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Broadband, capital, and the politics of the ignorant

Broadband is capital that is used by information service providers to produce an information service.  It is the copper, fiber, cable, electronics, and software created, deployed, and used as capital inputs in the production of information services that end-users eventually consume.  By extension the Internet is also an input in the production of information services.  The cables, routers, and servers on the Internet connect over 67,000 global networks making it possible to create and sell information.

By information services, I refer to services that either generate, store, or provide end-user access to content.  This would include broadband access operators such as Verizon or Comcast; router and server providers such as Cisco; back haul providers such as L-1; Internet search engines such as Yahoo or Google; and content providers such as Netflix or Hulu. They all use broadband capacity and the Internet as inputs for the production of information services.

End users or consumers buy information services for final consumption.  They are not using fiber, cable, copper, software, or network electronics to create anything.  They have no property claim or property interest in these components.  Many end-users have no clue as to how these inputs are used much less could define them.  All they know is that they point and click on a link to get their information on current events, gossip, or the recipe for making holiday season rum cakes.

Unfortunately the noise from net neutrality proponents, specifically those pushing Title II regulation of the subset of information services providers known as broadband operators, has obscured this view of broadband as a capital input.  In addition claiming that broadband is a civil right or platform for promoting social justice is also misleading and clouds the discussion.

And the Federal Communications Commission is doing nothing to clear the air on the issue, choosing instead to fan the flames of ignorance surrounding what broadband truly is, a mere input in the production of a service.

The Commission and net neutrality/Title II proponents make this mistake easily because they fail to identify the appropriate market for analysis; the information market.  We develop, deploy, and maintain our communications networks for that sole purpose, to facilitate information exchange.  Because information is a prime component in our knowledge economy, public policy’s main focus should be on how best to promote the deployment of capital so that the exchange of information becomes easier and faster.

Net neutrality/Title II proponents may rebut this line of reasoning by saying that putting into code the principles of transparency of network management, non-discriminatory treatment of content traffic, and no blocking of access to websites of choice based on Title II is the best way to ensure information flows across 67,000 globally interconnected networks.  I beg to differ.

Title II regulation does not address the basic market components of demand and supply for information.  Demand for news, entertainment, and advice drives the supply of information.  A priori, this demand never recedes.  It continually increases.  The economy, in particular the information markets, have created a way to supply increasing demand for information by funding the development and deployment of capital inputs that make accessing and delivering information easier and more efficient.

Title II’s focus is on price regulation and transparency of agreements between network operators.  Title II’s language says nothing about the demand for information services.  Title II does not say anything about encouraging the supply of information services nor does it speak to leveraging of capital inputs to supply services.

Title II’s primary objective is to ensure that in a monopoly market for voice telecommunications that the consumer of voice communications gets a fair and reasonable rate for her voice service and the Commission is aware of all network operators involved in delivering voice services.

Title II is not a public policy tool for the 21st century.  It’s time for the Commission to diffuse the narrative that end users have the right to tell private parties how to leverage capital inputs used for providing a commercial service in a free market.  Diffusing this narrative is easier if the Commission properly describes what broadband and the Internet really are and focus on the true market for analysis: the information markets.

Once the Commission realizes that this is the market that should be promoted and that the private sector has been doing a great job in building the networks necessary for information to flow, maybe then we’ll start moving in the right policy direction.

 

 

Hopefully Verizon’s wireless video service won’t raise a net neutrality stink

The Wall Street Journal yesterday reported that Verizon could create and deploy a digital video service that could rival Netflix or Hulu. Quoting Verizon chief executive officer Lowell McAdam, the Journal reported “the carrier has much of the technology ready to launch the service and is nearing agreements with major content companies, which until recently were more skeptical of licensing content for delivery over the Internet.  The need to connect with millennials who want to view TV shows and movies over the Internet is changing the tone of the discussions.”

The Journal also reported that Verizon has been receiving an increasingly warm attitude from content providers to the idea of supplying content for over the Internet consumption.

Content would be delivered from major broadcasters and live sporting events to smartphones via a technology called “multicasting.”  Muticasting avoids congesting the network because it allows the carrier to broadcast content over a single stream of airwaves that consumers can tune into.

In addition, the Journal reports that Verizon is open to expanding FiOS into more markets.

Net neutrality advocates may decide to raise red flags and voice concerns about Verizon potentially throttling the speed of a Netflix or Hulu in order to better promote the mobile broadband provider’s own video service.

The view may be buttressed by allegations made earlier this summer that Verizon was throttling Netflix’s speed and that this throttling forced Netflix to enter an agreement with Verizon that ironically provide Netflix’s video service.

Even without rules in place, the Commission may attempt to use the authority it has under section 706 of the Telecommunications Act of 1996 to investigate claims that net neutrality principles were violated.

In the end investors should view this potential regulatory overhang as a speed bump down the road toward competition in the video-over-the-internet market.

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No response to Wheeler’s response on wireless

There was no appreciable response to Federal Communications Commission chairman Tom Wheeler’s comments at the CTIA show in Las Vegas mentioning that the FCC may reconsider the distinction between fixed broadband and wireless broadband as it draws closer to issuing new rules on net neutrality or the Open Internet.

The goal of the Open Internet proceedings “is to establish rules of the road for Internet openness that will provide certainty in the market place and facilitate the continuation of the virtuous cycle of investment and innovation”, Mr. Wheeler said.

Consumers are increasingly relying on mobile broadband, noted the chairman, and acknowledged the wireless industry’s position that mobile broadband carriers face constraints that their fixed broadband cousins do not.

AT&T(T:NYSE); Sprint (S: NYSE); and Verizon (VZ: NYSE) saw their share values fall today but it wasn’t clear from media headlines whether the fall was in response to the possibility that fixed and mobile may be treated the same under net neutrality rules or his policy of challenging wireless broadband company mergers such as the attempted AT&T-T-Mobile combination or the more recent attempt by Sprint to acquire T-Mobile.

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What I heard Tom Wheeler say yesterday

Yesterday, Federal Communications Commission chairman Tom Wheeler delivered remarks to the organization, 1776, on the future of broadband competition.  What I took away from Mr. Wheeler’s remarks was an attempt by the Chairman to flesh out the role of Title II in a regulatory framework for broadband access.

In its notice of proposed rulemaking addressing the protection of Internet openness, the Commission states that:

“The goal of this proceeding is to find the best approach to protecting and promoting Internet openness.  Per the blueprint offered by the D.C. Circuit in its decision in Verizon v. FCC, the Commission proposes to rely on section 706 of the Telecommunications Act of 1996.  At the same time, the Commission will seriously consider the use of Title II of the Communications Act as the basis for legal authority.”

I believe, based on Mr. Wheeler’s comments, that he would like the Commission to apply Title II primarily to consumer protection issues hence creating a competitive environment for broadband access.  While Mr. Wheeler appears uncertain as to whether a competitive broadband access industry exists for consumers that are choosing broadband for the first time, he is less convinced that there are competitive alternatives available for consumers who want to switch carriers.

A truly competitive broadband market will see consumers being able to switch between broadband access providers with the relative ease that consumers changed long distance carriers during the 1990s long distance carrier price wars, according to Mr. Wheeler.  Mr. Wheeler argues that consumers may be foreclosed from pursuing competitive alternatives when deciding to switch carriers due to high switching costs in the form of terminating fees and equipment rental fees.

While section 706 speaks primarily to encouraging advanced services deployment, interpreted as broadband deployment, it doesn’t expressly discuss consumer protection mechanisms.  Title II doesn’t expressly claim to be a consumer protection portion of statute but given its heavy emphasis on pricing and contractual relationship disclosure and its call for the application of just and reasonable rates, a Commission order that emphasizes using Title II to protect consumers would not be surprising.

A hybrid system would create regulatory uncertainty because of the potential clash between what section 706 provides in options to pursue increased innovation and deployment versus Title II’s restrictions on common carriers.

For example, it may be a challenge to forbear from certain pricing methodologies pursuant to section 706 while requiring a broadband access provider who has been reclassified as a common carrier to file tariffs and while making showings on a frequent, case-by-case basis why its rates are just and reasonable.

In order to reduce uncertainty, what investors and broadband access providers should continue arguing for and what the Commission should seriously consider is a regulatory scheme based solely on section 706.  Again, section 706 focuses on broadband deployment by encouraging modifying regulatory action in order to incentivize investment and deployment.

To address consumer protection issues, the Commission should take an ex-ante approach to consumer complaints of discrimination or blocking, taking each complaint on a case-by-case basis.

 

http://apps.fcc.gov/ecfs/comment/view?id=6017642393

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What would a mid-term election loss by Democrats mean for the Open Internet

Based on the latest prognostication of election poll watchers, House congressional initiatives to rein in the Federal Communications Commission’s attempts to further regulate broadband access may be in for a small boost.  That boost may be tempered, however, by presidential veto power.

A post in The Economist blog, Democracy in America, cites a number of polls giving the Republican Party a chance in this November’s mid-term elections to win the U.S. Senate while keeping the U.S. House of Representatives.  That may provide initiatives promoted by House Republicans Marsha Blackburn of Tennessee and Robert Latta of Ohio some additional ammunition in their attempts to prevent the FCC from reclassifying broadband access providers as Title II common carriers.

Last July, Mrs. Blackburn secured an amendment to the fiscal year 2015 financial services appropriation bill designed to retard FCC attempts to preempt state laws that regulate municipal broadband.

Meanwhile, Mr. Latta introduced H.R. 4752, a bill that would limit the authority of the FCC over providers of broadband access.  Specifically, the bill would prevent the FCC from reclassifying broadband access providers as common carriers under Title II of the Communications Act of 1934.

H.R. 4752 would amend the Act by clarifying that the term “common carrier” would not include a provider of information service or of advanced telecommunications capability.  The bill is currently in the House sub-committee on communications and technology but is not on the House agenda for hearing, markup, or vote.

There doesn’t appear to be any movement in the Democratic controlled U.S. Senate on legislation that would have the opposite effect of what Republicans in the House are proposing.  While Senate commerce, science, and transportation committee chairman John D. Rockefeller, Democrat of West Virginia, has been an ardent proponent of the Open Internet and Senator Al Franken, Democrat of Minnesota, an equally strident advocate for reclassifying broadband access providers as Title II common carriers, there are no bills scheduled for hearing, vote, or markup, that would implement the Title II regulatory framework.

If the prognosticators are correct, the Republicans maybe biding time until after this November’s mid-term elections.  A number of forecasts are giving the GOP anywhere from a 51% to 60% chance of winning the U.S.Senate while keeping the U.S. House.

But even if the Republicans were to take both chambers and pass legislation similar to H.R. 4752, they would face the stiff challenge of a presidential veto.  They would need at least 290 votes in the House and 67 votes in the Senate to override a veto by President Obama and even with the chance of winning both chambers, I don’t see those numbers materializing.

Without statutory authority, open Internet rules are dead.  Adherence to open Internet principles, as evidenced by past broadband access provider behavior, will continue, however.