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Michael Powell, Nick Gillespie, chime in on Obama and net neutrality

Posted November 19th, 2014 in Broadband, Federal Communications Commission, Internet, net neutrality by Alton Drew

President Barack Obama’s direct call for action on net neutrality has some in the broadband industry and political punditry asking if he has crossed the line with his unprecedented attempt to publicly influence the Federal Communications Commission.

On 17 November 2014, former FCC chairman Michael Powell opined at NARUC’s annual convention in San Francisco that he’d never seen a president make such an attempt given that the FCC is supposed to be an independent agency.

Mr.Powell also noted that since the FCC’s chair was appointed by Mr. Obama, this makes the President’s public policy recommendation even more interesting.

Meanwhile, Reason.com’s Nick Gillespie chides Mr. Obama for not properly considering the impact of regulating broadband access as a utility in this piece for Time.

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The best broadband play for minorities is to own its intellectual property

There has been plenty of discussion about the minority community’s lack of access to broadband.  Evidence supporting that narrative includes findings by the Pew Research Internet Project showing that while 87% of whites use the internet, only 80% of blacks do so.  In addition, 74% of whites have broadband at home while only 62% of blacks access the internet using broadband from their residences.

Arguments have been made that given this disparity in access between white and black Americans that blacks are falling behind on accessing economic opportunities especially when it comes to competing for jobs.  Even though blacks are over-indexed on smartphone ownership and access to the Internet via mobile devices, it is very difficult to create or submit business proposals or resumes using a smartphone.

Honestly, I’m no longer that concerned about access to the broadband protocol for transmitting and accessing information over the internet.  Part of the reason is that given the level of investment in deployment over the last decade and a half, approximately 99% of Americans have access to broadband.  In my opinion, if minorities are to garner any true wealth creation from the broadband, it will have to come in the form of intellectual property with a particular emphasis on owning patents.

In addition to pursuing job opportunities, the discussion of wealth generation via broadband access has centered on creating content.  From the distribution of movies and television shows via Netflix to Maggie Watson providing fitness tips on YouTube, there is an abundance of video content.  Netflix and YouTube account for 50% of North American internet trafficThe other well-known and not so well-known traffic generators bringing up the rear include:

Apple: 4.3%

Twitch: 1.8%

Hulu: 1.7%

Facebook: 1.5%

Valve: 1.3%

Amazon: 1.2%

Pandora: .5%

Tumblr: .4%

Not only are these companies sending content downstream, but they are aggregators of content and as such create bottlenecks to producers that want to get their content in front of as many eyeballs as possible.  Bottlenecks increase the costs of doing business for content providers making it even more difficult to create market niches.

With the abundance of content, however, comes the reality that creating a wealth-generating niche becomes increasingly difficult as content providers compete for more space.

And let’s not talk about apps.  The number of apps in existence is well over one million, but the vast majority of these apps generate little revenue.  For example, for the developer creating an app for Apple, the average revenue is around $4,000.

So where are the opportunities on the internet for minorities?  First, let’s look at the future needs of the internet and its sub-component, broadband transmission protocol.  In September 2014, Accenture released a report documenting the opportunities for growth in services, products, and revenues via the “Industrial Internet of Things.”  Accenture found that global investment in IIOT is expected to top $500 billion in 2020. According to Accenture’s report:

“Companies that introduce automation and more flexible production techniques to manufacturing can boost productivity by as much as 30 percent, and predictive maintenance of assets can save companies up to 12 percent over scheduled repairs, can reduce overall maintenance costs by up to 30 percent and can eliminate breakdowns by 70 percent.”

One path to increasing productivity via IIOT is through innovation via intelligent technologies.  Again, according to Accenture:

“Manufacturers soon will be building intelligence into every machine they produce and the innovative applications that accompany these smart machines will be vehicles for driving new revenue streams out of product-service hybrids. To reap the full benefits of the Industrial Internet of Things, says Accenture’s report, companies must exploit sensor-driven computing, industrial analytics and intelligent machine applications and weave together enterprise and machine-generated data to create new monetization opportunities.”

Building intelligence into every machine calls for inventive activity and this is where I see the best opportunity for Americans in general and people of color in particular.  Closely related to inventive activity is the ownership of the patented technology that can drive innovation.

The Brookings Institution reports that the average patent is worth approximately half a million dollars, a much more attractive sum than the paltry $4,000 for an Apple app.  Although patent values are increasing, the U.S., according to Brookings, has to face certain challenges in order to remain competitive, including maintaining funding for research and development and ensuring access to high-quality education, especially for lower income students.  If students are not prepared academically to contribute to research and development and the inventive activity necessary for keeping America innovative, the innovation system would be deprived of people that can make or market important discoveries.

I believe that this is where more black and Hispanic Americans should place their focus; on being inventive and innovative.  Finding better ways to efficiently and effectively deploy internet infrastructure including broadband technology is still a challenge especially in rural areas.  Also, developing new and better technology for the more efficient use of spectrum is necessary for connecting mobile devices to the internet.

To be true players in the content and information industries, inventiveness and ownership is where it’s at for minorities.

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Would shifting to an internet-pipe only service get broadband providers out of the FCC’s cross-hairs?

Recently The Wall Street Journal reported on Viacom’s CBS and Time Warner’s HBO’s intent to establish a stand-alone streaming service for their content.  For cord cutters that dream of putting together their own portfolio of video content, this may seem like the a la carte approach that consumers and policymakers have been asking for.  While these moves are not indicative of a tsunami of movement by programmers from traditional cable, I have to wonder what the media world would look like if all content providers took the Netflix, over the top approach to getting programming to the consumer.  What would be the new consumer behavior?  Would net neutrality become a non-issue?

Regarding consumer behavior, consumers may feel emboldened by this increase in consumer choice, especially given the cost of cable service.  According to data from the Federal Communications Commission, as of January 1, 2013, the average price for cable service in all communities is $64.41.  Where there is effective completion, average price for cable service is $63.03, but where effective competition is non-existent, average price is $66.14.

I can see consumers combining Netflix programming at $8 per month with ESPN at $30 per month; CBS at $6 per month; and AMC at $10 per month.  I can’t pass up on “The Walking Dead.”  I agree with The Journal article’s conclusion that cord cutting may become more expensive than traditional bundling packages.  This becomes apparent when you look at the stand alone prices for internet access.

Again, according to data from the FCC, the price for stand-alone, 1-5 Mbps, internet access service is $35.  Consumers that want faster service ranging from 5-15 Mbps pay on average $44, while consumers feeling the need for more speed ranging from 15-25 Mbps pay on average $56.50.

If consumers make the decision solely on price, I don’t see much migration from current bundling options for cable.  According to an article in ArsTechnica.com, American cable subscribers receive an average of 189 cable channels but only watch 17 of them.  Assuming consumers could subscribe to 17 stand alone streaming internet channels at a price of $6 per channel, plus the broadband capacity sufficient for streaming video, consumers would still pay over $100 for service while given up 170 channels.  That may be okay for some subscribers if exercising consumer choice through a la carte service is that important to them.

If I’m paying that much to stream “Game of Thrones” strictly via the internet, I don’t want my service slowed down because my video bits have the same priority as a cat video on YouTube.  I would be willing to designate which content traffic should get higher priority to ensure that I see whether the Lannisters win the Iron Throne.  Netflix, HBO, or Viacom may not want the quality of their services degraded either due to equal treatment of their traffic and the traffic from a website showing the best way to apply lipstick.  This emerging on-demand/streaming model for video may see consumers driving the demand for paid prioritization.

Seeing how the FCC would manage the political fallout from telling consumers that consumer prioritization is a no-no would be very interesting.  Telling Viacom that it cannot meet consumer demand by entering prioritization agreements with backbone or last-mile broadband operators on the premise that such arrangements would put a cat video at a disadvantage would have content providers thinking twice about innovation in online video distribution.

As Hal Singer shared with me in a tweet, net neutrality is a Trojan Horse and Title II regulation is the end game.  I don’t see either approach advancing CBS or HBO’s new services.

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Random thoughts on consumer choice of content

Progressives have expressed concerns about consumer access to content of their choice; that decisions to access lawful content not be undermined by the end-user’s broadband access provider.   Consumer choice implies that the consumer has placed some value on the content he or she wants to receive.  One consumer may place a greater value on using their bandwidth to reading up-to-the-minute press releases on PR Newswire and business news content.  Another consumer in Florida may place greater value on gaming with his friends in Wisconsin.  Should net neutrality proponents be concerned about a consumer’s value-maximizing decision where the very small websites that net neutrality proponents claim to advocate for are not accessed as a result of consumer versus broadband provider “blocking?”

Utility or value maximization is nary mentioned by net neutrality proponents.  They have beaten around the bush by discussing it indirectly in the guise of non-discrimination or non-blocking principles.  Saying non-blocking or non-discrimination provides a false sense of speaking truth to power by putting the “bad guy” taint on broadband providers.  It also helps to embolden their status with their constituency, the consumers who believe that a handful of documented net neutrality violations is indicative of how broadband providers will behave even when millions if not billions of transactions occur every day without a net neutrality hitch.

But highlighting actual consumer choice, a consumer’s ability to place higher priority of certain websites over other content doesn’t seem to be the progressives’ cup of tea.  An enhanced analysis of the content markets should have as an issue whether consumers can make this type of choice and whether public policy should encourage it.  My bet is that progressives prefer consumer choice light versus strong, robust consumer choice.

The reason why this proper market analysis won’t be entertained by net neutrality proponents goes back to the “V” word; value.  Small content providers don’t have much in capital or time to garner the traction and eyeballs that larger, more entrenched content providers have.  It’s the economics of net neutrality.  Larger content providers have sunk millions into the marketing necessary to gain traffic.  Some are merely leveraging their legacy infrastructure.  For example, I’m a fan of The Economist.  Not only do I subscribe online, but I also get the print version so that I can read it on the plane or MARTA rail.  The Economist leverages its print reputation to attract readers online.  Online magazines that can establish pay walls and maintain loyalty with superior content will make revenues, hopefully have profits, and maintain barriers to entry.

Unfortunately for the smaller content providers progressives are so concerned about, energy is being directed toward a public policy initiative that won’t do anything for their marketing or their profit.  It’s also unfortunate that nary one of the grass roots advocacy groups pushing net neutrality have made a cogent economic argument that could give the Commission any proper guidance.

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My response to Keith Ellison’s Huffington Post op-ed

Posted October 9th, 2014 in Broadband, Internet, net neutrality, Network Compact, open internet and tagged , , by Alton Drew

Yesterday, U.S. Representative Keith Ellison, Democrat of Minnesota, voiced his support for net neutrality and asked the Federal Communications Commission to implement rules that would protect Internet openness while ensuring that communities of color have a place at the digital table.

Mr. Ellison expressed concern that Internet service providers were in a position, by choosing to not treat traffic equally, to squelch the voices of minority communities on issues of particular importance such as the shooting this past summer in Ferguson, Missouri of Michael Brown, an unarmed teenager.

Mr. Ellison is wrong on the issue.  There has never been equal treatment of traffic. From the early days of the Internet treatment of traffic has always depended on the type of traffic coming across the pipes.

As noted Internet pioneer Nicholas Negroponte recently noted, the idea of equal treatment of bits is “crazy.” A book is about one megabyte of data, yet one second of video represents more than one megabyte.

E-mail came to your computer a lot faster than video back in the early to late 1990s.  Remember buffering? Today that problem is resolved in part by providing the bandwidth necessary for moving video from the producer to the ISP and eventually to the consumer.
Mr. Ellison raises the big “if” when it comes to potential blocking or discrimination on the part of ISPs. The reality is that ISPs did not block the content provided by people on the ground in Ferguson. ISPs do not want to risk the value of their last-mile networks by sending competitors the signal that their networks are unreliable.

Ironically, that very video traffic that Mr. Ellison refers to would never get through to end-users unless backbone providers and ISPs agreed to the provision of greater bandwidth for video.

Mr. Ellison has simply made the anti-net neutrality argument.