Comments Off

John Thune will need some help in November for his telecom initiative

The Hill reported last week on U.S. Senator John Thune’s desire to update the Communications Act of 1934, making it a 21st century law for a 21st century world.  While we have 86 and half years left in this century, Mr. Thune, Republican of South Dakota, only has four and a half months to set the stage for a 2015 re-write.  The Republicans will have to hold the House while trying to capture the Senate.

The House Energy and Commerce Committee, under the leadership of U.S. Representative Fred Upton, Republican of Michigan, has already started addressing an update of the Communications Act by issuing a series of white papers, seeking public comment on the white papers’ issues, and holding a number of hearings.

“The only way to provide the certainly that [Internet service providers], edge providers, content publishers and end users need and want is for Congress to legislate,” Mr. Thune said. “My colleagues and I need to roll up our sleeves and figure out how best to promote an open, competitive and free Internet.”

Mr. Thune and his colleagues on the left and the right of the aisle may have to work on the art of compromise if anything close to a re-write is to be accomplished by 2015.  I expect U.S. Senator Al Franken, Democrat of Minnesota, to lead a charge against any language in a re-write that attempts to negate net neutrality rules.  Mr. Franken has been making the media rounds arguing for an open Internet, expressing his fear that broadband access providers will only seek to block access to content or discriminate against certain content producers by favoring their content over a non-affiliate’s content.

In the immediate term I don’t see any new regulatory threats to edge providers.  I believe Congress’ initiatives will move slower than the innovations we see coming from edge providers.  The only way Congress can catch up to the broadband and Internet industries is to put a moratorium on innovation and that will never happen.

Comments Off

Good content and capital’s search for returns will slay the net neutrality dragon

No amount of net neutrality regulation is going to slow down the convergence we are seeing in broadband and media.  That’s my takeaway from remarks made by Federal Communications Commission member Michael O’Rielly’s speech made before the Media Institute last Thursday.  Mr. O’Rielly argued that content is king and that given the proliferation of multi-video distribution and online video platforms coupled with edge providers such as Google, Amazon, and Netflix, innovators who can provide relevant content will continue to drive the market place for ideas, experience, and products.

To set themselves apart, content providers will focus on delivering high-quality content, said Mr. O’Rielly, citing shows such as Netflix’s “House of Cards” and HBO’s “Game of Thrones.”  (I just started watching “Game of Thrones” myself and I’m hooked.)  The future success of content, Mr. O’Rielly observed, will be tied to high-quality and cable, satellite, phone, and online companies are increasingly becoming both distributors and producers of content.

Nielsen, the television ratings company, provides some backup to Mr. O’Rielly’s argument.  Last May, Nielsen released a report finding that in 2013 out of an average of 189 cable channels available to cable subscribers for viewing, the average channels viewed totaled 17.5.  In 2008, the average number of channels available to subscribers was 129 with the average number of channels actually viewed totaling 17.3.  Nielsen summarized their findings by saying:

“This data is significant in that it substantiates the notion that more content does not necessarily equate to more channel consumption. And that means quality is imperative—for both content creators and advertisers. So the best way to reach consumers in a world with myriad options is to be the best option.”

I think it’s safe to apply the cable video distribution model to what’s happening online.  Cisco reported two weeks ago that in 2013, video traffic would account for 66% of all traffic on the Internet and by 2018 video traffic would account for 79% of all Internet traffic.

Netflix accounts for 34% of all North American Internet traffic during the busiest hours of the day.  They have built their “house of cards” on quality content and show no signs of moving away from this model.   Google, a company that wants to be at the hub of the “Internet of Things” has over 60% of Internet end devices/users sending traffic to its servers.

Internet traffic is flowing to and from the big players on the Internet and no amount of FCC ex-ante net neutrality regulation is going to slow down this traffic juggernaut.  Capital will flow to where it finds the highest returns and on the Internet it’s about video content flowing from trusted sources.  When content producers spend millions on high-quality productions, they want their product moving quickly to the consumers driving demand for it.

If the FCC really wants to impress markets with its knowledge of the Internet, then pursuing rules that negate a broadband provider’s good judgment in managing their networks, including providing content providers with alternative methods for high-speed access to their subscribers, is not the way to transmit confidence to the markets that government acknowledges the private sector as fully capable of stimulating innovation.

 

Comments Off

Investors should support the current section 706 framework for spurring broadband investment

Investors, private equity firms, and venture capital firms concerned about the impact of public policy on broadband investment should support advocacy for the Telecommunications Act of 1996′s current Section 706 regime versus the imposition of additional net neutrality rules that run the risk of needlessly expanding the Federal Communications Commission’s jurisdiction and its penchant for ex-ante regulation into the edge provider space.

John Mayo raises a couple good arguments for why I believe that investors should stay off of the net neutrality bad wagon.  Regulation should be output centric.  According to Professor Mayo, Section 706 places policy emphasis on output and policies that emphasize output ensures competitive behavior.

How so?  look at the opposite of competitive behavior; monopolistic or collusive behavior.  Increased pricing on the part of monopolies and oligopolies are the result of reduction in output.  This is counter to our social policy of increased deployment of broadband access to all American households.  According to Professor Mayo, Section 706 aligns an economic policy rationale for Internet governance with traditional, policy proven anti-trust tools that focus on the output altering effects of firm behavior.

On the other hand, argues, Professor Mayo, Title II public utility style regulation takes an ex-ante approach that risks squelching novel, output enhancing innovation.  And where would this innovation and increased output occur?  On the edge.

I recently argued that the FCC should take into consideration the impact regulation has on an edge provider’s ability to enter markets.  Professor Mayo argues that an example of increasing output is the ability of edge provider’s to expand investment.  If an ISP’s behavior discourages edge provider investment, then yes, the FCC could make a call that Section 706 was violated because output has been restricted resulting in less content distribution choice and probably higher prices for subscribers to such services.

Investors should not let what appears as equivocation on the part of edge providers like Netflix confuse them.  A net neutrality regime further enhanced by additional rules does nothing for increase in output or entry by more viable edge providers.  Further regulations amount to additional barriers to entry manifested in greater costs of compliance, costs that impact that bottom line.

 

Comments Off

The FCC has no role in creating competition

Posted June 10th, 2014 in Broadband, economy, entrepreneurship, Federal Communications Commission and tagged , , by Alton Drew

I just filed comments with the House Energy and Commerce Committee responding to their white paper on the Federal Communication Commission’s role in competition.  Here is what I filed:

  1. 1.      How should Congress define competition in the modern communications marketplace? How can we ensure that this definition is flexible enough to accommodate this rapidly changing industry?

Congress should avoid defining competition based on the number of broadband providers in a market.  Instead, Congress should base its competitive analysis on an assessment of the entire Internet eco-system based on two prongs.

First, are prices for broadband access services falling, unchanged, or not increasing by an amount greater than the annual rate of inflation?  If the answer is yes, then the FCC should declare that the consumer market for broadband access providers is competitive.  Where consumer demand is negatively responsive to an increase in prices, there should be a declaration that the consumer market for broadband services is not competitive.

Second, do we see continued entry of edge, content, or access software providers into the Internet market?  Consumers access the Internet for the purpose of accessing information they can rely on.  The value of the information sought and of the network increases where there are an increasing number of information sources.  Where the FCC finds the number of edge, content, and app developers increasing, the FCC should declare that edge provider space is competitive.

 

  1. 2.      What principles should form the basis of competition policy in the oversight of the modern communications ecosystem?

Competition policy should have as its primary principle the maintenance of a regulatory environment that encourages entrepreneurial activity in the edge provider, content provider, and app developer space.  Included in this activity is the ability for the entrepreneur to attract capital and deliver to consumers via the Internet innovative products and services.

Promoting entrepreneurial activity results in service providers entering the market and providing services that will keep the information consumer coming back.  Consumers gain protection during transactions from the entrepreneur’s delivery of the best service possible with the knowledge that there are other providers willing to occupy his space.

 

  1. 3.      How should intermodal competition factor into an analysis of competition in the communications market?

It is time for Congress and the FCC to abandon the silo approach to assessing competition in the communications market.  The communications market is experiencing what I refer to as Convergence 3.0.

In Convergence 1.0, local phone companies wanted to be long distance companies.  Cable companies wanted to be local phone companies.  Long distance companies just wanted to survive and were willing to be anything.

In convergence 2.0, traditional wireline companies also provided wireless services and broadband.  Cable companies provided wireline, broadband, and delivered video services.  Long distance companies went the way of the wooly mammoth.

Today, under Convergence 3.0, Facebook and Google are attempting innovative ways to bring broadband to consumers, with the potential and the cash to offer competitive alternatives to current broadband providers.  Apple is making content plays, its most recent being the purchase of a music streaming service.  Today’s convergence has more than blurred the lines separating platforms.  Convergence has obliterated those lines.

In short, to think about intermodal competition is to go back to the Stone Age also known as the 20th century.  Congress must legislate and the FCC must regulate in the 21st century.

 

  1. 4.      Some have suggested that the FCC be transitioned to an enforcement agency, along the lines of the operation of the Federal Trade Commission, rather than use broad rulemaking authority to set rules a priori. What role should the FCC play in competition policy?

The FCC should play no role in competition and the Communications Act should be updated to reflect that.  The FCC’s focus should be on spectrum, spectrum, and spectrum, along with streamlining regulations that facilitate deployment of infrastructure necessary for deploying the nation’s digital communications capabilities.

Its enforcement powers should be carried out to the extent currently reflected in the Communications Act, but broad rulemaking should be abandoned.  The Commission does not have a clean crystal ball and should not be in the business of trying to predict how the communications markets will look in the future.

Were the Commission good at such predictions it would not have forced Sprint to divest its landline services prior to its merger with Nextel.  Sprint, without a wireline service, in my opinion was placed in a less competitive posture with AT&T and Verizon because of the divestiture.

 

  1. 5.      What, if any, are the implications of ongoing intermodal competition at the service level on the Commission’s authority? Should the scope of the Commission’s jurisdiction be changed as a result?

Competition between service providers using different platforms should work to reduce the Commission’s authority to regulate versus address disputes between consumers and service providers.  Intermodal competition tells me that consumers can choose another provider for their broadband services with the Commission stepping in only to resolve consumer protection issues that statutes give it authority to address.

 

  1. 6.      Competition at the network level has been a focus of FCC regulation in the past. As networks are increasingly substitutes for one another, competition between services has become even more important. Following the Verizon decision, the reach of the Commission to regulate “edge providers” on the Internet is the subject of some disagreement. How should we define competition among edge providers? What role, if any, should the Commission have to regulate edge providers – providers of services that are network agnostic?

As discussed above, consumers access the Internet for the purpose of accessing information they can rely on.  The value of the information sought and of the network increases where there are an increasing number of information sources.  Where the FCC finds the number of edge, content, and app developers increasing, the FCC should declare that edge provider space is competitive.

Should the FCC regulate edge providers?  No. Edge providers already face technical and financial hurdles to entering edge provider markets.  Regulation introduces uncertainty and uncertainty scares away capital investment.

7. What regulatory construct would best address the changing face of competition in the modern communications ecosystem and remain flexible to address future change?

What would be best is for Congress to re-write the Communications Act with the flexibility needed to address changes in technology.  That I admit is a tough task and may only be doable if the Act and the Commission did not focus on trying to predict what type of services or what platform services will be provided on in the future, but puts in place an adjudicative process that allows network providers to settle disputes while passing on consumer complaints to the Federal Trade Commission.  The Commission’s focus should be on making sure the communications infrastructure is maintained.

 

8. Given the rapid change in the competitive market for communications networks and services, should the Communications Act require periodic reauthorization by Congress to provide opportunity to reevaluate the effectiveness of and necessity for its provisions?

It took sixty-two years to update the Communications Act of 1934 and 18 years after the last major re-write, Congress is barely inching toward another amendment of the Act.  Meanwhile, innovation and convergence are taking place rapidly in the communications markets raising the chance that after the next rewrite the industry will be a lot closer to the 22nd century while the Commission and Congress struggle with the changes they couldn’t keep up with in the 21st.

Periodic updating may be ineffective given the uncertainty that partisanship introduces into the Congress.  As I discussed prior, what would be best is for Congress to re-write the Communications Act with the flexibility needed to address changes in technology.  That I admit is a tough task and may only be doable if the Act and the Commission did not focus on trying to predict what type of services or what platform services will be provided on in the future, but puts in place an adjudicative process that allows network providers to settle disputes while passing on consumer complaints to the Federal Trade Commission.  The Commission’s focus should be on making sure the communications infrastructure is maintained.

Comments Off

Broadband: Why would an edge provider let FCC see its business model

Technocrat’s Anne L. Kim blogged on comments Consumer Electronics Association CEO and president Gary Shapiro made at a recent Brookings Institution event.  Here is an excerpt from her post:

On net neutrality, Shapiro wants more of a hands-off approach from the government. He wants to see government allow industry and nongovernmental organizations establish principals. “And if the principals are violated, then act,” he said.

“I personally am fearful of all of a sudden sending those companies into a new area of regulation like utilities,” referring to the FCC considering using Title II of the 1996 Communications Act to rewrite net neutrality rules.

He said he likes things the “way they are” and that he’s rather not see them changed, adding that “good intentions scare me.”

Take a look at Title II, something more edge providers need to do, and you can appreciate some of Mr. Shapiro’s fear.  For example, section 211 of the Communications Act requires that common carriers (a classification that net neutrality advocates want applied to broadband providers) file copies of all contracts that they have with other common carriers.  So, if Google, a broadband wannabe, has peering or transit contracts with Comcast, Google will have to file its contracts with the Federal Communications Commission, and probably with state public utility commissions as well.  If these contracts contain information regarding traffic from certain edge providers a la Netflix, Netflix wouldn’t be happy that some aspect of its business model may be on public display with the FCC.

This type of transparency may bring joy to net neutrality proponents but not to the edge providers they purportedly are so concerned about.  In my opinion, letting the government have a copy of a contract entered into autonomously is the same as the government regulating your free speech.  Unless there is a dispute to be resolved between two parties to a contract, I see no reason to let the government have access to its contents.  If edge providers want to see a slippery slope created that takes regulation right to their doorsteps, Title II will lay the bricks for that driveway.

My walk down the Yellow Brick Road of regulation gets scarier when I take a look at section 215.  Section 215 allows the FCC to examine transactions involving the furnishing of services, supplies, equipment, personnel, etc., to a carrier.  Also, the FCC, pursuant to this section, may examine transactions that impact charges a common carrier assesses for provision of wire or wireless services.  Section 215 also allows the FCC to determine how reasonable these charges are.  Also, the FCC may report its recommendations to Congress as to whether charges are invalid and should be modified and prohibited.

Now, not to knock on Google, but since they are the Internet flavor of the week given the disclosure of their perceived wretched diversity in hiring practices, disclosing matters regarding personnel much less on their services should make the company and its investors think twice about supporting net neutrality brought to you via Title II classification.

All of Title II should be scary to venture capitalists, private equity, and their investor clients, but section 218 should bring great pause. This section allows the FCC to inquire into the management of all common carriers.  The FCC may obtain management information not just from the carriers, but from entities that directly or indirectly control them.  That, in my mind, includes private equity firms or venture capitalists that may have a controlling interest in some little regional or rural broadband provider.  With the SEC stepping up its scrutiny of private equity via the Dodd Frank Act, does private equity want another alphabet soup agency knocking on its door?

Here is one more, especially for the app developers.  Section 231 speaks to app developers, or more definitively access software providers.  This section prohibits the use of the World Wide Web to transmit material harmful to minors.  I wonder how many apps fall under this category.

When you look behind the curtain of good open network intentions, you can find some scary stuff.