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The FCC shouldn’t risk creating market failure by issuing a blanket ban on prioritization

In a letter filed yesterday with the Federal Communications Commission, broadband access provider AT&T made an argument for promoting user-directed prioritization of internet traffic.  AT&T wants to ensure that the Commission does not lump user directed prioritization together with paid prioritization agreements entered into between a content producer and a broadband provider.  The narrative has been that paid prioritization, where a content producer pays for faster throughput via a digital high volume lane, discriminates against other content providers who may not have the scale or capital to leverage in return for an express lane.  AT&T is basically saying, if you aren’t going to cut the big content producers some net neutrality slack, at least let end-users determine which traffic they would like coming their way at a faster speed.

AT&T does provide an internet traffic management service for its enterprise customers.  AT&T Managed Internet Service allows business customers to prioritize certain internet traffic.  Business customers designate certain performance sensitive traffic for special handling in the event of network congestion.

So, if a medical office places greater value on receiving data on whether a patient is taking their medication versus whether the mailroom boy gets his favorite Felix the Cat video, the patient data will take higher priority.

What this service implies from a consumer welfare perspective is that certain consumers of content transmitted over the internet have made determinations about the value or quality of information they choose to consume.  In the example of the medical office, they know what content is important to them.  They, through trial and error and search experience have eliminated some amount of information asymmetry and choose to enhance the value of time spent consuming data by receiving the most important information first.

This may also be the case in publishing.  When I wrote for a trade magazine back in 1999, we subscribed to a rich data base of media information online.  That data base took precedent over other sources of information. Through experience we had made a determination on the quality of data.

From an efficiency and market failure view, end-user directed prioritization makes sense.  It would be good if broadband access providers could create and market similar services to non-enterprise consumers who, in the new emerging world of quasi a la carte content viewing may also want to prioritize HBO or CBS’ video traffic over other content.  Consumers won’t see this benefit if the Commission issues a blanket ban on prioritization.

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Requiring access to cable-owned content creates a barrier to entry for smaller content providers

Yesterday Federal Communications Commission chairman Tom Wheeler announced his intent to ask his fellow commissioners to sign off on a rule that would require cable companies to provide over-the-top video distributors with access to cable company-owned content.  According to Mr. Wheeler, the intent of the rule modification is to provide consumers of content “more alternatives from which to choose so they can buy the programs they want.”

What this change to the rules will actually do is create a barrier to entry by smaller content providers.  Mr. Wheeler’s rule amendment, much like the statute passed in 1992 and its subsequent rule, will simply give incumbent content an additional platform from which to be seen.  “Law and Order: Criminal Intent” will now be seen on cable, satellite, and over-the-top video distribution.  Over-the-top providers can now take a short cut to content and forgo negotiating contracts for new content from new entrants.

For start-up, minority-owned, or woman-owned content production companies there will be a lost opportunity to showcase more of their content to over-the-top distributors.  Smaller content providers may have to reduce the price offerings for their programming just to get one of fewer remaining slots on a over-the-top’s network.

If the FCC is so concerned with competition throughout the internet ecosystem, it should let all stakeholders in the ecosystem enter into contracts on their own without government interference.  Also it should provide smaller content providers the opportunity to enter into strategic partnerships that get their product in front of the public.

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The best broadband play for minorities is to own its intellectual property

There has been plenty of discussion about the minority community’s lack of access to broadband.  Evidence supporting that narrative includes findings by the Pew Research Internet Project showing that while 87% of whites use the internet, only 80% of blacks do so.  In addition, 74% of whites have broadband at home while only 62% of blacks access the internet using broadband from their residences.

Arguments have been made that given this disparity in access between white and black Americans that blacks are falling behind on accessing economic opportunities especially when it comes to competing for jobs.  Even though blacks are over-indexed on smartphone ownership and access to the Internet via mobile devices, it is very difficult to create or submit business proposals or resumes using a smartphone.

Honestly, I’m no longer that concerned about access to the broadband protocol for transmitting and accessing information over the internet.  Part of the reason is that given the level of investment in deployment over the last decade and a half, approximately 99% of Americans have access to broadband.  In my opinion, if minorities are to garner any true wealth creation from the broadband, it will have to come in the form of intellectual property with a particular emphasis on owning patents.

In addition to pursuing job opportunities, the discussion of wealth generation via broadband access has centered on creating content.  From the distribution of movies and television shows via Netflix to Maggie Watson providing fitness tips on YouTube, there is an abundance of video content.  Netflix and YouTube account for 50% of North American internet trafficThe other well-known and not so well-known traffic generators bringing up the rear include:

Apple: 4.3%

Twitch: 1.8%

Hulu: 1.7%

Facebook: 1.5%

Valve: 1.3%

Amazon: 1.2%

Pandora: .5%

Tumblr: .4%

Not only are these companies sending content downstream, but they are aggregators of content and as such create bottlenecks to producers that want to get their content in front of as many eyeballs as possible.  Bottlenecks increase the costs of doing business for content providers making it even more difficult to create market niches.

With the abundance of content, however, comes the reality that creating a wealth-generating niche becomes increasingly difficult as content providers compete for more space.

And let’s not talk about apps.  The number of apps in existence is well over one million, but the vast majority of these apps generate little revenue.  For example, for the developer creating an app for Apple, the average revenue is around $4,000.

So where are the opportunities on the internet for minorities?  First, let’s look at the future needs of the internet and its sub-component, broadband transmission protocol.  In September 2014, Accenture released a report documenting the opportunities for growth in services, products, and revenues via the “Industrial Internet of Things.”  Accenture found that global investment in IIOT is expected to top $500 billion in 2020. According to Accenture’s report:

“Companies that introduce automation and more flexible production techniques to manufacturing can boost productivity by as much as 30 percent, and predictive maintenance of assets can save companies up to 12 percent over scheduled repairs, can reduce overall maintenance costs by up to 30 percent and can eliminate breakdowns by 70 percent.”

One path to increasing productivity via IIOT is through innovation via intelligent technologies.  Again, according to Accenture:

“Manufacturers soon will be building intelligence into every machine they produce and the innovative applications that accompany these smart machines will be vehicles for driving new revenue streams out of product-service hybrids. To reap the full benefits of the Industrial Internet of Things, says Accenture’s report, companies must exploit sensor-driven computing, industrial analytics and intelligent machine applications and weave together enterprise and machine-generated data to create new monetization opportunities.”

Building intelligence into every machine calls for inventive activity and this is where I see the best opportunity for Americans in general and people of color in particular.  Closely related to inventive activity is the ownership of the patented technology that can drive innovation.

The Brookings Institution reports that the average patent is worth approximately half a million dollars, a much more attractive sum than the paltry $4,000 for an Apple app.  Although patent values are increasing, the U.S., according to Brookings, has to face certain challenges in order to remain competitive, including maintaining funding for research and development and ensuring access to high-quality education, especially for lower income students.  If students are not prepared academically to contribute to research and development and the inventive activity necessary for keeping America innovative, the innovation system would be deprived of people that can make or market important discoveries.

I believe that this is where more black and Hispanic Americans should place their focus; on being inventive and innovative.  Finding better ways to efficiently and effectively deploy internet infrastructure including broadband technology is still a challenge especially in rural areas.  Also, developing new and better technology for the more efficient use of spectrum is necessary for connecting mobile devices to the internet.

To be true players in the content and information industries, inventiveness and ownership is where it’s at for minorities.

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If Netflix was attempting rent seeking, any success may be short-lived.

Gerald Faulhaber and David Farber today published a post questioning the need for open internet rules.  The authors expressed a sense of irony that after decades of successfully running a communications platform built on open network architecture that technologists and engineers today would need the help of the Federal Communications Commission in keeping said network of networks open.

Online video distributor Netflix has been documented as thinking that the Commission should be riding to the rescue of content providers by advocating that the Commission implement strong net neutrality rules.  By strong net neutrality rules Netflix means that the Commission should prohibit the payment of tolls by content providers to broadband operators such as AT&T, Comcast, or Verizon. According to Netflix:

“Without strong net neutrality, big ISPs can demand potentially escalating fees for the interconnection required to deliver high quality service. The big ISPs can make these demands — driving up costs and prices for everyone else — because of their market position.”

Netflix tried to invoke a little altruism asking the Commission to imagine the plight of smaller content providers facing the threat of escalating toll charges assessed year of year at an increasing rate by broadband providers.

It appears the real plight that Netflix is concerned with is the uptick in competition resulting from an HBO or ESPN streaming their content.  For example, an analysis last week by Morningstar questioned the long term profitability of Netflix in the face of competition from content owners.  According to Morningstar:

“Video distribution firms (cable, satellite, phone) have suffered from inertia in building out TV Everywhere, which would allow customers to stream current channels on the device of their choice. Aside from HBO GO and Watch ESPN, the ability to stream channels is much weaker than we would have expected in the present day. Still, we view this service as inevitable within the next two to three years and believe the market is underestimating the potential negative impact on Netflix when most cable channels with fresh content can be streamed.”

This competitive threat, in my opinion, has Netflix seeking rents with net neutrality and Title II as the vehicle.  According to Investopedia, rent seeking is defined as when a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.  An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don’t create any benefit for society; they just redistribute resources from the taxpayers to the special-interest group.

Time Warner’s HBO, Disney’s ESPN, and Viacom’s CBS apparently recognize the need to respond to Netflix’s disruptive model with a little innovation of their own, thus their proposed streaming services.

Would consumers of video content via the internet benefit if competing online streaming providers were ensnared by additional regulations flowing from Title II or net neutrality rules?  No, they would not because fewer online content providers would step up to challenge Netflix and consumer welfare would shrink because of reduced access to video content.

The Commission should recognize that net neutrality and calls for Title II regulation are nothing but attempts at rent seeking.  If Netflix and other content providers believe their content or services are of value to the consumer, they will not need the Commission to intervene in this market.

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Morningstar report shows that wireless environment is competitive

This morning I came across an analyst report on Morningstar.com that described how Verizon is under more competitive pressure from wireless rivals such as AT&T, Sprint, and T-Mobile.  Analyst Ryan Knutson wrote the following:

“Verizon is under more pressure from rivals now than at any time in years, especially as Sprint Corp. recently began aggressively cutting prices and AT&T Inc. has been reacting to T-Mobile US Inc.’s continued momentum. Verizon has lowered its prices and mimicked some of Sprint’s offers to increase the size of data buckets. So far, it seems to have helped it avoid customer losses. An important metric to monitor is churn, or the percentage of customers leaving each month. Verizon has done well keeping that percentage below 1%. A figure much higher than that is a sign things are getting tougher.”

Mr. Knutson went on to say that while Verizon was still adding more post-paid subscribers than losing them and that the company’s churn rate (percentage of customers leaving the service) was below 1%, the company is being challenged by T-Mobile which added 1 million subscribers in this quarter.  Mr. Knutson also estimated that Verizon plans to spend approximately $10 billion in upcoming spectrum auctions.

Mr. Knutson’s report supports an argument made earlier today by Verizon’s Libby Jacobson.  Ms. Jacobson, in describing the competition Verizon faces in wireless, stated:

“One of the hallmarks of the wireless industry – from devices to applications to service plans — is the broader range of choices available to consumers enabled by the various differentiated arrangements and business models in the competitive and still-rapidly-evolving wireless business. Such flexibility is particularly important so that wireless services can continue to develop into a more full-throated competitive option to the higher speed wireline services that, in many places, may only be available from cable operators.”

In a competitive marketplace, we should expect to see changes in the relationship between wireless services consumers and producers of those services reflected in pricing, notably price decreases.  In the classic Hoteling example, we should see firms moving closer together in prices and services as they try to persuade more consumers to buy their product.  We are seeing that in the wireless space, but wireless report after wireless report, the Federal Communications Commission refuses to draw the conclusion that the market for wireless services is a competitive one.

Would making a declaration that the market for wireless services is competitive somehow undermine the Commission’s role in communications?  Given the light touch treatment extended by the Commission on to the wireless industry, saying that the market is competitive would be the scissors that cuts an umbilical cord that quite frankly has not been needed for decades.  The fear that somehow wireless providers would reverse course by taking actions that would make the wireless market less competitive should also go the way of the Dodo bird.