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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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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.

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How Congress and the FCC can avoid future Section 257 proceedings

On 25 March 2016, the Federal Communications Commission circulated an item regarding a Section 257 market entry barriers proceeding. The purpose of the proceeding is to prepare and distribute a report to Congress detailing regulatory barriers to entry faced by telecommunications and information service providers. The Commission is also expected to promote policies that favor diversity of media voices, vigorous economic competition, and technological advancement.

I think the biggest barrier to information services providers is not a bunch of rules or the Communications Act itself. It is the philosophy behind describing information services; a philosophy that is still silo-based; that separates broadband access providers from websites, information portals, and search engines. All these platforms have the exchange, gathering, repackaging, and sale of data or information in common and it is time that the Commission recognize this basic characteristic of the digital jungle.

The anti-ISP posse will argue that firms like Verizon and AT&T should not be viewed as mere information service providers because they also sell access services; that content providers and consumers rely on these gateways to access information. The anti-ISP posse have a very limited point when they distinguish Verizon or AT&T from other information services based on their access services. The New York Times, an online digital content provider, may be able to hire delivery boys but it won’t shell out billions for deploying networks just to deliver one publication to their subscribers. Paying last mile, mid-mile, or content delivery networks is more economically feasible for them to get their content out. But if we treated the information markets as an exchange, I believe there is an opportunity to create a model that increases opportunities for smaller content providers while getting the Commission and probably Congress out of the business of trying to make the information markets efficient.

Congress and the Commission should explore a blended exchange/independent system operator model for internet service providers. ISPs trade on information. The information markets in this blended model would be coordinated by a “central ISP”, similar to the regional transmission or independent system operators found in the electricity markets. Carriers, such as AT&T or Verizon, would voluntarily turn over functional control of their networks to this central ISP. In order to trade on this central ISP platform, information service providers such as Facebook, Hulu, Amazon, Google, etc., would buy seats on the central ISP’s exchange, similar to a stock market exchange. As a member, the information service provider would have a say in how the exchange is managed. As long as the information service provider has the annual fee to get a seat or membership, they must be allowed to join.

Yes, I hear your next question. “But what about the lone blogger who wants to get his content out there or the start-up information service provider who can’t afford a seat?” My first response would be “value.”  My second response would be, “tough nookies.”

ISPs are looking for content of great value. Smaller content providers will have to step up their game and demonstrate to ISPs that their content should be added to the ISPs portfolio of video and text goodies. And if a content provider cannot demonstrate this value, then tough. The content provider will have to either find another way to distribute content digitally or accept that the digital content world isn’t ready for her…yet.

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On March 31st, the FCC will immerse itself further into information markets

Posted March 28th, 2016 in Broadband, edge providers, Federal Communications Commission, privacy and tagged , , by Alton Drew

The Federal Communications Commission will issue a notice of proposed rulemaking on 31 March 2016 providing requirements that internet service providers should follow in order to protect personal information of consumers. Commission chairman, Tom Wheeler, describes the proposed rules as an initiative that gives consumers the “tools they need to make informed choices about how and whether their data is used and shared by broadband providers. Mr. Wheeler has constructed his rules within a framework of three principles: 1. Consumer choice, where consumers exercise meaningful choice over what data an ISP can use and how it can be shared; 2. Transparency, where consumers are made aware of what types of information an ISP is collecting and how that information is being used; and 3. Security, where ISPs have an obligation to protect information where ever it is carried over a network and stored. While consumers can “opt-out” from having their personal information used by ISPs in order to market additional services to the consumer, the consumer must opt-in to the use of their information for any other purposes. Anyone following the Commission since Mr. Wheeler’s ascent to the chairmanship acknowledges that this is a partisan commission and leading the opposition on this notice of proposed ruling is Commissioner Mike O’Rielly. Mr. O’Rielly refers to the proposed rules as “troubling and conflicting” given that these rules may not apply to other internet companies like Google and Facebook.  Mr. O’Rielly also takes issue with the Commission flirting with issues such as data security and data breach, issues, he argues, that are not covered by the Communications Act. And Mr. O’Rielly is correct. Data breach and security are not covered by the Communications Act. Nor does the Communications Act describe broadband access providers as telecommunications companies. In addition, ISP access to consumer proprietary information is limited, according to research conducted by Peter Swire, Justin Hemmings, and Alana Kirkland. Also, other companies have access to more information and a wider use of personal information than ISPs. Mr. Wheeler is playing with judicial uncertainty betting that the U.S. Court of Appeals-District of Columbia will uphold the Commission’s reclassification of broadband services as telecommunications services thus extending the 20th century protections of Section 222 of the Act for telephone customer personal information to consumers subscribing to 21st century broadband access services as well. Will Mr. Wheeler’s rules lead to an increase in deployment of broadband facilities? I don’t see it. Ironically, Mr. Wheeler’s rules may cause a conflict between sections 1302 and 222 of the Communications Act.  Why would ISPs, pursuant to the Commission’s directive under section 1302 of the Act, want to increase deployment of broadband access platforms if their ability to gather, package, and sell consumer information is going to be heavily regulated by rules, supported by section 202 of the Act, that don’t apply to social media networks that are increasingly gathering more consumer data than ISPs?

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FCC’s set top box policy displays no understanding of markets

On 18 February 2016, the Federal Communications Commission issued a notice of proposed rulemaking that would allow third parties access to a consumer’s cable television set top box (STP) to gather information that could be used to provide competitive viewing services. Specifically, the third party would have access to:

1. Information about what programming is available to the consumer, i.e., channel listing, video-on-demand lineups;

2. Information about what a device is allowed to do with content; and

3. The video programming itself.

The Commission’s rationale for allowing a firm like Google access to these information streams is that with this information, third parties could create services i.e., apps and hardware, to compete with a cable company’s STP.

Will this policy increase demand for content thus driving up prices, revenues, and returns on the capital it takes to create content? No, it won’t. What the Commission’s policy will do is create a shell game for content. It’s not clear whether there will be a change in demand for content and while alternatives for accessing content will increase incrementally, unless the policy entices more consumers to go online, the policy won’t do much for increasing economic activity in the content markets.

In addition to not creating additional demand in the content markets, the Commission ignores the competition that already exists for cable and the movement from STP to apps. Steve Pociask makes this observation in a recent piece for Forbes.com where he argues that:

“Absent the plan, cable competition already exists and its growing”, and that, “the market is currently moving away from STB to apps, but the plan would forever require STBs.”

The Commission’s proposed policy is indicative of an ongoing problem of failing to focus on the primary market that its policy impacts, in this case the content market. Where information is proprietary, the Commission should protect the content owners’ rights. Otherwise, the Commision should advocate policy that promotes content flows.