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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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An offer Democrats shouldn’t refuse

Internet Innovation Alliance honorary chairman Rick Boucher recommended a compromise between Congressional Democrats that favor the transparency and non-discrimination that net neutrality rules is supposed to provide and Congressional Republicans who see net neutrality rules as onerous and intrusive while hampering the level of investment ion broadband deployment.  Mr. Boucher would like net neutrality principles codified in federal statute in return for internet service providers being returned to their prior information services classification.  From a market reality perspective, Mr. Boucher’s offer in compromise makes sense.  You can read Mr. Boucher’s persuasive argument here.

I’ve argued before that Comcast, AT&T, Verizon, and a host of other broadband access providers have gone or heading beyond their old classifications as broadband providers or even communications companies.  These companies sell ad space on their portals; provide news and information; collect data from their customers that may be used to enhance the quality of the ads consumers see or any other services the broadband entity provides.  Collecting and distributing information is an increasingly important part of their business model as they compete with Google, Facebook, and Netflix for consumer eyeballs.  Classifying them as information service providers is appropriate and would show that the Federal Communications Commission has some understanding of the information market that they are trying to regulate.

Of course I’d rather the rules not even exist thus eliminating the need for Congress to come up with another statute.  Market realities and the philosophy of openness that the internet has adhered to for a quarter of a century should be enough incentive for broadband providers not to discriminate against traffic from certain websites or block their subscribers access to websites of their choosing.  The internet has always been the geeks haven for information flow and its commercialization hasn’t changed that,  If anything, keeping the tap on information flow wide open only drives up the value of a provider’s network leaving the provider with the fun challenge of monetizing that flow.

Mr. Boucher’s offer is one that the Democrats shouldn’t refuse.

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Democrats plan to counter GOP attempts at defunding net neutrality

Senator Ed Markey, Democrat of Massachusetts, and Senator Al Franken, Democrat of Minnesota, will like to thwart their Republican colleagues attempts at reducing the amount of money the Federal Communications Commission will have to enforce net neutrality.  Mr. Markey wants to organize enough Democrats in the Senate to block a rider in the GOP appropriations bill that would make it harder for the FCC to enforce the new rules.

From a capital flow perspective, some investor advocates argue that the wrong net neutrality regulatory framework may disadvantage start-ups who do not have the deep pockets of incumbents.  For example, paid prioritization has been cited by the National Venture Capital Association as an example of how larger, well financed firms can leverage their advantages stemming from their greater access to capital.

But as Harold Furchtgott-Roth argues in a piece for Forbes Magazine, capital expenditure growth in the information sector has been sub-par when compared with capital expenditures in the rest of the economy.  Between 2010 and 2013, capital expenditures in the information sector grew at an annual rate of 8.2% while capital expenditures in the remainder of the economy grew at 10.7%.

But if paid prioritization is the primary concern of venture capitalists like Marc Andreesen, their fears could be partially allayed by Republican willing to meet Democrats half-way by codifying in legislation net neutrality principles of no paid prioritization, no throttling, and no favoring of particular websites over other sites.  If the paid prioritization concern can be put to rest by legislation, then maybe a budget fight (which the Democrats will lose) or the pending lawsuit against the FCC in the federal court of appeals can be terminated.

Congress should not fund a FCC with misplaced priorities

Free Press has been calling on its constituents to encourage the Republican-controlled Congress to vote against a House appropriations bill that would significantly reduce funding for the Federal Communications Commission.  For Fiscal Year 2016, the FCC asked Congress for $388,000,000 in offsetting collections. This represents a $48 million increase over the FCC’s request for Fiscal Year 2015, which ends tonight at midnight.

House Republicans have been blatant about their unwillingness to fund the FCC’s net neutrality regime.  So serious are they about taking the wind out of the so called open internet that they have a budget bill that would provide the FCC with only $314,844,000 for Fiscal Year 2016.  If federal budgets represent national priorities, it is clear that net neutrality is not a priority for the GOP, whose members have railed against how onerous the rules are.

While the rules are burdensome, what is more telling is the FCC’s unwillingness to get out of the narrow vision box.  The FCC is still stuck on the concept of encouraging competitive telecommunications networks.  In the 21st century why would the FCC be concerned about a concept calling for a multiple number of firms providing point-to-point voice communications services via wire or wireline?

What the FCC should be concerned about is promoting the development of the information and data markets that are being created and transacted in over internet infrastructure.   Information and data are the currency being exchanged on digital networks.  Also the returns on stock that investors are seeing should be an indication as to where the economy via the internet is going.

According to data from Morningstar, the telecom services industry saw one-year returns on stock at 8.42%.  Three-year returns were 9.82% while five-year returns were at 9.64%.

In the information technology services industry, one-year returns amounted to 10.93%; three-year returns came in at 10.41%; and five-year returns were 12.16%.

The internet content and information industry saw first-year returns of 17.04%; three-year returns of 23.90%; and five-year returns on 18.70%.

I don’t pretend to be a stock analyst but if the FCC really wants to encourage competition on the internet, shouldn’t the agency promote entry into the higher performing industries?  If the FCC wants to convince me that they are interested in economic growth, their analysis should be based on the current reality of the internet economy and the data and information markets.

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By pursuing STEM education and digital media opportunities, minorities can add value to broadband

Posted August 30th, 2015 in Broadband, edge providers, Internet, media and tagged , by Alton Drew

A recent article in the Times-Pucayune has me thinking (again) about the approach inner city communities take to developing their economies.  It has me questioning the entire “community activist” approach to bringing jobs and businesses to an area.  In the article the heads of a number of non-profits and a small business participated in a panel discussion on economic development post Hurricane Katrina.

The panelists raised concerns about billions of public and private sector  coming into the New Orleans area while black businesses were relegated to the sidelines with hardly any of this new capital flowing to them.  If the article caught the sentiments of the panelists correctly, the emphasis of the panel appeared to be on creating more public policy that would ensure more public and private funds go to black-owned businesses.

What I didn’t pick up from the article was any discussion on what value black-owned businesses in New Orleans would bring to an investor; whether these businesses could generate sizable returns on and growth of capital to satisfy an investors.

One area of growth is digital media.  According to an article in The South China Morning Post, an unprecedented amount of capital is flowing to online media outlets like BuzzFeed.com, Vice Media, and Vox Media.

One thing for sure is that it won’t be barbershops, beauty salons, convenience stores, package stores, or fast food restaurants.  These types of businesses make up what you see in black communities.  They have low barriers to entry and are very competitive industries.  They are also what I call “echo effect” industries which most people also call service industries.  These industries pop up to serve people who people who work in what I call the “impact” industries.  In San Francisco, an echo effect industry is a dry cleaners.  The impact industry is Google or a data analytics firm where its workers are creating intellectual property and earning the higher incomes that come with it.

In black communities it’s tough for these impact industries to get started because the first investment in intellectual capital hasn’t been made.  For example, in Delaware only 19% of African American students are enrolled in STEM-related courses. Getting students into these courses is necessary if entrepreneurship in the tech area is ever to grow in the African American community itself.

STEM-related employment is expected to grow 16% between 2014 and 2024, according to the website, ChangetheEquation.org.  Non-STEM jobs are expected to grow 11% over the same period.  And right now students of color are not getting the inspiration they need to pursue the education that leads them into the more lucrative STEM careers.  Again, according to ChangetheEquation.org, African-Americans and Hispanics comprise just over 20% of those who earn computing degrees.

If black communities are to generate business ideas that capture capital and generate higher incomes in the 21st century, its leaders have to recognize the clog in the labor supply line.  That clog is caused by a labor pool that is growing to slow to meet STEM-related demand.  The community approach to generating wealth sets itself up for failure if its leadership does not take a more proactive and innovative approach to managing the community’s political economy. Falling back on arguments for revamping affirmative action alone wont lead to a revitalized economy.