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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Lifeline is about promoting a good society

Today the Federal Communications Commission voted on a notice of proposed rule-making to extend Lifeline services to include access to broadband.  The internet provides modern society an enhanced conduit for sending and receiving messages and data.  This capability allows businesses to provide innovative services on a cost-effective basis and allows consumers an efficient mode for accessing services.

For example, yesterday I met with my new primary care physician.  Not only was I impressed with her personality and knowledge but I was also impressed with how her office uses the internet to manage patient health.  Her patients can get online and register with her information portal in order to review their prescriptions, other medical information, and contact the doctor or her staff with questions.  I can do all this with a laptop and a high-speed internet access connection.

The internet and the high-speed broadband access services that allow us to connect to it provide mechanisms for society to carry out its purpose: to help spread the risks that threaten the abundance of life.  We join societies in order to share resources, maximize our wealth, and increase our security.  Broadband access does that by giving society’s members access to multiple sources of information and data.

Today’s discussion at the FCC unfortunately got hung up on issues such as fraud and waste.  FCC member Mike O’Rielly was correct when he said that today’s vote should have been a five to zero slam dunk but as Chairman Tom Wheeler also noted, it was unfortunate that the issue had become politicized.

If waste and fraud are an issue then the FCC should take consider a couple approaches shared by AT&T’s vice president for external affairs, Jim Cicconi.  In a blog post posted 1 June 2015, Mr. Cicconi  offered the following:

“First, AT&T believes that the government, not carriers, should be responsible for determining Lifeline eligibility and enrollment.  This is the way most federal benefit programs work, and there’s no good reason for handling Lifeline in a radically different way.  Many of the problems associated with Lifeline are rooted in this flawed approach.  Administrative burdens on carriers today are huge, and innocent mistakes can lead to disproportionate punishment—which in turn discourages carrier participation.  And the potential for fraud by less reputable players is very real.  Moreover, consumers are saddled with difficult burdens if they simply want to change carriers.  Government itself should determine eligibility, and can provide the benefit through a debit card approach much like food stamps.  Consumers could then use the benefit for the service of their choice.”

The FCC should keep its eyes on the prize.  It can play an important role in keeping society’s members connected to today’s most important piece of capital, knowledge.  Waste and fraud, albeit important considerations from an operational standpoint should not be a barrier to implementing equitable social policy.

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Why can’t broadband competition proponents focus on the real picture?

The Center for Public Integrity released a post yesterday that has me questioning their economics integrity.  In the post, the Center describes how broadband providers avoid competition by arguing that the “Internet service grew out of the old telephone and cable TV systems, where only two companies owned direct lines to U.S. households.”  Sorry, but that’s only half the story.  As I shared in my comments on the post:

“Advocates for competition in the broadband access platform market need look no further than the localities that ensure that only the provider with the deepest pockets are able to get entry into a market. Onerous financial, regulatory, and technical barriers keep ouyt smaller players. Richard Bennett makes a powerful point about legacy carriers having no incentives to go beyond service territories they negotiated for or acquired when initiating services.

In addition, there is too much emphasis on the “number of carriers” narrative. This is a capital intensive business and unless new players can muster up the cash, then you won’t see a third wireline carrier entering a market.

Finally, when will “competition proponents” come out and give a definitive number for the amount of carriers in a market necessary for a declaration of competition. Two, three, or four carriers still reflects an imperfect competitive market.”

Not only are Federal Communications Commission rules not promoting broadband deployment, but local government policies are adding to the hindrance.  No one complains about whether Interstate 4 connecting Tampa and Orlando should have a duplicate interstate running along it.  The concern is whether there is enough commerce running over the highway to spur economic growth and justify widening the existing lanes.

For example, according to comScore.com’s report , 2015 U.S. Digital Future in Focus”, in 2014, mobile app usage made up the majority of digital media activity.  Traditional television ratings fell as more Americans obtained content from emerging online platforms.    Seventy-five percent of all digital consumers over the age of 18 use desktop and mobile platforms to access Internet content.

Another sign of mobile’s encroachment on the desktop is growth in smartphone use.  According to comScore, smartphone use increased 16% in 2014.

I just started watching “House of Cards” (Okay, I’m a late bloomer) so now I’m counted as one of 7 of 8 Americans watching video content online, with half of these consumers watching content online on a daily basis.

And about that commerce moving along the roadway?  E-commerce grew 14% in 2014 with businesses raking in $268.5 billion.

All this content and e-commerce activity happening while consumers allegedly are “abused” by a lack of broadband access platform competition.  Policy makers shouldn’t waste their time on making an oligopoly a larger oligopoly.  The focus should be on clearing spectrum for greater use of the internet and ensuring that the provision of data, whether in the form of video or text, is not interfered with.

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Will the information and delivery services industry like data minimization?

Posted January 27th, 2015 in knowledge economy, knowledge market, privacy and tagged , by Alton Drew

Today the Federal Trade Commission released a report on the Internet of Things and the best practices companies could put in place to protect consumer privacy.  The scope of the report was limited to IoT devices that consumers use to access other devices via the internet.  In addition, one of the best practices for securing consumer privacy mentioned in the report was the concept of data minimization.

How would data minimization impact firms within the information and delivery services industry who rely on large amounts of data in order to analyze consumption behavior?  The FTC defines data minimization as limiting the collection of consumer data, and retaining that information only for a set period of time and not indefinitely.  By minimizing collected data, tyhe FTC believes that larger data storers may make themselves less attractive to thieves and that the risk that data will be used in a way departing from consumer expectations will be reduced.

What the report overlooks are firms that consumers may not have face-to-face exposure to.  Take for example Broadridge Financial Solutions.  Broadridge processes and transfers sensitive personal information provided to them by their clients.  These clients include financial institutions, public companies, and mutual funds.  Under certain circumstances Broadridge’s own vendors may have access to the personal information Broadridge receives.  According to the company, they maintain systems and procedures to protect consumer data including encryption, authentication technology, data loss technology, and the transmission of data over private networks.

Even with their own protections in place, would information and delivery services firms like Broadridge see a decrease in volume if their clients are forced via additonal best practices to collect a limited field of data?  I’ve read nothing in the financials of a number of companies that tell me that they are concerned about additional regulations from the FTC indirectly impacting them.  Bear in mind that the clients for these information firms are other business firms, but since the information they analyze is collected by firms with direct exposure to consumers, information and delivery services firms and their investors should be aware of these developments in the regulation of the internet of things.

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What regulators say about the internet of things

For the past two or three days the chairmen of the Federal Communications Commission and the Federal Trade Commission have been clarifying their regulatory agendas for and approaches to the Internet.  FCC chairman Tom Wheeler plans to issue net neutrality rules around 5 February with the full FCC voting on those rules on 26 February.  Media reports have Mr. Wheeler outlining what he believes the benefits consumers would enjoy from reclassifying broadband as an old school, run-of-the-mill telephone company.  For example at the Consumer Electronics Show in Las Vegas Mr. Wheeler reportedly said the following:

“So, there is a way to do Title II right, that says there are many parts of Title II that are inappropriate, and would thwart investment, but that a model has been set in the wireless business.”

CTIA-The Wireless Association has taken the position that given the level of competition for mobile broadband that net neutrality rules should be “mobile broadband specific” and that mobile broadband has never been regulated under Title II.

Mr. Wheeler, in an attempt to keep net neutrality advocates happy, appears to be willing to use Title II regulation to strike down deals between content providers and broadband operators where content providers pay to have their traffic given higher priority over other providers.  Mr. Wheeler wants the role of determining which transactions and agreements are commercially reasonable and how that traffic should be moved from content provider to broadband provider to ultimate end user.

FTC chairman Edith Ramirez’s approach appears to focus more on transparency of participants in information markets.  Her concern, as shared with CES participants, is about privacy and the Internet of Things. As more devices connect to each other via the internet, more devices become subject to hacking and a wealth of data, thought by consumers to be private, becomes subject to misuse, theft, or fraud.

Ms. Ramirez’s focus on the consumer is not surprising given the nature of her agency’s work, but it also seems the slightly, and I mean slightly, better approach to overseeing market behavior versus individual business behavior.  The internet is a platform for information exchange between information generators and information seekers.  The more information that a provider has on how her information is going to be used in the markets helps her make better decisions not only on whether she should make it available but also on its value and how best to monetize her data. Information gatherers will simply have to provide better incentives to information providers to get them to give up their data.

What kind of growth does the market see for the Internet of Things?  According to Cisco’s Internet Business Solutions Group, some 25 billion devices will be connected to the internet by the end of 2015.  That number will climb to 50 billion connected devices by the end of 2020.  That’s a lot of broadband infrastructure for the FCC to oversee and more hacking access points for the FTC to worry about in five short years.

Investors will see the biggest gains in the infrastructure space of the Internet of Things.  Leading growth in this space will be manufacturers of processor chips, wifi networks, sensors, and software.  Investors should also be concerned with factors that impact demand for devices that talk to each other and I believe the factor that has the heaviest weight is the consumer privacy factor.  Devices aren’t just talking to each other but are gathering information on consumer likes and habits and storing this data for the information gatherer’s future use.  Privacy is an immediate and long term issue because it concerns one half of the parties involved in the information market transaction: the consumer.

As for the FCC’s open access approach it is too short-sighted.  Mr. Wheeler’s focus on competition for broadband service and equal treatment of traffic may have a nice sounding populist ring, but in the internet eco-system what matters is the consumer’s choice of product obtained through broadband.  That product is content and the price the consumer pays in exchange for that content is, ironically, content in the form of personal data.  Consumers already have wireless and wireline choices for broadband access.  The value play for consumers lies in the quality of content available online and consumers are more than capable of deciding that for themselves.

What the government can do is what it does best (albeit it is not the best at it, but work with me); government should adjudicate privacy and other consumer disputes and make available to consumers information that they may not be able to gleen readily from the private sector.  The FTC’s focus on privacy and consumer protection does a better job at this than the FCC.

I’ll go out on a limb and say that the private sector is taking care of the FCC’s mandate of ensuring a nationwide communications network.  The FCC’s focus given the growth in the mobile market and the increasing need for devices to wirelessly connect should remain on allocating spectrum and assuring the reliability and safety of wired and wireless communications infrastructure.  Any other endeavor is waste.