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Convergence 3.0

Posted May 31st, 2014 in Broadband, energy, Federal Communications Commission, Google and tagged , , by Alton Drew

We are in Convergence 3.0.  Convergence 1.0 occurred in the 1990s when telecommunications companies wanted to compete with long distance carriers; long distance carriers wanted to be local phone companies; and cable companies wanted to provide voice services.

In Convergence 2.0 we found cable companies, wireless phone companies, and traditional phone companies competing with hardware creators such as Apple; search engines, such as Google and Yahoo; and social media platforms, such as Facebook, LinkedIn, and Twitter, to become a higher form of media company, competing for eyeballs by owning and developing content that can be easily seen on their devices and connected to by their networks.

In this Bloomberg Businessweek article it appears that Convergence 3.0 is here.  Google and AT&T are providing services beyond the electric companies’ meters, services that promote the “Internet of Things” where not only can you turn on your lights with your smartphone, but you can use broadband connectivity as part of net metering services that allow consumers to monitor their energy conservation efforts and sell excess energy that they generate at home back to the utilities.

Consider this quote from the article:

“ ‘The battleground over the next five years in electricity will be at the house,” says David Crane, CEO of NRG Energy (NRG), whose company has made large investments in solar and is facing off against established utilities. “When we think of who our competitors or partners will be, it will be the Googles, Comcasts, AT&Ts who are already inside the meter. We aren’t worried about the utilities, because they have no clue how to get beyond the meter, to be inside the house.” Collaborating with Comcast, Crane’s NRG is running a trial in Pennsylvania that adds electricity to the traditional cable, phone, and Internet triple-play package.”

In addition, also from the article, here is an example of how broadband is used to monitor energy conservation:

Vivint’s business plan exploits the company’s large home-security customer base—800,000 homes across six states and the District of Columbia—to lease rooftop solar arrays. Vivint, which was bought by private equity giant Blackstone Group(BX) in 2012 for $2 billion, installs the solar equipment for free. Customers sign contracts to buy the power their systems generate at rates as much as 30 percent lower than the local utility. In just two years, Vivint’s solar unit accounts for 9 percent of all new rooftop solar installs in the U.S.

Because its customers are still hooked up to the grid, Vivint is able to sell any excess power back to the utilities under state-mandated net metering programs. Vivint and others are also learning how to deploy smart technology that can consolidate energy savings from millions of homes and businesses. Vivint offers a security system that incorporates computerized energy-conserving features—including the ability to set thermostats and control appliances. Utilities can contract with home-automation companies like Vivint to get their customers to defer the use of big appliances or turn down their air conditioning units during peak periods, helping utilities avoid power outages or the need to buy power on the spot market to make up for shortages. Consumers like it because they get paid for saving energy.

You have to ask yourself if we will also see a convergence of regulators and if there is a convergence of regulation, how will this impact capital flow and investment.  The net metering and the associated rates and credits affiliated with the program are regulated by state utility commissions.

Meanwhile, the Federal Communications Commission issued proposed net neutrality rules for the alleged purpose of ensuring that consumers can access the content of their choice at whatever points of the combined 66,000 networks we call the Internet.  These rules are also intended to ensure that app developers can deploy their services without fear of discrimination.

What happens if an electric utility says to a company like Vivint or to a consumer that they can’t use a certain application for accessing their network?  Can the FCC construct an argument under current statute that says the utility is discriminating against the consumer’s choice of application used on its network, thus a net neutrality violation?  And there is the more fundamental question of whether an electric utility is a broadband provider simply because it deploys smart grid technology within its network and allows connectivity with other wireless networks?

If the FCC were to wade into these waters, its strongest regulatory scheme would be section 706 versus Title II.  An electric utility could make a very strong argument that its not a telecommunications company and that Title II shouldn’t apply to it.  Smart grid and net metering are arguably advanced communications technology where computers are talking to and exchange information with each other about a consumer’s energy usage and under section 706 the FCC could make the argument that an electric utility’s prohibition of an application’s use on its network goes against the goal of deploying advanced communications.

Codifying section 706 in rule format may only serve to restrict the FCC even if it wanted to make an exception for electric utilities and avoid the headaches of dealing with over 50 state regulatory boards.

Regulatory arbitrage in the broadband age.  Something to think about.

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The New York Times needs to stop using the silo view to assess Comcast, Time Warner

The New York Times’ editorial board today opined on the proposed merger between Comcast and Time Warner.  In the piece, the editorial board argued that the combination could mean that in the future Comcast could keep competitors from accessing its NBC content and that there would be an inordinate amount of control over the consumer’s broadband access to content.  Here was my response:

“The Editorial Board is focusing on a lot of “what ifs” that if the feared scenarios were carried out by Comcast, the result would be a devaluing of their network and the content that they own. Comcast wants its NBC content shown on as many platforms as possible. The more eyeballs for its content means certainty in advertising and license fees generated by viewers.

Also, the Board is still stuck in the 1990s view of regulation. You can’t use the silo view of how to view Comcast or Time Warner. Google and Apple are developing a business model that connects consumers end-to-end to content. Google is also exploring providing broadband in a number of cities. A Comcast-Time Warner combination is merely good planning as the companies try to prepare themselves for a future where companies that have been erroneously described as tech companies are showing their through colors as media companies.

The notion of information portal is being taken to another level by all of these companies and it’s time for the FCC and the U.S. Department of Justice to recognize this.”

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Can the FCC look at peering arrangements? No

The New York Times yesterday reported that Federal Communications Commission chairman Tom Wheeler wants to take a look at peering arrangements.  Here is a definition of peering provided by TechTarget.com:

“Peering is the arrangement of traffic exchange between Internet service providers (ISPs). Larger ISPs with their own backbone networks agree to allow traffic from other large ISPs in exchange for traffic on their backbones. They also exchange traffic with smaller ISPs so that they can reach regional end points. Essentially, this is how a number of individual network owners put the Internet together. To do this, network owners and access providers, the ISPs, work out agreements that describe the terms and conditions to which both are subject. Bilateral peering is an agreement between two parties. Multilateral peering is an agreement between more than two parties.

Peering requires the exchange and updating of router information between the peered ISPs, typically using the Border Gateway Protocol (BGP). Peering parties interconnect at network focal points such as the network access points (NAP) in the United States and at regional switching points. Initially, peering arrangements did not include an exchange of money. More recently, however, some larger ISPs have charged smaller ISPs for peering. Each major ISP generally develops a peering policy that states the terms and conditions under which it will peer with other networks for various types of traffic.

Private peering is peering between parties that are bypassing part of the public backbonenetwork through which most Internet traffic passes. In a regional area, some ISPs exchangelocal peering arrangements instead of or in addition to peering with a backbone ISP. In some cases, peering charges include transit charges, or the actual line access charge to the larger network. Properly speaking, peering is simply the agreement to interconnect and exchange routing information.”

I decided to post this definition to give readers a taste of the complexity of peering arrangements.  The FCC may have a bit of time discerning paid from free exchanges of traffic as well as figuring out whether they are looking at a private arrangements circumventing the public Internet or one that is indeed running over networks used by everyone.

Mr. Wheeler may be throwing a ratchet into the definition of net neutrality with this initiative.  Net neutrality has so far focused on the relationship between an end-user of Internet services and her broadband access provider.  Peering arrangements don’t fall into that traditional net neutrality box since the relationship is between broadband providers, edge providers, or content distribution networks. In addition, Mr. Wheeler made clear last week before a House sub-committee on communications and technology that net neutrality was about that “last mile” connectivity between broadband providers and end-users.  If he is changing the definition, does he have a legal leg to stand on?

Well, he can’t look to Title II.  Section 251 of the Communications Act describes interconnection requirements for telecommunications companies and the intent behind that section was to help spur competitive markets for local telephone service.  Unless Mr. Wheeler is ready to make a dangerous Title II reclassification move, I don’t see him going down that road on peering arrangements.

How about under Title I, specifically section 157 which encourages the provision of new services to the public.  I don’t see a winner here either.  Peering arrangements are not services for the public.  They are network management strategies employed by network owners to regulate and manage traffic.  Sure in the end the end-user may benefit when traffic flows to his computer, but peering arrangements may not be for consumer traffic and the FCC would have to determine which portion of traffic is flowing for what purpose.

Finally, section 1302 of the Act, otherwise known as section 706 of the Telecommunications Act of 1996, doesn’t seem to help out Mr. Wheeler either.  Yes, the section calls for incentivizing deployment of advanced telecommunications services through regulatory mechanisms such as price cap regulation, regulatory forbearance, or other methods that remove barriers to investment, but again peering is about network interconnection, not about encouraging local telecommunications competition.  The local competition boat successfully left the regulatory harbor years ago and demand for broadband services and the benefits of the Internet appear to be encouraging infrastructure development on its own.

No, the FCC need not look at peering arrangements.

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What part of the Internet is Congress, FCC talking about?

Federal Communications Commission chairman Tom Wheeler’s testimony nor the questions and comments from members of the House Sub-committee on communications and technology did little to shed light on encouraging broadband adoption or deployment.  A significant portion of today’s chatter centered on net neutrality, whether consumers would be harmed by failure of public policy to ensure an open Internet, and paid prioritization, where a content provider would pay an Internet service provider extra fees in order to send traffic at a faster speed.  Members of the sub-committee appeared to be mixing up the two.

I expected the committee’s questions to address net neutrality.  While Mr. Wheeler emphasized that net neutrality was about consumer assurance of use of the entire “pipe” connecting him to the Internet, I still left with the testimony with the feeling that Congress and the FCC are too focused on the entire Internet infrastructure. They appear confused about where on the Internet the FCC would be responsible for regulating.

As CNET’s Marguerite Reardon correctly noted in a blog post last week, the Internet is made up of globally interconnected networks and the FCC would only be responsible for applying its regulatory oversight over the last mile piece, that portion of the Internet where a content provider’s traffic begins traveling along an Internet service provider’s network with its final stop at the consumer’s premises.

And should we be concerned about paid prioritization preventing equal treatment of traffic pursuant to net neutrality philosophy?  No, because while net neutrality has to do with the transparency of network management of the broadband pipe; no blocking of access to content of a consumer’s choice while using that pipe; and the ability of all traffic to traverse that pipe to the consumer, paid prioritization has to do with agreements entered into between content providers and broadband providers regarding how their networks are interconnected and the compensation necessary for handing off and accepting traffic.  For these reasons, paid prioritization is not a net neutrality issue.

The FCC and Congress should keep the focus on the last mile.

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No. Broadband access providers are not public utilities

Since the Federal Communications Commission’s release yesterday of its draft net neutrality rules and request for comments, open Internet proponents have been howling for public utility treatment of the information superhighway.  Rashad Robinson, executive director of civil rights group Color of Change, argued in The New York Times that classifying broadband providers as public utilities would ensure the promotion of net neutrality.

Julie Samuels, executive director at Engine, argues, also in The Times that,  ”We can only achieve true network neutrality by reclassifying the Internet service as a public utility. Only this will ensure that we can protect and empower consumers, small businesses and the economy.”

The term, “public utility”, gets tossed around as if it is supposed to create some realm of fairness.  Too bad none of the advocates bother to share a definition of the word and make an argument that broadband service providers should be dumped into the box.  Based on the definition, broadband providers simply don’t fit, and that lack of fit hinges on the concept of necessity.

In general, a public utility is a business that provides an everyday necessity to the public at large.  Traditionally these necessities include, electricity, natural gas, and water and waste water services.  Typically a public utility is a monopoly, the creation of which may be natural but is sanctioned by a government authority via a license or some other charter.  It may be more efficient and less expensive from an infrastructure standpoint to allow one provider of a utility service in a given territory.

Telephone and cable companies typically are not included in the definition of public utility and while their licenses to operate are usually not exclusive, financial and technical barriers to entry may be substantial enough to keep potential entrants out of a market.

As part of an exclusive license to operate, monopolies subject themselves to regulation of their fees, rates, and other charges.  Under traditional rate regulation the process also involves evaluation of their assets to ensure that the assets claimed as necessary for generating services are doing just that.

As I mentioned earlier, whether we are looking at a utility depends on whether the service provided is necessary or a necessity for sustaining life.  Trying cooking without energy or water or bathing without water.  Would you want to go into surgery without electricity?  There would be a significant impact on health and life without a utility’s service.

Now, can you say the same for services provided by a broadband provider?  Yes, broadband services provide convenience and speed of delivery to market of digital products and services.  Without broadband I would not be able to digitally deliver this blog post, but does getting this message out have to rely on broadband or more importantly, would I be able to survive without broadband with no threat to my health or life?  Yes, I could survive.

To me this is the basic crucial element missing from the argument of net neutrality proponents.  Yes, saying that broadband is not necessary is damned near heresy for a lot of people, but we need to analyze broadband’s necessity in this way to understand its place as a utility; so that the noisiness of the public utility chant is properly pierced.  Just saying that broadband is used by 87% of the population everyday does not mean it’s a necessity for public utility purposes, not when there are alternatives, albeit slower and probably clunkier for doing the same thing.

In addition, the dynamism of broadband access and the glacier-like process of regulating a utility would collide and the glacier would win.  Imagine your broadband service provider wants to introduce a new service.  It may have to wait several weeks or months for regulatory approval, hoping that it passed the FCC’s reasonable network management criteria.

In addition to the FCC’s regulatory review, your provider may have to seek approval from several states before deploying the service through its territory, assuming the states decide to change their statutes in order to classify broadband access providers as a utility.  Most states currently don’t.

Shouting “public utility” from the rooftops is the easy part.  To classify a broadband provider as such is also poor policy.