With all the talk of pending recession, why implement net neutrality rules?

So far 2016 has not been the best year for the equity markets. Over the past four weeks the Dow Jones average has fallen almost three percent and year-to-date decline is approximately 8.7%.  The telecommunications, media, and technology sector hasn’t fared much better. The NYSE TMT Index has seen a fall of 13.72% over the last twelve months. In the past four weeks, the index fell 2.38%. Last month the investor adviser firm Charles Schwab rated the telecommunications sector as under-performing due in part to the sectors move away from the steady cash flow of a monopoly land line business to the cut throat competitiveness found in the wireless arena.

Just about the only thing that has slowed down capital expenditures in the digital economy has been recessions. Capital expenditure outlays in the information sector, which includes television, radio, publishing, wireless and wireline telecommunications and internet portals, peaked in 1999 at an annual $120.1 billion. The impact and aftermath of the 2000-2001 and 2007-2009 recessions were the two major economic bumps in the road that caused decreases in capex. After hitting a bottom of $87.7 billion in capital expenditures in 2009, the information sector, of which roughly 74% is made up of wireline and wireless telecommunications, has seen an uptick in investment from $97.4 billion in 2010, to $99.7 billion in 2011, to $105.5 billion in 2012.

This increase in spending has occurred when broadband while broadband has been treated as an information service. But if talk of recession becomes solidified over the next twelve months, a slowdown in spending can be aggravated where a recession is compounded by rules that go back to the depression-era 1930s.

Depression-era rules applied during a pending recession. The irony.

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Any regulation of zero rating is unnecessary market interference

Members of the wireless industry got together yesterday in Washington, D.C. to debate what the Federal Communications Commission’s next move on zero rating ought not to be. Inside Sources reported that the wireless confab included T-Mobile, Verizon, Facebook, and other parties. Zero rating allows wireless services subscribers to access certain content providers without that access being charged against the consumer’s data plan. T-Mobile’s “Binge-On” service is a recently deployed example of this type of service.

Pro-net neutrality groups like Free Press, Public Knowledge, and the Electronic Frontier Foundation believe that zero rating violates the Commission’s open internet order by throttling data streams while favoring certain content providers over other providers.  For example, under 47 CFR 8.7, a person engaged in the provision of broadband internet access service shall not impair or degrade lawful internet traffic on the basis of internet content, application or service, or use of a non-harmful device, subject to reasonable network management.

One issue will be whether a service like “Binge-On” actually throttles traffic pursuant to this rule. The Commission so far has opted to a light touch approach to zero rating-type services, which wireless carriers have likened to 800-number services where the 800-number customer or its telephone service provider ate the cost of a long distance call from a customer. The Commission should find that there is no throttling because treatment of data traffic will be the same for all content providers, whether access to their content is done via “Binge-On” or not. The Commission’s political constraints go beyond the letter of their rules.

The Commission has been fervent about its clear and fair “rules of the road”; that all traffic be treated equally, that it may not want to rock the boat with the pro-net neutrality posse or their alleged four million post-card writing supporters. There is a chance that the Commission may opt for the safety of saying no to “Binge-On” with the claim that its best to err on the side of caution and avoid having its net neutrality rules go sliding down a slippery slope.

A call against “Binge-On” and other zero rating services is a strike against investor interests especially for investors in smaller carriers like T-Mobile. If T-Mobile is to acquire more market share it will do so with bolder offerings like “Binge-On.” The service appears to be an effective way for promoting the company’s other offerings, so much so that T-Mobile is finding that some customers, having had free access to participating websites are opting for additional and more expensive service. If there is an opportunity for government to show how anti-investor some policies can be, treating zero rating as anti-net neutrality would be one of them.

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The FCC’s net neutrality hole

Posted January 4th, 2016 in net neutrality and tagged , by Alton Drew

As a regulatory agency it’s impossible for the Federal Communications Commission to avoid political discourse. When the likes of John Oliver goes about explaining net neutrality to the public (and getting it wrong in the process), the result is four million American consumers applying political pressure on the Commission to ensure that the agency preserve the democratic spirit of the internet; that each piece of content stand equally shoulder to shoulder no matter who produces the content or whether the content reaches one million people or one hundred. When it comes to the economics of the internet then network management be damned.

But for all its rhetoric on equality of access, the Commission appears to have dug a hole into which to throw economically disadvantaged consumers. As Mark Jamison argues in this piece for TechPolicyDaily.com, net neutrality has a negative impact on low income consumers who may not be accessing online content because of the cost of purchasing broadband. Net neutrality hurts the poor by:

1. Prohibiting pricing plans that help the poor pay for what they can afford;

2. Imposing injunctions on the free delivery of some content or zero-pricing; and

3. Prohibiting access to net work features such as fast lanes by fledgling firms.

If the Commission is serious about furthering the closure of the digital divide then it should not allow a delusional argument that all traffic should be treated equally to stop access by the poor to some online content for free. Supporting an erroneous political position as advocated by net neutrality proponents forces the Commission to take a public policy position that is adverse not only to its stated goals but to the poor.

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The markets don’t tell me that net neutrality rules are working

Posted December 9th, 2015 in Broadband, Federal Communications Commission, net neutrality and tagged , by Alton Drew

The telecommunications services sector is in the red, and has been in the red for the past year. If net neutrality was such an enabler of the virtuous innovation cycle as Federal Communications Commission chairman Tom Wheeler is fond of mentioning, then the concept gets an “F.”  The market value of the telecommunications sector is down 4.14%, according to The New York Times. Within the sector, the integrated telecommunications services industry (companies that provide telecom services minus wireless) has seen market value fall 5.05% over the last year.  The wireless industry didn’t fare that badly, falling 2.09% over the same period.

The irony regarding the Commission’s application of Title II/net neutrality regulation is that it assumes that the sector’s broadband operators are monopolist deserving of utility type regulation in order to protect consumers and grow competition.  On the contrary. Investors in the sector, while historically viewing the sector as a hedge during the valley of a business cycle, are wary of the sectors performance as companies face an increasing amount of competition. Title II/net neutrality policy doesn’t appear helpful to a sector that sees declining pricing power as consumers seek out better pricing plans; falling profits that come along with decreasing pricing power; rising expenses as broadband providers spend more to upgrade their networks; and heavy debt loads, given its position as having the highest debt-to-equity ratio of any non-financial sector, according to an analysis by Charles Schwab. With the Federal Reserve expected to increase rates next week, credit markets may get even tighter for the telecom sector.

If the Commission is really concerned about a robust, competitive telecom sector, Title II/net neutrality public policy is not where you start.

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Investors should cross their fingers for the court to say no to net neutrality rules

Posted December 1st, 2015 in capital, content providers, net neutrality and tagged by Alton Drew

Online content entrepreneurs should be concerned about access to three main sources of capital necessary for producing their products and services.  Entrepreneurs want 1) access to affordable financial capital; 2) access to affordable natural capital i.e. land, spectrum; and 3) access to infrastructure.  A number of online content providers were hoodwinked by advocacy groups that extolled the virtue of openness via the Federal Communications Commission’s that net neutrality rules.

These advocates argued that prohibiting paid prioritization would level the playing field that incumbent content providers like Google and small, new entrants play on.  The net neuties also argued that, and rightfully so, that consumers should have unfettered access to the legal content of their choice. Neither the advocates or the Commission carried on a conversation as to how net neutrality rules would benefit online content providers in terms of access to capital or the direct or indirect costs online content providers would incur if broadband access providers saw increases in their costs for deploying infrastructure. Investors should know that while in the short run net neutrality rules may not have any adverse impact on network deployment, in the long run, firms may decide that the increase in operational costs do not offset the cost of increased capital expenditures. Only larger online content firms ironically with the capability of deploying their own infrastructure or broadband access firms with the ability to scale up to being media players in their own right will survive. In the long run, net neutrality would have create the very monopolies on the internet it intended to eliminate.

In a 2010 study, Stratecast, a consulting firm, concluded that net neutrality rules would discourage investment in infrastructure. Net neutrality rules would also reduce expectations regarding revenue. Increases in compliance costs would eventually be passed on to consumers at an estimated $10 to $55 a month per customer. Shutting off an avenue of revenue by prohibiting paid prioritization could result in either running up costs by building duplicative pipes or reducing the amount or type of services consumers receive. The latter would have a negative impact on broadband penetration, the opposite of the Commission’s goal of closing the digital divide and getting more Americans connected.

And while building more pipes may reduce congestion, it doesn’t mean that there will be an increase in traffic to compensate for the additional costs.  The smaller upstarts the net neuties claim to protect won’t be the ones generating any additional traffic. The 15 most visited websites include the usual suspects such as Google, YouTube, Facebook, Yahoo, and Amazon. The number of monthly visitors for these websites range from 240 million for WordPress to 1.1 billion for Google. On average, consumers spend most of their time on five websites.

If the court doesn’t vacate the Commission’s net neutrality rules, the pass-through of higher network costs to online entrepreneurs will increase their cost of business making new entrants a riskier investment.