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Consumer behavior makes net neutrality a none issue

A lot of content on the Internet is straight up “ratchet”.  For those who do not spend too much time in the inner city, the term ratchet refers to poor, ignorant, nonsensical.  This is one of the advantages of having a twelve year old.  You get to keep up with the latest urban lingo.  With all the talk coming from net neutrality advocates about the impact a lack of net neutrality rules will have on consumer choice of broadband providers and media diversity, I’ve become curious as to who Americans are visiting online, ratchet or otherwise.

The first thought we may have is that people are primarily visiting social media websites; that these sites are getting the most visits.  Actually these sites are the second most visited.  Using data from Alexa.com, I determined that 17% of the top 100 websites visited in the United States were social media/network websites.  Facebook and YouTube came in at number 2 and number three, respectively, while Linkedin and Twitter came in at number eight and number nine, respectively.

Taking the number one spot in websites visited in the U.S. are retail oriented sites.  Twenty-one percent of websites in the top 100 visited sites were in the retail category.  Coming in third are the entertainment oriented sites with 16% of the top-100 sites falling into this category.

What I found disappointing was what I refer to as the encyclopedia/research websites.  Five percent of the top-100 websites fell in this category.  I would hope that as we move further into a knowledge and information economy that these sites would get more visitors, but it appears that shopping and socializing receive higher amounts of value perception from people online.

For the record, coming in at number four were news and media sites.  Fifteen percent of the top 100 sites fell into this category.

Consumers are apparently placing a higher value on Internet traffic from retail, social media, and entertainment and quite frankly this is no different from how consumers parceled their time before the Internet came along.  We have always preferred to shop, hang out with friends (albeit real), and be entertained.  As long as potential providers of these services saw some profit opportunity they would enter the market to provide them.  That was the case before the Internet and that is the case in the two plus decades we have been going online.

Broadband providers realize this, which is why blocking access to and discriminating against providers of these services does not serve a broadband provider’s self-interest, whether a consumer’s taste is ratchet or not.

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My response to the New York Times’ position on net neutrality

The New York Times has an editorial that discusses its concerns with with Federal Communications Commission chairman Tom Wheeler’s latest attempt to implement net neutrality rules.  The editorial board would also recommends that the FCC exercise its authority to reclassify broadband as a telecommunications service.  Here are my comments to the board.

“What the Times editorial board does here is conveniently ignore the entire Internet eco-system. Long haul and backbone providers like Cogent are already charging Google, Netflix, and Facebook a “toll” to move their digital traffic throughout the digital space. Why should the last mile be any different?

In addition, if reclassifying broadband access is the solution, then guess what? Under Title II treatment, these very broadband providers will tell the FCC and the states that it has a right to charge interconnection fees to Google, Netflix, and Facebook should they choose to by-pass backbone providers and connect directly. Cogent won’t take to kindly to having to pay interconnection fees while Google, Facebook, and Netflix don’t.

Plus throw in the delays that will occur from reviewing interconnection agreements and you’ll see innovation dampening for sure.

The notion of traversing freely over the Internet came from an erroneous assumption that this is what a free open network architecture calls for. It doesn’t. There has always been and should always be a charge for interconnecting, whether it is the last mile, or long haul.

Finally, this just shows that net neutrality proponents have no consideration for the concept of value. If a content provider values the subscribers it’s trying to reach and the content it has, it will pay a premium to make sure subscribers get that content. You do the same thing when you decide to use regular mail or express.”

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I expect an unrestricted auction to help promote broadband deployment

Posted April 24th, 2014 in AT&T, Broadband, spectrum, T-Mobile USA, Verizon, wireless communications and tagged , , , , by Alton Drew

The Federal Communications Commission places a lot of emphasis on competition in the broadband access provider space; too much I think.  Regarding the reverse incentive auction for broadcast television spectrum, the competition narrative highlights the number of wireless broadband providers being able to bid for spectrum.  I’ve opined before on the FCC’s bottleneck status as gatekeeper to the airwaves.  As the monopoly supplier of licenses it won’t and should not be expected to parcel out spectrum to the lowest bidder.  On the contrary, economic logic says that the FCC should create an environment where it gets and takes the highest bid.

Getting the highest bid, optimizing its market power over licenses, won’t happen if the FCC forces AT&T and Verizon to sit on the sidelines.  A recent finding by The Phoenix Center states that including AT&T and Verizon in the reverse incentive auction won’t have the effect of driving out smaller wireless carriers as bidders.  Inclusion of AT&T and Verizon in the auction is expected to increase overall revenues and facilitate the revelation of auction values held by other bidders.  Using the 2006 AWS-1 auction as a basis for determining performance and outcomes in the upcoming reverse auction, the Phoenix Center determined that AT&T’s participation added a 21% premium to auction prices ” above and beyond the revenue effect of the typical bidder.”

There were 168 bidders in the AWS-1 spectrum auction and 104 bidders won spectrum.  Combined, AT&T and Verizon walked away with 61 licenses, but T-Mobile ( you know, one of the little guys) walked away with 120 licenses.

While the report did not speak specifically about broadband, it seems like an unrestricted spectrum auction, like the 2006 AWS-1 auction, would give large and small carriers access to the airwaves necessary for building out more facilities.

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What commercial reasonableness standard will FCC apply?

The Wall Street Journal reported earlier today reported the following:

“The Federal Communications Commission plans to propose new open Internet rules on Thursday that would allow content companies to pay Internet service providers for special access to consumers, according to a person familiar with the proposal.

The proposed rules would prevent the service providers from blocking or discriminating against specific websites, but would allow broadband providers to give some traffic preferential treatment, so long as such arrangements are available on “commercially reasonable” terms for all interested content companies. Whether the terms are commercially reasonable would be decided by the FCC on a case-by-case basis.”

The announcement, for which we should have more details tomorrow from the FCC, leaves the door open for more confusion in the eco-system for the last mile in broadband.  Defining “reasonableness” has always been a regulatory pain.  What standard will a regulator use to determine what is “commercially reasonable”? And compounding the confusion is the “case-by-case” determination that the FCC is supposed to make.

Case-by-case is regulatory speak for unnecessary delay and if there is one thing that businesses find unreasonable is delay.  In commerce, what is reasonable is what both parties agree to given their experience in the market, knowledge about each other’s business, and the needs of their customers and investors.

The commercial environment of the Internet is too dynamic to wait for the FCC to come up with a standard for commercial reasonableness.  Let the market, the actual sellers and purchasers of Internet transit, determine what’s commercially reasonable and if arrangements break down, let them duke it out in court where a commercially reasonable standard can be settled on.

Steps that Congress can take to modernizing spectrum policy

Happy Monday to all.  This morning I shared the following comments via a letter with the House Committee on Energy and Commerce.  I thought I’d share them with you as well.

An updated Act should not only provide broadband access to providers with clear guidance as to the rules of the road, but it should ensure that the road is not littered with debris from a 20th century regulatory framework.  Through legislation and rulemaking, Congress and the FCC have worked to increase the amount of spectrum available to commercial providers.

Now is the time for Congress to go another step further by ensuring that an update of the Act sends a clear message to the FCC to the take steps necessary for increasing the amount of commercially available spectrum to providers that are ready to put this finite and valuable resource to its best use.

Increasing the amount of spectrum available for commercial use should be viewed as an investment in the value the wireless industry brings to the American economy.  According to CTIA-The Wireless Association, in terms of contribution to gross domestic product, the wireless industry is now larger than the publishing, agriculture, hotels and lodging, air transportation, motion picture and recording, and motor vehicle manufacturing industry segments and rivals the computer system design services as well as the oil and gas extraction industries.

Job seekers have benefited from the growth and size of the wireless industry.  CTIA reports that the wireless industry gained 1.6 million new jobs between 2007 and 2011.  Meanwhile the rest of the economy saw private sector jobs fall by 5.3 million during what was arguably the worst economic downturn since the 1930s.

And while prices for wireless services have fallen 93% between 2008 and 2013, the United States, contrary to critics right here at home, leads the rest of the world in mobile broadband speeds.  Again, according to CTIA the average mobile broadband speed in the U.S. in 2012 was 2.6 Mbps, the fastest in the world, and double the speeds seen in Europe.

American enterprise is exceptional because of America’s exceptional emphasis on innovation.  The wireless industry helps to set standards of innovative excellence.  An example of this excellence is the wireless industry’s rollout of 4G Long Term Evolution (LTE) technology and the devices that use it.  According to data from CTIA, the number of 4G LTE-connected devices was 33.1 million devices in 2012.  That number represented a 273% increase in devices that year.   By the end of 2013, that number increased to 62.5 million.

This small sample of industry data supports the argument that there is a thirst for services provided by wireless carriers; that consumers place a value on the services they receive from all carriers, whether they be large national carriers such as AT&T, Verizon, T-Mobile, or Sprint, or smaller carriers such as Boost Mobile, Virgin Mobile, or C-Beyond. 

There is competition in the wireless eco-system, and consumer demand for innovative, flexible services, pricing, and data plans motivate a demand for spectrum that is just as value driven.  Any mechanism for providing wireless carriers with access to additional spectrum must recognize the value the market delivers to consumers and the initiatives carriers take to bring value to the market. 

One mechanism that will provide quality spectrum to wireless carriers is the pending incentive auction.  While the FCC has certainly conducted spectrum auctions before, it has never done one like this complex, two-sided auction. During the first part, or the reverse auction, television broadcasters will give up their licenses if they are confident that they’ll be adequately compensated for doing so.  Then during the forward auction, wireless carriers will bid on the spectrum.  Part of the proceeds from the revenue of the forward auction will compensate the broadcasters; hence their interest in a bidding process that maximizes revenue. However, carriers like T-Mobile and Sprint and their advocates have been advocating for restrictions on the amount of spectrum that AT&T and Verizon may bid on.  What would be the consequences of implementing a policy that restricts AT&T and Verizon’s participation in the auction?

One consequence would be less revenue, which translates into less money to compensate the broadcasters, less money for deficit reduction, and potentially not enough funding a long-awaited national broadband first responder network.  How big would the risk of leaving dollars on the table be?  If we use past auctions as examples, leaving AT&T and Verizon out would have resulted in revenues being 45% lower in the 700 MHz auction and 16% lower in the AWS-1 auction. 

Another consequence would be less spectrum available for commercial use.  Data referenced above points to the value of the wireless industry to the economy and to consumers.  Consumer demand for spectrum is rising and will continue to do so as mobile plays a bigger role in the education, healthcare, and energy sectors, not to mention our day-to-day personal and professional lives.  The industry needs more spectrum to serve its customers as their needs increase. 

Also, another mechanism that could provide quality spectrum to wireless carriers is a federal incentive auction as proposed in HR 3674, the Federal Spectrum Incentive Act.  The bill would create a spectrum fund, and proceeds from the fund could be used to offset sequester cuts, among other uses.  The bill has been with the House Sub-Committee on Intelligence, Emerging Threats, and Capabilities for three months, and it’s time to move it forward.

I believe the broadcast television incentive auction and the federal agency incentive auction as defined in HR 3674 are great opportunities to create pathways for wireless carriers to get access to spectrum.

I encourage you to let Congress know that broadband deployment in the mobile world will mean greater access to spectrum by all carriers.  Consumers shouldn’t be penalized by the implementation of spectrum caps simply because they chose service with a larger wireless carrier.