Any regulation of zero rating is unnecessary market interference

Members of the wireless industry got together yesterday in Washington, D.C. to debate what the Federal Communications Commission’s next move on zero rating ought not to be. Inside Sources reported that the wireless confab included T-Mobile, Verizon, Facebook, and other parties. Zero rating allows wireless services subscribers to access certain content providers without that access being charged against the consumer’s data plan. T-Mobile’s “Binge-On” service is a recently deployed example of this type of service.

Pro-net neutrality groups like Free Press, Public Knowledge, and the Electronic Frontier Foundation believe that zero rating violates the Commission’s open internet order by throttling data streams while favoring certain content providers over other providers.  For example, under 47 CFR 8.7, a person engaged in the provision of broadband internet access service shall not impair or degrade lawful internet traffic on the basis of internet content, application or service, or use of a non-harmful device, subject to reasonable network management.

One issue will be whether a service like “Binge-On” actually throttles traffic pursuant to this rule. The Commission so far has opted to a light touch approach to zero rating-type services, which wireless carriers have likened to 800-number services where the 800-number customer or its telephone service provider ate the cost of a long distance call from a customer. The Commission should find that there is no throttling because treatment of data traffic will be the same for all content providers, whether access to their content is done via “Binge-On” or not. The Commission’s political constraints go beyond the letter of their rules.

The Commission has been fervent about its clear and fair “rules of the road”; that all traffic be treated equally, that it may not want to rock the boat with the pro-net neutrality posse or their alleged four million post-card writing supporters. There is a chance that the Commission may opt for the safety of saying no to “Binge-On” with the claim that its best to err on the side of caution and avoid having its net neutrality rules go sliding down a slippery slope.

A call against “Binge-On” and other zero rating services is a strike against investor interests especially for investors in smaller carriers like T-Mobile. If T-Mobile is to acquire more market share it will do so with bolder offerings like “Binge-On.” The service appears to be an effective way for promoting the company’s other offerings, so much so that T-Mobile is finding that some customers, having had free access to participating websites are opting for additional and more expensive service. If there is an opportunity for government to show how anti-investor some policies can be, treating zero rating as anti-net neutrality would be one of them.

Independent and minority programmers will have to demonstrate value to cable companies

The Federal Communications Commission wants to promote diversity of programming provided over cable networks. Commission chairman Tom Wheeler shared in a blog post last month arguing that the Commission wants consumers to have the choice to watch independent and diverse programming via traditional video distribution networks, i.e. cable. The Commission will review and vote on a notice of inquiry at their next open meeting on 18 February 2016.

The Commission should consider the reality of new entrants into the video distribution marketplace. A considerable amount of capital is needed to start and sustain a cable programmer on air. Programming has to be either created in-house or purchased. Technical and marketing staff have to be hired. Equipment has to be purchased. Cable companies have to be convinced that a programmer should get some cable “shelf-space”; that the programmer’s content will attract the right number of eyeballs to justify the taking up of network capacity needed to carry the programmer’s channel.

These minor details have probably been the main reasons, ever since the passage of the Cable Communications Policy Act of 1984, that smaller programmers have had a hard time finding distribution space on cable company’s network. The Commission will have statutory authority to address the question of diversity of programming distributed by cable companies. Section 522(a) of the Communications Act of 1934 requires the Commission to “promote competition in the delivery of diverse sources of video programming and to assure that the widest possible diversity of information services are made available to the public from cable systems in a manner consistent with growth and development of cable systems.”

One statutory constraint the Commission should face in developing any policy to promote diversity is the cap on capacity allocated to non-affiliated programmers. For example, under Section 532(b) of the Communications Act, a cable operator with 36 to 54 activated channels is to allocate ten percent of channel capacity to non-affiliated programmers. A cable operator with 55 to 100 channels has to allocate 15% of its network to unaffiliated programmers while an operator  with more than 100 activated channels must also allocate 15% of its network to unaffiliated programmers.

The question is when an independent or minority programmer enters the market to sell its content to distributor, what should the exchange be built on? It should be built on value. The value of the cable operator to the programmer is the operators ability via its network to get the programmer’s content before a lot of eyeballs. The value that the programmer should bring to the cable operator is content that will entice consumers to watch; to stay on the cable operator’s network. If an independent or minority programmer were able to occupy a cable operator’s channel and not bring this type of value, then the cable operator would have a gross resource allocation problem on its hands. Dropping the programmer would be the correct thing to do.

But should the Commission be in the business of persuading a cable operator as to which programmers provide value and which ones do not? No. This should be a market condition that cable operators and independent/minority programmers work out. Politically, this might be a lame duck move on the part of the Commission. Should a Republican grab the White House this fall while the rhetoric surrounding diversity may survive with a Republican chairman, an intense commitment to the diversity issue may subside.

We’ll have to wait until the Commission issues its notice of inquiry on 18 February to determine how far the Commission is willing to go tentatively.

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The FCC should pay attention to the overall economy

Posted January 21st, 2016 in AT&T, Broadband, capital, economy, Verizon, Wall Street and tagged , , , , by Alton Drew

Yesterday at the World Economic Forum in Davos, Switzerland, AT&T chief executive officer Randall Stephenson shared with The Wall Street Journal his opinion on economic growth. Mr. Stephenson shared that he is not optimistic about growth in the economy. Expected growth of two percent is unacceptable, according to Mr. Stephenson. Tax policy changes are needed but there is no expectation that there will be any fiscal action this year.  Without fiscal action there is the potential of more downside than upside.

Mr. Stephenson added that lower oil prices were expected to lead to increased consumer spending but that has not panned out because consumers have been price conscious about mobile services. Discounts as  little as ten dollars could prompt a consumer to change mobile carriers.

There has been little if any evidence that the Federal Communications Commission is taking into account the state of the economy and its impact on consumer demand for broadband services. In comments before the Brookings Institution, FCC chairman Tom Wheeler argued that the success of broadband services leads to increases in demand for broadband which increases the incentive for competitive broadband.

Mr. Wheeler might not buy AT&T’s argument that lack of national economic growth is constraining carriers like AT&T. Mr. Wheeler believes that 75% of AT&T’s network will be controlled software by 2020. The replacement of hard physical switching systems by software is expected to reduce Verizon’s real estate costs by 80%, according to Mr. Wheeler. Powering a few computers can save up to 60% of energy costs versus endless hard switches, according to Mr. Wheeler. As the cost of delivering broadband goes down, says Mr. Wheeler, the opportunities for innovation increase. “This means we’re not going to let imaginary concerns about investment incentives and utility regulation cause us to let up on policies to encourage fast, fair, and open broadband.”

If the concerns are imaginary then maybe equity analysts are sleep deprived. We shared in a 28 December 2015 post that analysts believed that the wireless industry participated in a competitive market. The large wireless service companies are subject to pricing squeezes brought on by smaller entrants, analysts found, and extremely high prices for spectrum were further compounding pricing squeezes.

The reality of market concerns are further highlighted when one considers how much the information sector impacts gross domestic product. According to the U.S. Bureau of Economic Analysis, the information services portion of the economy has been playing an increasing role over the last three years. Information represented 9.3% of gross domestic product in 2013. By 2014 this percentage increased to 9.5%. At the end of the third quarter in 2015 the percentage has climbed to 9.6%.

Given Wall Street’s assessment of wireless markets and the impact information services plays on the overall economy, the FCC should look beyond the switch to software-based communications infrastructure when ascertaining the competitiveness.

 

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FCC measures quality of the broadband market

Posted January 6th, 2016 in Broadband, Federal Communications Commission and tagged , by Alton Drew

Last week the Federal Communications Commission released a report that measured the quality of broadband services offered in the broadband access market. It’s overall assessment was that the market offered significant growth in broadband speeds although growth was not uniform across all platforms, i.e. digital subscriber line (DSL), data over cable service interface specification (DOCSIS), satellite, fiber.  The disparity is such that DOCSIS and fiber are leaving DSL in the dust. Also, actual download speeds were either close to or exceeding advertised speeds in most cases.

Fortunately, neither the report or individual commissioners discussed tinkering with the market for broadband access based on these findings. The telecommunications sector has been up just over one percent over the past 12 months, according to The New York Times. Other than encouraging technology improvements in DSL or asking telecoms to come up with incentives that encourage subscribers to move from DSL to fiber or some other platform, there appears to be nothing else the Commission can do.

Nor should the Commission be increasingly engaged. A politicizing of investment priorities isn’t necessary when competitors such as cable are offering consumers greater download speeds as a result of deploying a superior DOCSIS platform and making the choice on their own to deploy this platform.

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The FCC’s net neutrality hole

Posted January 4th, 2016 in net neutrality and tagged , by Alton Drew

As a regulatory agency it’s impossible for the Federal Communications Commission to avoid political discourse. When the likes of John Oliver goes about explaining net neutrality to the public (and getting it wrong in the process), the result is four million American consumers applying political pressure on the Commission to ensure that the agency preserve the democratic spirit of the internet; that each piece of content stand equally shoulder to shoulder no matter who produces the content or whether the content reaches one million people or one hundred. When it comes to the economics of the internet then network management be damned.

But for all its rhetoric on equality of access, the Commission appears to have dug a hole into which to throw economically disadvantaged consumers. As Mark Jamison argues in this piece for TechPolicyDaily.com, net neutrality has a negative impact on low income consumers who may not be accessing online content because of the cost of purchasing broadband. Net neutrality hurts the poor by:

1. Prohibiting pricing plans that help the poor pay for what they can afford;

2. Imposing injunctions on the free delivery of some content or zero-pricing; and

3. Prohibiting access to net work features such as fast lanes by fledgling firms.

If the Commission is serious about furthering the closure of the digital divide then it should not allow a delusional argument that all traffic should be treated equally to stop access by the poor to some online content for free. Supporting an erroneous political position as advocated by net neutrality proponents forces the Commission to take a public policy position that is adverse not only to its stated goals but to the poor.