Congress should not fund a FCC with misplaced priorities

Free Press has been calling on its constituents to encourage the Republican-controlled Congress to vote against a House appropriations bill that would significantly reduce funding for the Federal Communications Commission.  For Fiscal Year 2016, the FCC asked Congress for $388,000,000 in offsetting collections. This represents a $48 million increase over the FCC’s request for Fiscal Year 2015, which ends tonight at midnight.

House Republicans have been blatant about their unwillingness to fund the FCC’s net neutrality regime.  So serious are they about taking the wind out of the so called open internet that they have a budget bill that would provide the FCC with only $314,844,000 for Fiscal Year 2016.  If federal budgets represent national priorities, it is clear that net neutrality is not a priority for the GOP, whose members have railed against how onerous the rules are.

While the rules are burdensome, what is more telling is the FCC’s unwillingness to get out of the narrow vision box.  The FCC is still stuck on the concept of encouraging competitive telecommunications networks.  In the 21st century why would the FCC be concerned about a concept calling for a multiple number of firms providing point-to-point voice communications services via wire or wireline?

What the FCC should be concerned about is promoting the development of the information and data markets that are being created and transacted in over internet infrastructure.   Information and data are the currency being exchanged on digital networks.  Also the returns on stock that investors are seeing should be an indication as to where the economy via the internet is going.

According to data from Morningstar, the telecom services industry saw one-year returns on stock at 8.42%.  Three-year returns were 9.82% while five-year returns were at 9.64%.

In the information technology services industry, one-year returns amounted to 10.93%; three-year returns came in at 10.41%; and five-year returns were 12.16%.

The internet content and information industry saw first-year returns of 17.04%; three-year returns of 23.90%; and five-year returns on 18.70%.

I don’t pretend to be a stock analyst but if the FCC really wants to encourage competition on the internet, shouldn’t the agency promote entry into the higher performing industries?  If the FCC wants to convince me that they are interested in economic growth, their analysis should be based on the current reality of the internet economy and the data and information markets.

Try the markets, Public Knowledge. Not a failed 1990s policy

Posted September 29th, 2015 in Broadband and tagged , , , , by Alton Drew

Public Knowledge’s Gene Kimmelman and COMPTEL’s Chip Pickering recently wrote an opinion piece for The Hill arguing for the Federal Communications Commission should build on data they have gathered and push an initiative to make the marketplace for broadband more competitive.  Messrs Kimmelman and Pickering would like incumbent broadband providers to unbundle their access networks and allow alternative broadband providers “open access” to these networks.  The U.S. has been down the resale path before with phone services in the 1990s and it didn’t work then.  The companies that were able to mount a real challenge to incumbent telephone companies were cable companies. They were able to do this because they had their own facilities.

If Public Knowledge and COMPTEL really want network competition, they should enter the capital markets and raise funds for alternative providers to deploy physical networks.  They should also be willing to meet the financial, technical, and regulatory barriers put in place buy local franchising authorities.  If capital markets aren’t working, they should open up their own private equity shops and raise the funds to build an additional, nationwide provider to compete against incumbent broadband companies and newcomers like Google.

Merely asking the Federal Communications Commission to bring competition is not enough.

The FCC and hypothetical competition

Posted September 27th, 2015 in Broadband, capital and tagged , by Alton Drew

Last week, Federal Communications Commission general counsel Jon Sallet delivered remarks to the Telecommunications Policy Research Conference where he described the circumstances behind three recently attempted broadband mergers.  The term, “competition”, raised its head during Mr. Sallet’s speech as he argued that in the case of two of the mergers, signaling disapproval of or outright disapproving the mergers the Commission believed negatively impacted consumer welfare.

Reading Mr. Sallet’s remarks it was clear that the Commission still prefers turn a blind eye to the changes everyone else is seeing in the industry; that broadband companies are becoming content delivery, media companies, data analytic companies, or a combination of the three.  Verizon’s purchase of online legacy media company AOL and AT&T’s purchase of DirecTV are two examples of convergence 2.0.

In addition, not only are AT&T and Verizon ready and able to use their wireless networks to deliver content for consumers and eyeballs for advertisers, they are collecting and selling to third-parties the data they collect on their access networks.  The data they sell to third-parties may be used to better define a subscriber’s user experience or to determine buying habits such that better, more targeted advertising can be created.  The openness of internet infrastructure architecture is such that other data analytics and data broker firms are competing with broadband providers to gather, collate, and sell this very same consumer information. This along with content, in my opinion, is the closest thing to competition involving internet players.

But what about a competitive market for consumer access services via broadband?  While the number of choices for networks that get you online may differ based on whether you are a rural, suburban, or urban dweller, it still remains that you have a choice involving more than one carrier.  Progressives often cite how much better European and Asian countries are doing in terms of subscribers per capita when analyzing the “dearth” of choice in the U.S.  Some will argue that a European style mandate that opens up the last mile to competitors may do the trick. What progressives consistently overlook is that the Commission’s authority to open up the last mile with a European-style mandate is dead on arrival because permission to deploy in the last mile depends on local or state authority.  Franchise agreements and certificates of public convenience and necessity are the biggest bottlenecks to the very competition progressives and the Commission continuously choose to ignore.

So, if consumers aren’t happy with the quality or quantity of broadband access choices, they may have to include in their residential decision matrix, along with good schools and tax schedules, the amount of broadband choice available in a locality.

The irony is that progressives may have further shot their broadband access competition argument in the foot by advocating for onerous net neutrality rules.  Even if state and local governments further loosened franchise restrictions for entering local markets, there are for now network management, transparency, no blocking, and no throttling rules that new entrants will have to comply with.  Net neutrality has raised another barrier to entry that may serve to dissuade the very competition its proponents allegedly want.

What Mr. Sallet left out of his remarks was any discussion on capital flow.  This is one of the downsides of too many lawyers and not enough economists at the Commission.  While broadband networks have benefited from many billions of dollars in investment, that investment is tapering off.

According to U.S. Telecom: The Broadband Association, broadband capital expenditures totaled $78 billion in 2014.  Since 1996, total broadband capex was $1.4 trillion. But, according to one member of the Commission, broadband capex is falling.  In remarks to the American Enterprise Institute, Commission member Ajit Pai noted that major wireless companies saw a decline in capex of 12% during the first half of 2015.

Compounding Commissioner Pai’s observation is another observation by former Commission member Harold Furchtgott-Roth.  Mr. Roth shared in a recent piece that annual growth rates in capital expenditures in the information sector, the sector most impacted by broadband spending, has been running below the national rate for capital expenditure. While capex in the information sector has been running at an annual rate of 8.2% between 2010 and 2013, the average for overall capex is 10.7%

Broadly speaking, the only competition that matters is competition for resources and capital. Onerous regulations with a negative impact on capital expenditure growth rates will make investors go the other way.


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As the Fall begins, data broker, ISP investors should keep ears open for new rules

Posted September 23rd, 2015 in data brokers and tagged , , , by Alton Drew

This article discusses the possibility of the Federal Communications Commission writing a privacy rule component for its net neutrality rules.  The FCC may consider the issue of “super cookies”, a technology that allows a broadband provider to inject unique code into a consumer’s mobile traffic; and whether internet service providers should be able to price discriminate between consumers who allow data to be shared and those who don’t.

FCC chairman Tom Wheeler, according to the article, is considering rules for issue this fall. So far the FCC has not issued any notices for proposed rule making or an inquiry seeking comments.

Investors in data brokers should stay abreast of additions to net neutrality rules.  Internet service providers will like to enhance their ability to collect and distribute consumer data to data brokers with the use of techniques like deep packet inspection.  The FCC did not address deep packet inspection in great depth during the promulgation of its net neutrality rules. Net neutrality rule language doesn’t refer to deep packet inspection but given consumer privacy concerns raised by advocacy groups, this technique may not stay on the back burner for long.

And while the Federal Trade Commission has been at the forefront of probing data brokers, including a recommendation to Congress that legislation regulating the collection of data be drafted, the FTC itself has not come out with any new rules.


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Would more transparency on the part of data brokers be good for investors?

Posted September 9th, 2015 in big data, Broadband, data brokers and tagged , by Alton Drew

I came across an article in The Wall Street Journal about “device fingerprinting.” Device fingerprinting is information collected about a remote computing device for the purpose of identification. Data brokers use fingerprints can be used to fully or partially identify individual users or devices even when cookies are turned off.

Back in 2014, the Federal Trade Commission produced a report addressing the lack of transparency in the data broker industry.  While the report does not explicitly use the term device fingerprinting, the FTC does describe web crawling on particular websites containing public information and the use of application programming interface among the methods used to collect information.  Based on its description, device fingerprinting appears to take its place among these collection methods.

The FTC has recommended that Congress pass legislation that would provide consumers with access to the information data brokers collect on them.  It was also recommended in the report that consumers be allowed to opt out of a data brokers collection efforts. For further transparency, the FTC also recommended that a central website listing data brokers and describing their data collection policies be created.

In March 2015, Senator Ed Markey, Democrat of Massachusetts, introduced S. 668, the Data Broker Accountability and Transparency Act of 2015.  The thrust of the bill appears to focus on the accuracy of the data collected and shared; the transparency about why information is being collected; and the ability of the consumer to review the information collected and requesting that information not be used for the purposes collected.

It would be surprising to see the bill go beyond these three main restrictions.  Congress has shown over the past two decades a wariness about regulating commerce on the internet.  Regulating broadband, the on-ramp that gets the consumer to the information superhighway is one thing.  Regulating the actual commerce moving on that highway is a different story.

Ironically, it would especially put net neutrality advocates in a tight position between so called openness and privacy.  It is the open network architecture of the internet that allows for apps to capture information from websites and transmit the information to third-parties for packaging and analysis.  This is the openness that net neutrality types were advocating for. The millions of Americans who supported the open internet campaign may not like the result of net neutrality, that their privacy may have been put in some jeopardy.

S. 668 has been in committee for six months and shows little sign of moving to a vote much less the floor.  Since the language of the bill does not necessarily sound the death bells for the data broker industry, even if it passes and compliance costs increase, the increase in demand for data that the industry provides may offset these costs.