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My filed comment with the FCC on special access

Posted August 3rd, 2016 in Broadband, capital, special access and tagged , by Alton Drew

In re: Docket No. 16-143, Business Data Services in an Internet Protocol Environment

The Federal Communications Commission should implement a light touch regulatory model for business data services. Where a carrier needs to purchase for resale facilities provided by an incumbent local exchange carrier, a competitive local exchange carrier, or a cable company, prices should be market-based where negotiations are conducted based on an exchange of value determined by the parties. Also, the Commission should re-evaluate what it means by the term “competition.” Competition has been erroneously interchanged with “consumer choice.” I provide my reasoning below.

Special access services have evolved seemingly exponentially since the early 1990s. Prior to the 1996 amendment of the Communications Act of 1934, special access services were indeed dominated by incumbent local exchange carriers. By the middle 1990s cable companies, the only other facilities-based entities that had any chance of competing with incumbent local exchange carriers, had a very small share of the alternative access or by-pass markets. What they did have was vision to develop and use, at that time, what was considered innovative DOCSIS technology, a technology that would help them acquire more of the residential and enterprise markets for internet access.

Resellers, on the other hand, could never, in my opinion, be considered serious providers of telecommunications services. Take residential services. There was nothing more disconcerting to me as a young staffer at the Florida Public Service Commission during the 1990s to see complaint after complaint filed against resellers only for resellers to blame an issue on an underlying carrier. In my opinion, if a carrier wanted to seriously serve the public interest, it should have entered the capital markets and raised the financing to build out its own facilities. Consumers would have been better served under that model.

Fast forward to the 21st century and it cannot be denied that cable companies and other facilities-based competitive local exchange carriers have entered the special access markets offering business and enterprise customers alternatives to incumbent local exchange carriers. Business and enterprise customers can choose between incumbent local exchange carriers, competitive local exchange carriers, and cable companies for special access services.

Regarding the pricing of inputs i.e. lines that one type of carrier may have to purchase from another type of carrier for the purpose of providing special access services, prices should be determined in the market during negotiations between carriers. The Commission is not in a position to determine the value that the parties place on an exchange. That is not the Commission’s expertise. Only the carriers can best determine the value of the consideration being exchanged and the appropriate price. Each construction, deployment, or sale of special access facilities will differ for a number of reasons including location, business climate, capital markets, etc., information that private parties have better access to and more incentive to gather and get right.

The Commission believes it should insert itself heavily into pricing matters based on the premise that by doing so, it will bring about competition and garner better results for the consumer. This premise stems from an incorrect meaning of competition. Consumers have a greater number of carriers to choose from when there are a greater number of carriers that have determined that there are ample resources at a reasonable price to compete for in order to provide a service. Before an entity competes for a single customer, the ultimate resource that allows the entity to pay for all other resources, it has to compete for financial capital, land, labor, and entrepreneurial skillsets necessary for creating and selling its product and services. The Commission, in arguing a lack of “competition” in the business data services market, has not demonstrated that sufficient financial and natural capital exists in order to incentivize a provider to enter a market and meet consumer demand. Even if the Commission could make such an assessment, the Commission would next have to document the level of market failure, an exercise I doubt the Commission would want to endeavor given its knack for avoiding in-depth economic analysis.

Lastly, where a reseller or facilities-based carrier wishes to purchase facilities from another carrier, carriers should not be compelled to maintain legacy analog networks for this purpose. If consumer welfare is the Commission’s concern, then resellers should purchase digital facilities thereby furthering the use of more advanced technologies for the provision of broadband access.

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FreedomPop applies to FCC to resell services at all international points

On 29 July 2016, STS Media doing business as FreedomPop applied to the Federal Communications Commission to provide resold services from all international points. FreedomPop provides free mobile broadband plans, devices, digital services, and social sharing that allows its subscribers to share data across accounts.

The company was formed in 2011 and counts among its investors Mangrove Capital, DCM, and Atomico. According to its website, the company provides services in the United States and the United Kingdom and plans to roll out services to a dozen more countries this year.

FreedomPop uses Clearwire’s 4G WiMax data network and Sprint’s 4G LTE network.

The California-based start-up has avoided being acquired so far opting instead for raising private capital in a number of rounds. In June of 2015 it was reported that FreedomPop would invest $50 million in raised funds to invest in European and Latin American markets while expanding here in the United States.

STS Media’s application is filed under ITC-214-INTR2016-01757.

 

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Has net neutrality decision impacted trading in the telecom sector?

Today the United States Court of Appeals-District of Columbia gave the Federal Communications Commission a victory, holding that the agency has the statutory authority to reclassify broadband providers as telecommunications companies as opposed to the industry favored status of information service providers. Broadband providers and their supporters have vowed that the fight is not over, telegraphing the probability of obtaining a ruling from the full bench of the appellate court or, going all the way to the United States Supreme Court.

The telecommunications services sector seemed to have shrugged off the ruling. The Thomson Reuters G7 Telecoms Sector Index registered a .06% decline at the end of the trading day. The sectors biggest players, AT&T and Verizon, saw their stock values increase .47% and .80% respectively. The response is not surprising since broadband operators such as AT&T, Verizon, and Comcast have been providing their high-speed access services pursuant to an open internet philosophy for decades. Their primary argument has been that broadband regulation should be conducted with a light touch and that throttling access speeds or discriminating against certain content or websites would be bad for business given the level of competition that they face.

Wall Street, unlike the Commission, has not been afraid to declare how competitive the telecommunications sector is. Charles Schwab analyst Brad Sorensen had this to say in a recent report about the telecommunications services sector:

“The telecom sector is certainly not what it was a couple of decades ago, although some investors may not realize it yet. The days of near-monopolistic control of landlines are long gone. These days the sector is driven by fierce competition, with new ways of communicating continually entering the market, and consistent—and expensive—upgrade cycles. To us, this reduces the traditional defensive appeal of the telecom sector.”

The court avoided the question of market power and deferred to the Commission’s predictive judgment on telecommunications companies willingness to invest in broadband network deployment. Although the sector has long left the monopoly environment existing prior to the passage of the Telecommunications Act of 1996, should traders consider not only a throwback to the regulatory world of the 1990s that the court’s ruling has cemented but reorganization of the sector that resembles the Ma Bell days?

The 1990s were the pre-convergence days. Carriers followed a silo model separating, in the case of larger local exchange companies, their long distance operations from their local exchange operations. In order to avoid the disruption that may ensure from increased complaints regarding perceived throttling, suspected paid prioritization, and misunderstood network management techniques, what if larger carriers like AT&T and Verizon decided to spin off their newly created “utility” pieces and focused on providing backbone, mid-mile, advertising, content delivery, and special access services? State public utility commissions, long shut out of the broadband regulatory game, may now view the courts ruling as permission to re-enter the regulatory fray.

Spinning off the telecommunications component and leaving them subject to state and federal regulation may allow AT&T, Comcast, and Verizon to focus on the content and data business and go head to head with Google or Facebook, edge providers, who, though subject to the Federal Trade Commission’s privacy regulation, don’t have to suffer the FCC’s Title II regulation.

A spin off may be good for traders especially if the utility components are subject to rate-of-return regulation thus providing the certainty of fixed-income behavior while the unregulated portions, while subject to the volatility of competition, may generate higher rewards that come with the greater risk.

It’s still early and in the immediate term broadband providers will be focused on continued appellate court action. The long term potential restructure stemming from this action is something traders should keep in mind.

 

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Haven’t seen an argument for Title II regulation increasing the output of information services

According to the United States Bureau of Economic Analysis, information services, which includes telecommunications and broadcast services, saw its contribution to gross domestic product increase 10.6% in the fourth quarter of 2015. That was a big jump from the .4% increase in contribution to GDP in the third quarter of 2015. According to the BEA, fourth quarter growth primarily reflected increases in telecommunications and broadcast.

While real gross output increased just 1.4% for the United States in fourth quarter 2015, the information services sector saw its real gross output increase by 10.8% in the fourth quarter of 2015.  For all of 2015, real gross domestic product for the United States increased by 2.4%, but for the information services sector alone, gross domestic product increased 6.3% for 2015.

Proponents of Title II common carrier regulation and open internet rules have not given their preferred regulatory framework any credit for the performance of the information services sector. For example, a review of Federal Communications Commission chairman Tom Wheeler’s blog posts and statements at the time BEA released its report in April 2016 reveals no reference to the information services sector’s contribution to GDP. In a March 2016 blog post. Mr. Wheeler acknowledged the negative impact rate regulation could have on innovation and investment:

“But the 1996 Act did not change the basic economics of building and running large communications networks.   Whether they are wireless or fixed, operating these networks is a capital-intensive undertaking.   It requires the purchase of expensive inputs like spectrum, optical fiber, and radio antennae, plus the additional administrative and legal expenses of deploying these resources in the cities, towns and rural communities where network users live and work.  While the FCC has taken many steps over the years and is still working to promote competition among network service providers, the fact remains that the financial barriers to building these networks are formidable, and most American consumers have few or no choices when it comes to this service.   Our most recent Broadband Progress Report, for example, found that only 38 percent of Americans have more than one option for fixed advanced telecommunications technology.

One of the biggest challenges I have confronted in my time at the Commission is facing down the false choice between investment and openness.  I believe our Open Internet Order took the right approach, by protecting entrepreneurs and small businesses’ free and open access to the Internet, while also forbearing from sections of Title II like rate regulation and unbundling that might reduce network owners’ incentives to continue building out their networks and investing in new technologies like 5G.”

If Mr. Wheeler believes that forbearance from rate regulation will provide incentives for continued investment in broadband networks, then investors should expect continued positive growth in the integrated telecommunications services industry which has seen market value increase 2.69% over the past year, just as long as Mr. Wheeler keeps his word. I don’t believe Mr. Wheeler has any incentive to go back on his word to forbear. To do so would put the final dagger in the heart of the initiative to apply Title II to broadband providers and prove the anti-Title II constituency’s argument that Title II is bad for growth and investment.

So while we haven’t seen an argument that Title II regulation is responsible for information services positive contribution to growth, I wouldn’t expect to see one any time in the near future.

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African American communities shouldn’t wait on the State to close the digital divide

I have to wonder if the broadband digital divide is more a question of the broadband financing management. I believe more could be done with revenues collected by the black church when addressing the digital divide, particularly in the area of ownership of technology and content delivery platforms.

By some estimates, black churches have collected $420 billion in revenues since 1980. That’s close to $12 billion in annual revenues. I know some black churches invest in businesses within their communities; and while a very small fraction of the venture capital community, African Americans are joining the ranks of venture capital firms.

Venture capital likes areas of that offer large returns and for venture capital those areas are primarily technology. Historically when we talk about the digital divide we talk about access to broadband, but I don’t buy into that definition. African Americans are over-indexed on smart phone ownership and use of social media. Where African Americans are not over-indexed on is platform ownership. While on the energy end the argument has been that the capital intensity for building a grid makes it near impossible for minority ownership of electric utilities, the open architecture of the internet chips away at that notion.

And waiting on government is not a wise plan, if you want to call waiting a plan. The Federal Communications Commission is more concerned with underwriting broadband providers via its Connect America Fund versus promoting the deployment of content delivery networks. Private sector initiatives like those taken by Facebook, Google, and Microsoft to build their own global private networks are best for deploying content delivery networks, not only for the delivery of content but to capture and analyze data as well. This is where the money is, in my opinion, for communities of color and where venture capital generated in communities of color should be going.