of course if you can get multi-megabit per second service for less than $20 a month, your value proposition is better than the national average
So the U.S. has some ways to go before government and carrier officials can self-congratulate. Still no one in the U.S. can come close to the global best practices of $0.07 per 100 kbits/s in Japan. Put another way the average U.S. broadband price is 700% higher than the Japanese average.
Part of the challenge in this research lies in normalizing the data, i.e., comparing apples to apples, and deciding what constitutes success. The data compilations consider most helpful identify the number of subscribers per 100 residents, a broadband measure of “teledensity,” and the cost per 100 kilobits per month. See the ITU’s Digital Life Internet Report, http://www.itu.int/osg/spu/publications/digitalife/.
But even before one looks at the data, it makes sense to achieve consensus on the definition of terms such as bandwidth and throughput. Ironically the much maligned Senator Stevens from Alaska got it right: the Internet is a bunch of tubes or pipes. For the Digital Literacy course I teach at Penn State I analogize bandwidth as the size of the pipe, e.g., half-inch bathroom pipe versus 12 inch water main pipes. For throughput the pipe analogy considers the number of gallons that flow through the pipes per minute.
I am trying to consider the value proposition of broadband access in terms of available bandwidth (dedicated or shared), the likely throughput and aggregate usage per month. This is where the math and the value proposition get curious. You might not know that cable systems typically allocate only 6 MegaHertz of bandwidth for shared Ethernet-type access to the Internet. So if I am sharing 6MHz or less with hundreds of other subscribers, my virtual bandwidth allocation is quite small, even though I get multi-Megabit per second throughput and “All You Can Eat” uncapped access. Bear in mind that dial-up Internet access derives about 50,000 bits per second (50kbps) from an allocated bandwidth of 3-4 kiloHertz. For DSL, the dedicated copper local loop bandwidth expands by about 1.25 MHz. See http://electronics.howstuffworks.com/dsl2.htm.
Internet access subscribers actually care little about bandwidth except for its impact on about throughput, the number of downloadable and uploadable bits per second. But getting back to the value proposition, the ITU (in the Digital Life publication) ranked the U.S. 10th globally in terms of prices per 100 kilobits per second for 2006 using a $20.00 monthly subscription. Because I pay double the imputed rate, my value proposition would rank about 18th globally. Of course if you can get multi-megabit per second service for less than $20 a month, your value proposition is better than the national average
So the U.S. has some ways to go before government and carrier officials can self-congratulate. Still no one in the U.S. can come close to the global best practices of $0.07 per 100 kbits/s in Japan. Put another way the average U.S. broadband price is 700% higher than the Japanese average.
Tuesday, April 17, 2007
The Dark Side of Intelsat's Privatization
Once upon a time Intelsat operated as the International Telecommunications Satellite Organization, a global cooperative, with small debt and the ability to borrow more at near governmental rates. Intelsat dominated the global marketplace primarily because its government "signatories" agreed not to cause the gooperative "significant economic harm" by authorizing competing systems.
The U.S. government properly determined that satellite competition could occur without harming Intelsat's mission as the carrier of last resort. PanAmSat and other ventures thrived and Intelsat adapted to change, ultimately becoming a private venture. Ironically the privatized Intelsat subsequently acquired it former nemesis PanAmSat.
Intelsat never got around to an Initial Public Offering of stock as it became an easy mark for private equity investors who now seek to cash out their $515 million investment with an expected 6 billion dollar sale. Along the way Intelsat lost its blue chip debt risk, because the private equity players saddled the venture with $11 billion in debt.
The dark side of Intelsat's privatization is the extraordinary leverage risk undertaken by Intelsat's private, unregulated investors. In the satellite marketplace few players can come up with the equity and debt necessary to construct, insure, launch and track a constellation of satellites. A back of the envelope cost is about $300 million per satellite. The undertaking has significant risks, exacerbated by the statistic that on average one of three satellites fail to reach orbit or otherwise become operational.
While I generally endorse privatization, in Intelsat's case, the private equity gambit has left the venture at greater risk than prudent in light of the extraordinary role performed by the very few global satellite players that remain. For many nations off the major telecommunications grid, with little or no access to fiber optic cable trunks, Intelsat serves as the only carrier capable of providing global connectivity.
How ironic that the United States government worries about the prospect of a competing non-American global positioning satellite navigation system, but has no concerns about the extraordinary leverage risk Intelsat has incurred.
The U.S. government properly determined that satellite competition could occur without harming Intelsat's mission as the carrier of last resort. PanAmSat and other ventures thrived and Intelsat adapted to change, ultimately becoming a private venture. Ironically the privatized Intelsat subsequently acquired it former nemesis PanAmSat.
Intelsat never got around to an Initial Public Offering of stock as it became an easy mark for private equity investors who now seek to cash out their $515 million investment with an expected 6 billion dollar sale. Along the way Intelsat lost its blue chip debt risk, because the private equity players saddled the venture with $11 billion in debt.
The dark side of Intelsat's privatization is the extraordinary leverage risk undertaken by Intelsat's private, unregulated investors. In the satellite marketplace few players can come up with the equity and debt necessary to construct, insure, launch and track a constellation of satellites. A back of the envelope cost is about $300 million per satellite. The undertaking has significant risks, exacerbated by the statistic that on average one of three satellites fail to reach orbit or otherwise become operational.
While I generally endorse privatization, in Intelsat's case, the private equity gambit has left the venture at greater risk than prudent in light of the extraordinary role performed by the very few global satellite players that remain. For many nations off the major telecommunications grid, with little or no access to fiber optic cable trunks, Intelsat serves as the only carrier capable of providing global connectivity.
How ironic that the United States government worries about the prospect of a competing non-American global positioning satellite navigation system, but has no concerns about the extraordinary leverage risk Intelsat has incurred.
Monday, April 16, 2007
Review of Latest Sidak Piece on Network Neutrality
Even as the piece probably will induce significant mashing of teeth among network neutrality advocates, I strongly recommend a recent article by Greg Sidak entitled A Consumer-Welfare Approach to Network Neutrality Regulation of the Internet; available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=928582. It’s a comprehensive document with many compelling and legitimate points.
I am not completely opposed to “access tiering” if an ISP can offer complete end-to-end enhanced routing without violating Service Level Agreements and without deliberately dropping packets and degrading service to “regular” peering and transit users. Greg makes some fair points about the right of a network operator to discriminate on price and QOS both downstream to end users and upstream to other ISPs and content providers. I’m not sure how this can be done in light of existing peering and transit agreements, which are largely best efforts, but the potential for a complete end-to-end, “better than best efforts” exists.
He and I part company on a number of issues including his conclusion that the broadband access marketplace is robustly competitive and therefore there is no risk of price squeezes, anticompetitive pricing of access tiering, collusion, etc. Greg sees a competitive marketplace, based on the inclusion of dial up Internet access and based on the FCC’s broadband penetration statistics. I don’t agree that VoIP easily routes via POTS Internet access, particularly because Vonage and others state their service requires broadband access. The FCC’s use of zip codes is a very flawed measure for determining whether consumers have competitive options. The zip code measure attributes access in terms of numbers of ISPs if even one potential subscriber exists, regardless of price. So just about every zip code area has satellite access despite the lack of significant cross-elasticities between a $100 a month service and a $50 service. BTW Greg reports an average price of $25 for broadband access! I’m paying $60, but then again I’m one of the extraordinarily rare U.S. consumers in one of those rare rural zip codes that has one and only one option, cable modem service, unless you include DBS.
Greg reiterates much of the private property common law taking arguments to justify the premise that network operators should have total control over their networks including the right to deny interconnection, refuse to carry specific content or applications, including unaffiliated ventures’ VoIP traffic, and the option of vertically integrating and favoring corporate affiliate’s traffic. He does not give much credence to the rights of DSL/cable modem subscribers to expect an unfettered bitstream pathway to the Internet cloud.
I was confused by Greg’s extensive examination of the Madison River case and his apparent endorsement of the lawfulness in a network operator’s option of blocking downstream carriage of specific bitstreams. He does not acknowledge that the FCC could engage in an enforcement action only because Madison River falls under Title II of the Communications Act, as a telecommunications service provider and not an ISP. Madison River refused to terminate telephony traffic. I don’t think Title I would have the same force as Title II if an ISP refused to terminate traffic, particularly if the traffic is deemed part of an information service.
Lastly I did not see much discussion of whether a network service provider has the ability and inclination to drop packets and create congestion. Absent robust inter-modal competition an ISP could accrue monetary benefits by punishing ventures that do not agree to take more expensive routing options and who trigger robust demand for their services by end user DSL and cable modem customers.
I am not completely opposed to “access tiering” if an ISP can offer complete end-to-end enhanced routing without violating Service Level Agreements and without deliberately dropping packets and degrading service to “regular” peering and transit users. Greg makes some fair points about the right of a network operator to discriminate on price and QOS both downstream to end users and upstream to other ISPs and content providers. I’m not sure how this can be done in light of existing peering and transit agreements, which are largely best efforts, but the potential for a complete end-to-end, “better than best efforts” exists.
He and I part company on a number of issues including his conclusion that the broadband access marketplace is robustly competitive and therefore there is no risk of price squeezes, anticompetitive pricing of access tiering, collusion, etc. Greg sees a competitive marketplace, based on the inclusion of dial up Internet access and based on the FCC’s broadband penetration statistics. I don’t agree that VoIP easily routes via POTS Internet access, particularly because Vonage and others state their service requires broadband access. The FCC’s use of zip codes is a very flawed measure for determining whether consumers have competitive options. The zip code measure attributes access in terms of numbers of ISPs if even one potential subscriber exists, regardless of price. So just about every zip code area has satellite access despite the lack of significant cross-elasticities between a $100 a month service and a $50 service. BTW Greg reports an average price of $25 for broadband access! I’m paying $60, but then again I’m one of the extraordinarily rare U.S. consumers in one of those rare rural zip codes that has one and only one option, cable modem service, unless you include DBS.
Greg reiterates much of the private property common law taking arguments to justify the premise that network operators should have total control over their networks including the right to deny interconnection, refuse to carry specific content or applications, including unaffiliated ventures’ VoIP traffic, and the option of vertically integrating and favoring corporate affiliate’s traffic. He does not give much credence to the rights of DSL/cable modem subscribers to expect an unfettered bitstream pathway to the Internet cloud.
I was confused by Greg’s extensive examination of the Madison River case and his apparent endorsement of the lawfulness in a network operator’s option of blocking downstream carriage of specific bitstreams. He does not acknowledge that the FCC could engage in an enforcement action only because Madison River falls under Title II of the Communications Act, as a telecommunications service provider and not an ISP. Madison River refused to terminate telephony traffic. I don’t think Title I would have the same force as Title II if an ISP refused to terminate traffic, particularly if the traffic is deemed part of an information service.
Lastly I did not see much discussion of whether a network service provider has the ability and inclination to drop packets and create congestion. Absent robust inter-modal competition an ISP could accrue monetary benefits by punishing ventures that do not agree to take more expensive routing options and who trigger robust demand for their services by end user DSL and cable modem customers.
Revisionism
William B. Petersen, President of Verizon Pennsylvania visited the College of Communications at Penn State where I teach. Mr. Petersen's presentation was entitled "Broadband Services Convergence: The Benefits of a 'High Fiber' Diet." No dispute there.
Mr. Petersen, an affable fellow, blamed "regulatory uncertainty" for the relative poor progress in broadband market penetration that occurred in the decade following enactment of the Telecommunications Act of 1996. While I could have noted that Verizon and other incumbents surely contributed to the uncertainty through endless litigation, I chose to question Mr. Petersen's allegation that the courts always supported the Bell point of view in such litigation.
That's not how I read the case law. Yes the courts on three occasions reversed the FCC on the scope and level of unbundling obligations. But the Supreme Court on two occasions endorsed the FCC's implementation of a Congressional mandate to promote competition. In AT&T Corp. v. Iowa Utilities Board, 525 U.S. 366, 119 S.Ct. 721, 142 L.Ed.2d 835, 67 USLW 4104 (1999) the Supreme Court largely upheld the Commission's implementation of the Congressional mandate contained in Section 251 of the Telecommunications Act of 1996 as a reasonable exercise of its rulemaking authority, including its requirement that ILECs unbundle network elements and offer CLECs the opportunity to pick and choose from an ala carte menu or platform of elements. The Court also ruled that in identifying which network elements ILECs should unbundle, the Commission did not limit the set of network elements to those necessary to promote competition whose absence from the list might impair ILECs' ability to compete.
In other words the Court did not deem unconstitutional the Congressional mandate of unbundling. The Court also largely deferred to the FCC's dtermination how to price these unbundled elements. In Verizon Communications, Inc. v. FCC, 121 S.Ct. 877 (2001)
the Court rejected incumbent local exchange carrier arguments that using a theoretical, most efficient cost model, instead of actual historical costs, constituted a taking that violated the Fifth Amendment. The court noted that no party had disputed any specific rate established by the TELRIC pricing model and concluded that “[r]egulatory bodies required to set [just and reasonable] rates . . . have ample discretion to choose methodology.” Additionally the Court stated that the ’96 Act did not specifically require historical costs, particular in light of its explicit prohibition on the use of conventional “‘rate-of-return or other rate-based proceeding’ . . . which has been identified with historical cost ever since Hope Natural Gas was decided.”
Mr. Petersen appeared to dismiss these cases as nothing more than Chevron-type deferral to agency expertise, something he surely must have welcomed in the Brand-X case. These cases do more than indicate the Court's unwillingness to second guess the FCC. Federal courts have made a sport of second guessing the FCC, particularly its implementation of the '96 Act.
I read the two Supreme Court cases as a fundamental endorsement of the lawfulness of the '96 Act's model for promoting competition. The law failed in part, because the ILECs simply would not go along with the transition, instead prattling on about "confiscation" and "taking of property." Indeed Mr. Petersen hailed Korea as an example of where competition flourished, ignoring that the incumbent cooperated thanks to the heavy hand of government stewardship in that country.
The point here is that hindsight in telecom policy does not offer 20-20 vision. The laws that Verizon and other incumbents help draft did not offer the expected payoff. The litigation that Verizon and other incumbent initiated did not absolve these carriers of having to interconnect and price access elements at below market rates.
We can dispute the wisdom of a Congressional mandate for cooperation among competitors--a fundamental concept in common carrier-- and the terms for such access. But it surely comes across as revisionism of history and case precedent to claim the courts invalidated the Congressionally created scheme.
Mr. Petersen, an affable fellow, blamed "regulatory uncertainty" for the relative poor progress in broadband market penetration that occurred in the decade following enactment of the Telecommunications Act of 1996. While I could have noted that Verizon and other incumbents surely contributed to the uncertainty through endless litigation, I chose to question Mr. Petersen's allegation that the courts always supported the Bell point of view in such litigation.
That's not how I read the case law. Yes the courts on three occasions reversed the FCC on the scope and level of unbundling obligations. But the Supreme Court on two occasions endorsed the FCC's implementation of a Congressional mandate to promote competition. In AT&T Corp. v. Iowa Utilities Board, 525 U.S. 366, 119 S.Ct. 721, 142 L.Ed.2d 835, 67 USLW 4104 (1999) the Supreme Court largely upheld the Commission's implementation of the Congressional mandate contained in Section 251 of the Telecommunications Act of 1996 as a reasonable exercise of its rulemaking authority, including its requirement that ILECs unbundle network elements and offer CLECs the opportunity to pick and choose from an ala carte menu or platform of elements. The Court also ruled that in identifying which network elements ILECs should unbundle, the Commission did not limit the set of network elements to those necessary to promote competition whose absence from the list might impair ILECs' ability to compete.
In other words the Court did not deem unconstitutional the Congressional mandate of unbundling. The Court also largely deferred to the FCC's dtermination how to price these unbundled elements. In Verizon Communications, Inc. v. FCC, 121 S.Ct. 877 (2001)
the Court rejected incumbent local exchange carrier arguments that using a theoretical, most efficient cost model, instead of actual historical costs, constituted a taking that violated the Fifth Amendment. The court noted that no party had disputed any specific rate established by the TELRIC pricing model and concluded that “[r]egulatory bodies required to set [just and reasonable] rates . . . have ample discretion to choose methodology.” Additionally the Court stated that the ’96 Act did not specifically require historical costs, particular in light of its explicit prohibition on the use of conventional “‘rate-of-return or other rate-based proceeding’ . . . which has been identified with historical cost ever since Hope Natural Gas was decided.”
Mr. Petersen appeared to dismiss these cases as nothing more than Chevron-type deferral to agency expertise, something he surely must have welcomed in the Brand-X case. These cases do more than indicate the Court's unwillingness to second guess the FCC. Federal courts have made a sport of second guessing the FCC, particularly its implementation of the '96 Act.
I read the two Supreme Court cases as a fundamental endorsement of the lawfulness of the '96 Act's model for promoting competition. The law failed in part, because the ILECs simply would not go along with the transition, instead prattling on about "confiscation" and "taking of property." Indeed Mr. Petersen hailed Korea as an example of where competition flourished, ignoring that the incumbent cooperated thanks to the heavy hand of government stewardship in that country.
The point here is that hindsight in telecom policy does not offer 20-20 vision. The laws that Verizon and other incumbents help draft did not offer the expected payoff. The litigation that Verizon and other incumbent initiated did not absolve these carriers of having to interconnect and price access elements at below market rates.
We can dispute the wisdom of a Congressional mandate for cooperation among competitors--a fundamental concept in common carrier-- and the terms for such access. But it surely comes across as revisionism of history and case precedent to claim the courts invalidated the Congressionally created scheme.
Sunday, April 15, 2007
World Economic Forum Network Readiness Index--U.S. Drops From 1st to 7th
For the better part of a decade local exchange carrier management claimed that regulatory uncertainty and unbundling obligations removed incentives to build next generation networks. Since 2006 the FCC has created an information services "safe harbor" that insulates carriers from having to unbundle, share or interconnect. There is absolutely no common carrier obligation for broadband fiber and greenfield installations.
So it comes as a surprise to me that despite plenty of incentives to invest, including lost market share and revenues for local voice services, the WEF Network Readiness Index shows U.S. carriers as comparatively losing ground: http://www.weforum.org/en/media/Latest%20Press%20Releases/gitr_2007_press_release.
I appreciate that the WEF offers but one measure, but I would place more creditability to this index than say U.S. New and World's Reports' college rankings. Do Verizon and AT&T need more incentives, does the universal service fund need to expand coverage of broadband, is the U.S. suffering from a broadband duopoly regardless of what the FCC says in its zip code based measure of 200 kbps or higher "broadband" competition?
What accounts for a 7th place ranking in network readiness? Hmmm, good question.
I believe our leading telecommunications service providers no longer operate with global best practices. They haven't had to for so long. Even before enactment of the Telecommunications Act of 1996, and certainly since then, the major U.S. carriers have found it easier and more lucrative to compete in the court room instead of the marketplace. It's been too easy to demand and receive incentives to invest in next generation facilities and services.
Carriers such as Verizon and SBC had seats at the tables where the '96 Act was crafted and these carriers agreed to a simple quid pro quo: agree to lose local exchange service market share by cooperating in the introduction of competition and in turn the market access prohibitions contained in the 1956/1982 divestiture of AT&T (know as the Modification of Final Judgment) would evaporate. In other words the Bell Companies had to unbundle their local exchange network and interconnect with the competition at below market rates in exchange for access to long distance markets. As it turned out the long distance market did not prove lucrative enough to satisfy the Bell Companies, so they immediately refused to comply with the deal they cut. Putting it in its best light the Bell Companies tirelessly litigated the meaning of what they had agreed to.
So in a sense the Bell Companies willingly help create the regulatory uncertainty they claimed as foreclosing investment in next gen networks.
There's little regulatory uncertainty now, so I'd appreciate hearing from you the reasons for the decline.
So it comes as a surprise to me that despite plenty of incentives to invest, including lost market share and revenues for local voice services, the WEF Network Readiness Index shows U.S. carriers as comparatively losing ground: http://www.weforum.org/en/media/Latest%20Press%20Releases/gitr_2007_press_release.
I appreciate that the WEF offers but one measure, but I would place more creditability to this index than say U.S. New and World's Reports' college rankings. Do Verizon and AT&T need more incentives, does the universal service fund need to expand coverage of broadband, is the U.S. suffering from a broadband duopoly regardless of what the FCC says in its zip code based measure of 200 kbps or higher "broadband" competition?
What accounts for a 7th place ranking in network readiness? Hmmm, good question.
I believe our leading telecommunications service providers no longer operate with global best practices. They haven't had to for so long. Even before enactment of the Telecommunications Act of 1996, and certainly since then, the major U.S. carriers have found it easier and more lucrative to compete in the court room instead of the marketplace. It's been too easy to demand and receive incentives to invest in next generation facilities and services.
Carriers such as Verizon and SBC had seats at the tables where the '96 Act was crafted and these carriers agreed to a simple quid pro quo: agree to lose local exchange service market share by cooperating in the introduction of competition and in turn the market access prohibitions contained in the 1956/1982 divestiture of AT&T (know as the Modification of Final Judgment) would evaporate. In other words the Bell Companies had to unbundle their local exchange network and interconnect with the competition at below market rates in exchange for access to long distance markets. As it turned out the long distance market did not prove lucrative enough to satisfy the Bell Companies, so they immediately refused to comply with the deal they cut. Putting it in its best light the Bell Companies tirelessly litigated the meaning of what they had agreed to.
So in a sense the Bell Companies willingly help create the regulatory uncertainty they claimed as foreclosing investment in next gen networks.
There's little regulatory uncertainty now, so I'd appreciate hearing from you the reasons for the decline.
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