With all the talk of pending recession, why implement net neutrality rules?

So far 2016 has not been the best year for the equity markets. Over the past four weeks the Dow Jones average has fallen almost three percent and year-to-date decline is approximately 8.7%.  The telecommunications, media, and technology sector hasn’t fared much better. The NYSE TMT Index has seen a fall of 13.72% over the last twelve months. In the past four weeks, the index fell 2.38%. Last month the investor adviser firm Charles Schwab rated the telecommunications sector as under-performing due in part to the sectors move away from the steady cash flow of a monopoly land line business to the cut throat competitiveness found in the wireless arena.

Just about the only thing that has slowed down capital expenditures in the digital economy has been recessions. Capital expenditure outlays in the information sector, which includes television, radio, publishing, wireless and wireline telecommunications and internet portals, peaked in 1999 at an annual $120.1 billion. The impact and aftermath of the 2000-2001 and 2007-2009 recessions were the two major economic bumps in the road that caused decreases in capex. After hitting a bottom of $87.7 billion in capital expenditures in 2009, the information sector, of which roughly 74% is made up of wireline and wireless telecommunications, has seen an uptick in investment from $97.4 billion in 2010, to $99.7 billion in 2011, to $105.5 billion in 2012.

This increase in spending has occurred when broadband while broadband has been treated as an information service. But if talk of recession becomes solidified over the next twelve months, a slowdown in spending can be aggravated where a recession is compounded by rules that go back to the depression-era 1930s.

Depression-era rules applied during a pending recession. The irony.

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The FCC should pay attention to the overall economy

Posted January 21st, 2016 in AT&T, Broadband, capital, economy, Verizon, Wall Street and tagged , , , , by Alton Drew

Yesterday at the World Economic Forum in Davos, Switzerland, AT&T chief executive officer Randall Stephenson shared with The Wall Street Journal his opinion on economic growth. Mr. Stephenson shared that he is not optimistic about growth in the economy. Expected growth of two percent is unacceptable, according to Mr. Stephenson. Tax policy changes are needed but there is no expectation that there will be any fiscal action this year.  Without fiscal action there is the potential of more downside than upside.

Mr. Stephenson added that lower oil prices were expected to lead to increased consumer spending but that has not panned out because consumers have been price conscious about mobile services. Discounts as  little as ten dollars could prompt a consumer to change mobile carriers.

There has been little if any evidence that the Federal Communications Commission is taking into account the state of the economy and its impact on consumer demand for broadband services. In comments before the Brookings Institution, FCC chairman Tom Wheeler argued that the success of broadband services leads to increases in demand for broadband which increases the incentive for competitive broadband.

Mr. Wheeler might not buy AT&T’s argument that lack of national economic growth is constraining carriers like AT&T. Mr. Wheeler believes that 75% of AT&T’s network will be controlled software by 2020. The replacement of hard physical switching systems by software is expected to reduce Verizon’s real estate costs by 80%, according to Mr. Wheeler. Powering a few computers can save up to 60% of energy costs versus endless hard switches, according to Mr. Wheeler. As the cost of delivering broadband goes down, says Mr. Wheeler, the opportunities for innovation increase. “This means we’re not going to let imaginary concerns about investment incentives and utility regulation cause us to let up on policies to encourage fast, fair, and open broadband.”

If the concerns are imaginary then maybe equity analysts are sleep deprived. We shared in a 28 December 2015 post that analysts believed that the wireless industry participated in a competitive market. The large wireless service companies are subject to pricing squeezes brought on by smaller entrants, analysts found, and extremely high prices for spectrum were further compounding pricing squeezes.

The reality of market concerns are further highlighted when one considers how much the information sector impacts gross domestic product. According to the U.S. Bureau of Economic Analysis, the information services portion of the economy has been playing an increasing role over the last three years. Information represented 9.3% of gross domestic product in 2013. By 2014 this percentage increased to 9.5%. At the end of the third quarter in 2015 the percentage has climbed to 9.6%.

Given Wall Street’s assessment of wireless markets and the impact information services plays on the overall economy, the FCC should look beyond the switch to software-based communications infrastructure when ascertaining the competitiveness.

 

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Virgin Islands senator raises concern about power outages and communications

Posted December 29th, 2015 in Broadband, cable company, economy, U.S. Virgin Islands by Alton Drew

The following is a press release from U.S. Virgin Islands senator Tregenza Roach regarding recent power outages in the U.S. Virgin Islands and the impact on subscribers with bundled internet, cable, and telephone services:

TAR# 80-2015
FOR IMMEDIATE RELEASE
MEDIA CONTACT PERSON: ANNICE CANTON 340-693-3613

Senator Roach is Concerned with Loss of Communication Services during Blackout

Senator Tregenza A. Roach, Esq. says the recent power outage which left St. Thomas, St. John, and Water Island without power for several hours has revived his concern that residents who rely on one connection for telephone service, Internet services, and cable television will be left without access even to emergency services in the event of an extensive, long-lasting outage.

Senator Roach said he has raised the concern with both Innovative and the Public Services Commission (PSC) on previous occasions, and that these entities have both responded with assurances connected to the use of a back-up battery which should ensure connectivity for several hours of an outage.

But clearly Tuesday’s outage which left many residents without telephone, Internet and cable services proves otherwise, Senator Roach, said. To compound the problem, the Senator observed that the situation also extends to the Territory’s business community, as all card transactions which require a telephone phone line are also affected. The same applies to ATM transactions as well.

At the least, the telephone company should be required to provide each of its landline households a low-cost cell phone which can be used only in the event of an emergency. Certainly our residents are worth such an investment, Senator Roach said.

“This is huge,” Senator Roach said, “It can cripple the Territory just like that.” Roach said he will bring his concerns to the PSC again and believe that VITEMA, the Virgin Islands Territorial Emergency Management Agency, should also have the concern about the inability of residents to communicate in the event of another outage, a hurricane, or other type of emergency.

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The FCC needs to change its mindset about capital and Title II

The politics of Washington is not commensurate with capital flow when it concerns broadband investment.  The Federal Communications Commission’s decision to apply Title II common carrier rules has resulted in a decrease in capital expenditures.

It has been reported that during the first half of 2015, AT&T saw a decrease in capital expenditures of 29% relative to 2014.  Charter Communications also saw a decline of 29% relative to 2014 while Cablevision saw capital expenditures fall off by 10% versus last year. CenturyLink was down nine percent while Verizon saw a fall in capex of four percent.

The politics pushing the FCC toward their anti-capital decision was driven by a grass roots group argument that freedom of expression was being challenged by the potential bottlenecks that broadband providers could create.  With narratives that included claims that consumers would not be able to create content on the internet or access the content of their choice, at least the three Democratic FCC members fell sway to it.

Edge providers, like Netflix, also played the “threat to democracy” card, arguing that broadband access providers , via paid prioritization, would discriminate among content providers and deny consumers access to their content.  Netflix, however, has been able to hedge its political bets by paying some of these broadband providers for fast lanes so that video traffic to its subscribers is not congested.

Now the political center of gravity lies in the Congress, at least this week, as the House committee on energy and commerce takes a look at how Title II common carrier treatment of broadband will impact investment.  Given Republican control of the committee, it’s no surprise that the committee’s leadership sees Title II as a burden on investment.  For example, the committee’s majority takes issue with the FCC’s finding that the total annual cost on all broadband providers for complying with the application of the FCC’s Title II rules would be approximately $700,000.  The majority believes the annual cost of compliance could be as much as $52 million.

Having supervised a tariff shop for a state regulator and drafting and filing tariffs as a staff attorney for a law firm, I can assure you that the cost of complying with Title II rules will well exceed the $6.95 per hour that the FCC estimates.  We are not talking flipping burgers here.

Politically, reversing the impact Title II regulation will have on broadband investment is out of the hands of Congress, at least in the short term.  Should a Republican win the White House in 2016 and the GOP maintain control of both chambers of Congress, then investors should expect a new FCC Republican majority to repeal the rules.

A repeal by the Republicans could be moot should the United States Court of Appeals-District of Columbia find that the rules have no statutory basis or that the FCC has not shown why its earlier treatment of broadband as an information service should be abandoned.

The probabilities of a court decision or an election outcome in favor of broadband providers is difficult to calculate but the likelihood of the FCC or the Obama administration changing its mindset about Title II’s impact on capital flows to broadband is definitely zero.  Both the President and the FCC’s three Democrats have invested too much political capital in steering the wrong course.

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Al Franken up in arms about the false concept of competition

Posted July 22nd, 2015 in Department of Justice, economy, edge providers, Facebook, Government Regulation and tagged , by Alton Drew

Multichannel News‘ John Eggleton today reported that Senator Al Franken, Democrat of Minnesota, is up-in-arms about Apple’s streaming service.  He believes that Apple is preventing competitors to its streaming service from communicating with consumers about similar streaming products.  According to the Multichannel News:

“Apple’s licensing agreements have prevented companies from using their apps to inform users that lower prices are available through their own websites, to advertise the availability of promotional discounts, or to complete a transaction directly with a consumer within their app,” he said. “These types of restrictions seem to offer no competitive benefit and may actually undermine the competitive process, to the detriment of consumers, who may end up paying substantially more than the current market price point.”

Subject to check, if the alleged snub is the result of a licensing agreement, then tough cookies for the app developers.  They didn’t have to sign the agreements. If terms agreed upon included a “no informing customers of your service because we are afraid of the competition clause, then the app developers are obligated to follow the agreement.

I’ve discussed before how unnerving the “it’s not fair. I can’t compete” argument is.  Unless you are admitting that consumers are pieces of capital just like land, labor, and air is, then competition for consumers needs to be a mantra that goes the way of the dodo bird.  Competing for the finite resources that go into making products for end-user consumption is a valid argument.  You need financial capital in order to purchase the labor and land resources necessary for creating and distributing a product so pushing against the bottlenecks to these resources is expected.

Applying the argument to end-users gets no points with me, however.  If your product is whacked and you can’t convince the consumer to buy it in an open market as we have here in the United States, then belly-aching how unfair it is that you can’t sell said product is noise wasted on closed ears.  America’s antitrust concept is weak for this reason.  No one is guaranteed success in our economic environment.