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Google must not be worried about the possibility of Title II reclassification

An article in The Wall Street Journal posted last Friday talks about Google’s on-demand broadband deployment in a number of American cities.  Google is circumventing the traditional universal service approach forced upon cable carriers as part of their franchise agreements with an on-demand approach that has the world’s largest Internet search portal deploying fiber in neighborhoods that are willing and able to pay for the facilities.

Not that Google is cherry picking, according to the article, but the company’s pursuit of higher margins coupled by other broadband providers slowing down their high-speed roll-outs created an environment that gave some localities no choice but to allow Google to serve higher demand neighborhoods.

Question is, does the action by these localities help aid broadband deployment?  I don’t think so, especially where Google’s services will be prevalent, but not exclusive to, more affluent neighborhoods.  Broadband providers that are obligated under existing franchise agreements to build out their facilities may be at a competitive disadvantage to a cash cow like Google that deploys only where it sees demand.

On the other hand, Google’s approach is standard economics 101.  They are serving customers most responsive to their service’s price points and right now it’s those customers with the right amount of wealth.

So, how does this square with the Federal Communications Commission’s proposed Open Internet rules?  So far I see no conflict as long as the FCC stays on the section 706 path versus the common carrier/Title II route.  Google’s approach should send a signal to Free Press and Public Knowledge that the reality on the ground when it comes to broadband deployment is not in sync with their common carrier narrative.

Title II would bring back the slow old days of tariffs, price regulation, and inter-carrier compensation, a regulatory framework that would disincentivize Google from deploying broadband.  I expect that Google would eventually reduce prices and offer tiered offerings thus allowing broadband deployment into less affluent neighborhoods.

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Net neutrality advocates change the definition of net neutrality … again

I have stopped counting how many times advocates for net neutrality have changed the definition of the open network concept over the past four years.  Yesterday Mike Masnick wrote a piece for arguing that net neutrality actually refers to a broadband provider charging a content provider to deliver content to the broadband provider and then turning around and charging the content provider again for delivering content to the consumer. Mr. Masnick also argued that net neutrality proponents have no problem with different tiers of service speeds for consumers because the advocates understand that tiered data service is modus operendi for the broadband industry.

In fairness to Mr. Masnick, here are his exact words:

“The actual concern is not about that. It’s about the broadband providers then turning around and doing a massive double dip. That is, even if you’ve, say, purchased an access plan with certain speeds and the internet companies have purchased their access and bandwidth at their own speeds, the broadband companies want to also be able to go to those internet services and charge them again to reach you at the level both of you have already paid for. Basically, they’re arguing that when you buy internet access, you’re merely buying the right to reach from your end of the network to the middle. And that’s it. They’re saying you haven’t bought the right to reach service providers’ end points. So, what they want to do is get the internet service providers to pay a second time to “reach you” rather than just the middle. And, if they don’t, they may degrade or even block access.”

What?  Really?  Weren’t these very advocates railing against caps on speed, disputing wireless carrier claims that managing costs necessitated different service tiers?  Let’s look back at some of the past definitions of net neutrality.

First, here is the Federal Communications Commission’s take on net neutrality:

“The ‘Open Internet’ is the Internet as we know it, a level playing field where consumers can make their own choices about what applications and services to use, and where consumers are free to decide what content they want to access, create, or share with others. ”

To clarify the open Internet and net neutrality, the FCC says:

“Network, or “net,” neutrality is just another way of referring to Open Internet principles.”  And just what are those principles?  Again, according to the FCC:

1. Transparency: Broadband providers must disclose information regarding their network management practices, performance, and the commercial terms of their broadband services;

2. No Blocking: Fixed broadband providers (such as DSL, cable modem or fixed wireless providers) may not block lawful content, applications, services or non-harmful devices. Mobile broadband providers may not block lawful websites, or applications that compete with their voice or video telephony services;

3. No Unreasonable Discrimination: Fixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic over a consumer’s broadband Internet access service. The no blocking and no unreasonable discrimination rules are subject to limited exceptions for “reasonable network management.”

I guess the FCC will make changes to their principles some time soon, but right now, the rules make no reference to or prohibition on Mr. Masnick’s “double dipping” scenario.  But since Mr. Masnick has issues with FCC data, let’s look at the definition of net neutrality as offered by Free Press:

What keeps the Internet open is Net Neutrality — the longstanding principle that preserves our right to communicate freely online. This is the definition of an open Internet.

“Net Neutrality means that Internet service providers may not discriminate between different kinds of online content and apps. It guarantees a level playing field for all websites and Internet technologies.

Net Neutrality is the reason the Internet has driven online economic innovation, democratic participation and free speech. It protects our right to use any equipment, content, application or service without interference from the network provider. With Net Neutrality, the network’s only job is to move data — not choose which data to privilege with higher-quality service and which to demote to a slower lane.”

I don’t see any reference to double dipping in Free Press’ definition either, and they have been defining net neutrality this way since 2010.  Any doubts about the validity of net neutrality is generated by the lack of a definition of the rule as offered by these advocates.  Anyway, their position on what net neutrality is when it comes to regulating broadband providers is of no consequence.  What matters are the FCC’s rules, and since their rules do not address double dipping, so what if it occurs.  If content providers want to get their information to consumers, this is the toll that they will have to pay.

But to flip the script on the double dipping concept, isn’t double dipping the legacy network pricing mechanism that advocates like Free Press and Mr. Masnick are arguing for?  The legacy network saw long distance companies being charged a fee upon accessing a local telephone company’s network, and then another fee for terminating the call at the consumer’s point of presence.  These are the same Title II regulations and pricing schemes that net neutrality advocates would like to remain in place for the few remaining consumers who are copper line junkies.

So, double dipping for legacy network consumers, but no double dipping for content providers on digital networks.  Net neutrality advocates should keep their confusion to themselves.



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A number of rural carriers say no to FCC’s rate of return analysis

A number of rural telecommunications carrier associations yesterday filed joint reply comments in a Federal Communications Commission proceeding where the FCC is considering reducing authorized rate of return on a rural carrier’s assets from the current 11.25% to a rates of return range of 7.39% to 8.79%.

Needless to say the rural carriers are a bit miffed. The rate of return is used to determine how much revenue a carrier can generate on assets put into use to provide telecommunications services. When the revenue is determined, the FCC determines the appropriate rates for interstate special access services and common carrier line rates, as well as the appropriate amount of universal service contribution a rural carrier may receive. The higher the rates of return, the greater the rates a carrier may charge to recover these revenues.

The carriers argue that lowering the ROR means there will be less funds available for reinvesting in the deployment of broadband facilities. The FCC argues that since 1990, the last year the ROR was determined, changes in technology warrant a change in these rates and initially found that the appropriate rate should be around 9%.

But could that be the FCC’s approach from the beginning? Regulators reason that the higher the rate of return, the less the incentive to invest in innovation. I don’t think that is necessarily true. For example, if a carrier has aging assets in its rate base, they will remove them, either on their own or as a result of a rate review. As technologies change and carriers find themselves facing competitive pressures brought on by cord cutting and cable companies able to bundle in on-demand services, these carriers will want to keep up, but they will need the revenues necessary for purchasing and deploying the facilities necessary for deploying new facilities and services. It’s during this period that ROR should be remain at the same level or even increased.

The FCC’s logic seems to be centered on keeping rural carriers captive to the updated, new and improved universal service fund. We’ll keep your interstate rates low and force you to come to the trough and drink even if you feel your customers are better served if you fund broadband deployment on your own dime. The FCC believes that there is market failure sufficient enough to keep rural providers from meeting voice and broadband needs of consumers. If that is the case, then the FCC is ensuring that market failure by decreasing the ROR rural carriers should earn.

It’s truly ironic given the FCC’s policy goal of basing inter-carrier compensation received by rural carriers on a free market framework, but I see nothing free market about forcing rural carriers to stay on a universal service funding scheme premised on fake innovation.

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There is infrastructure. Then there is broadband infrastructure

Highways, airports, roads, bridges, harbors. All are part of the conduit that moves American commerce, getting goods and services from consumer to producer. They are part of the commonwealth, owned by municipalities, states, and the federal government. When commenters talk about building or renovating America’s infrastructure, these are typically the components they are referring to.

The financing of these components is usually done with tax revenue or revenue or bond issues paid back with tax revenues. Accounting wise, a municipality may have a specific fund established which accounts for the revenues dedicated to and expenditures resulting from an infrastructure project.

Broadband facilities tend to be mentioned in the same breath as the infrastructure components mentioned above. Broadband facilities, the “information superhighway”, carry digitized voice and data between our cell phones, lap tops, and tablets. Broadband facilities are described as the on ramp to electronic commerce, much like the on ramp to Interstate 20 at Joseph E. Lowery and Oak Street in the West End of Atlanta.

That’s about where the similarities end.

Unlike airports, highways, bridges and toll roads, the vast majority of broadband facilities are owned by private entities; Comcast, Verizon, Time Warner, and AT&T, to name a few. The vast majority of the capital used to build and deploy central offices, nodes, other packet switches, and cable is provided either from equity shareholders or creditors. Broadband providers go into the markets to buy the capital needed to meet the demand for facilities. The private versus public ownership of these facilities creates a dependence on the private sector for the financing. Price paid for capital, not government mandate, determines whether capital will be available to meet the consumer demand for broadband facilities.

Sometimes the consumer demand comes from geographical areas that make a business model very expensive to finance; specifically rural and insular areas. Terrain and climate raise challenges to broadband providers because in addition to the physical deployment of facilities, a business case must be made about the probability that consumers in rural and insular areas will be able to pay the higher than average cost of receiving broadband services. The price mechanism may preclude broadband providers from buying the investment capital needed to make the investment. The rational investor or underwriter may not buy into a rural or insular broadband business model.

Enter the irrational. Enter the Federal Communications Commission.

Driven by its interpretation of universal service as provided in the Communications Act, the FCC has over the past few decades implemented a universal service and inter-carrier compensation scheme designed to subsidize delivery of telecommunications services to the poor, underserved rural markets, and health care providers in underserved areas. Business customers were basically overcharged in order to subsidize residential customers. Interexchange companies paid originating and terminating fees to local exchange companies with these funds placed into a pot where LECs would receive a cut after certifying the expenses claimed were for providing telecommunications services.

The FCC, threw its Connect America Fund, has essentially modified the model so that funds go to broadband services versus the legacy plain old telephone service network prior universal service finds financed. To date, the FCC is still trying to get broadband companies to bite on the remaining $180 million in subsidies available during the first phase of CAF. Broadband providers leaving money on the table should be a red flag that something is wrong with this model.

What’s wrong with this model is that it does not take into account that the infrastructure belongs to private entities, entities that could borrow at near zero rates, but who do not finance infrastructure projects in unserved, rural, or insular areas because a strong business case cannot be made for it. The FCC and the Congress throw money at them anyway, hoping that the initiative will get broadband to the homes. In a free market, capitalist society where the method of production and delivery is held in private hands, this 1930s view of stimulation cannot work. What is needed is something more direct especially if government is to participate in stimulating broadband demand.

While it is good to see Mr. Genachowski and his Gang of Four act like supply-siders, what is needed for broadband deployment is a combination of demand stimulation and a “private equity” mindset on the part of government, in this case, the FCC.

First, Congress should get rid of language describing the methods of implementing universal service. Rather than extorting money from IXCs to fund universal service, Congress, via the FCC, should issue poor consumers vouchers to be used with the broadband provider of their choice. This voucher could reflect the difference between the average monthly amount paid for broadband in the consumer’s market area and what they pay for telephone service.

Second, Congress should establish a broadband infrastructure bank to be administered by the U.S. Department of Commerce. The infrastructure bank would be funded from general tax revenues and would lend funds to broadband providers who present innovative business plans for providing service in insular, rural, and urban unserved and under-served areas. Funds would be paid back to the infrastructure bank at some rate below prime. The infrastructure bank could also issue debt giving investors another avenue for hedging other investments. Profits would either be returned to the Treasury, reinvested in the voucher program, or go on to support broadband in schools and libraries.

The current universal service program is open to abuse, such as skewing most funding toward carriers that do not need the funds. It introduces additional government regulation for the purpose of financing broadband deployment by private actors when those actors could go into the markets and get financing themselves; financing based on the showing of a good business model. By requiring the showing of a good business model, broadband providers would be required to develop innovative technologies to provide service. Innovation will beget financing which begets the value added to a service, value that consumers will identify and demand.

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Section 706 Puts FCC in Unnecessary Bind

Section 706 of the Telecommunications Act puts the Federal Communications Commission in a peculiar bind. The statute requires that the FCC determine whether Americans have access to high-speed, switched, broadband telecommunications capability that enables users to originate and receive high quality voice, data, graphics, and video telecommunications technology.

The FCC concluded that broadband was not being deployed in a timely manner. Factors such as broadband costs, quality of service, and adoption by consumers were hindering deployment.

Can you blame the industry? I say no, not after investing, according to the FCC, approximately $41 billion a year in network deployment. You can’t really fault the federal government, particularly after Congress allotted and the NTIA and RUS spent $7 billion to incentivize the design, construction, and deployment of broadband facilities in unserved and underserved communities.

But with 19 million Americans not having access to broadband, and 14.5 million of them living in rural areas, what more should the FCC do? As a promoter of commerce, the FCC has done a good job encouraging infrastructure deployment, but should it be responsible for encouraging broadband adoption?

Broadband adoption is a market reaction. By that I mean it’s up to consumers to determine the value of buying broadband access and it’s up to producers to create the demand. I got uncomfortable seeing FCC Chairman Julius Genachowski standing in front of a Best Buy talking about the fun apps and gadgets that could run on broadband networks. Fine and dandy, but once the FCC has met its duty to promote commerce by encouraging the deployment of networks, it’s time for the market players, consumers and producers, to do the rest.

Rural residents made a decision to live in rural areas. They should pick up the cost of building their own networks; pick up the cost of accessing current broadband networks, or investigate the alternative technologies that can provide them with access to broadband. Subsidies in the end mean some consumers are paying more than they have to in order for others to get service. Producers will have to rely on controversial cost models to approximate cost information that the market could more easily provide.

To limit the FCC’s interference in the broadband market, Congress could start by eliminating Section 706. By repealing this mandate, the FCC could better focus on ensuring the deployment of a ubiquitous network while the market could focus on sending and receiving more accurate supply and demand information.