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Wheeler, Franken, and Wyden show a naivete about today’s internet

In an opinion piece published yesterday in The Washington Post, Senator Al Franken, Democrat of Minnesota, Senator Ron Wyden, Democrat of Oregon, and former Federal Communications Commission chairman Tom Wheeler made the argument that planned attempts by current FCC chair Ajit Pai to remove Title II net neutrality rules would have a negative impact on consumers. The three argue that deep pocketed broadband access providers such as AT&T, Comcast, and Verizon want to take away the consumer protections that Title II of the Communications Act provides. Since broadband was reclassified as a telecommunications service by a Democratic weighted FCC under Mr Wheeler’s tenure, the privacy protections afforded to customer proprietary information connected to telecommunications customers would be lost to broadband consumers. The three go as far as to argue that net neutrality has created jobs because smaller retailers and other consumer services providers are able to get their products and services in front of the eyeballs of the everyday consumer because their traffic is now being treated fairly.

Given that there are two lawmakers authoring this piece I figured that they would at least offer an amendment to the Communications Act that defines net neutrality thus giving policy makers some firm platform from which to proceed and make good policy. The piece conveniently lacked that. Instead, Messrs Wheeler, Franken, and Wyden stuck with the lofty, airy definition of net neutrality that gives the impression that democracy is under attack. This is how the Democrats were able to scare four million consumers into putting their concerns onto postcards while blocking Mr Wheeler’s driveway.

What the opinion piece fails to explain is that net neutrality has to be defined in the context of commercialism, not as an assault on democracy. The internet has been commercialized for a quarter of a century. It provides the platform for gathering, processing, and selling information. Broadband companies are seeking out other revenue streams including processing and leveraging data for the purpose of generating advertisement revenues. Internet portals such as Google, Yahoo, and Facebook have been using customer information to attract advertisers. I sometimes refer to these sights as “legal hackers.” They get consumers to give up personal information for free and craft advertisements based on the personal information they garner. Ironically, Messrs Wheeler, Wyden and Franklin don’t discuss this disparity in treatment; that broadband providers who collect less personal information than these portals should find themselves under more statutory scrutiny than Facebook.

So dismissive of the market aspect of the internet that Messrs Wyden, Franken, and Wheeler could not even offer up a market solution for protecting consumer privacy. One solution I recommend is allowing consumers to sell their proprietary information, allowing them to trade on their info for cash or some other in-kind offering. Instead, Messrs Wheeler, Wyden, and Franken prefer stick with the “Government is a benevolent God” business model of consumer protection, usurping the individual’s power to use the markets to satisfy their own self interests.

Democracy is about the freedom of residents to choose leaders. That term has been tossed about too much by the net neutrality posse to the point where it is near meaningless. Net neutrality is not about democracy. Ron Wyden, Al Franken, and Tom Wheeler should do better than just stirring up the pot.

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Pai challenges the notion of government providing a free, open internet

Federal Communications Commission chairman Ajit Pai today laid out his vision for removing broadband access from under Title II regulations imposed in 2015 by a 3-2 Democratic majority on the Commission.  Two decades prior to the Commission’s net neutrality order that imposed Title II regulations, the internet was already free and open. Companies such as Google, Facebook, and Netflix came into being under a non-Title II regime. Title II was an archaic regulation designed in the 1930s for plain old telephone services.

Title II boiled down to a solution in search of a problem, Mr Pai further argued. Rather than energizing a demoralized Democratic Party base licking its wounds from the butt hurt of the 2014 mid term elections, Former president Barack Obama and the rest of his Title II proponents wound up disincentiving $5.1 billion in capital investment and dissuaded companies to not hire or lay off 75,000 to 100,000 laborers.

What particularly caught my attention in Mr Pai’s remarks was his highlighting the belief that Title II proponents have about government and freedom, namely that government was going to guarantee freedom on the internet. A close read of the American Constitution tells you that its framers were concerned about the natural propensity of government to squash freedom. This is why the document put in place checks and balances against attempts to usurp power over individuals. Net neutrality opponents and members in Congress who support continued imposition of the rules confuse “rights” with “freedom.” The rights issued by government are permission slips that say “a person can be, but only up to the limits we allow them to be” versus freedom which is innate.

This is not to say that freedom doesn’t have its limits. You can’t just violate another person’s spectrum without facing the consequences that result from moving into another person’s space. But how those consequences are managed should be left up to the individuals or in the case of broadband, the broadband access providers and their customers. Allow customers and access providers to define the limits, terms, and consequences of their relationship, including price and type of service. In the 21st century, this type of strategic partnership between customer and access provider is very possible.

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Haven’t seen an argument for Title II regulation increasing the output of information services

According to the United States Bureau of Economic Analysis, information services, which includes telecommunications and broadcast services, saw its contribution to gross domestic product increase 10.6% in the fourth quarter of 2015. That was a big jump from the .4% increase in contribution to GDP in the third quarter of 2015. According to the BEA, fourth quarter growth primarily reflected increases in telecommunications and broadcast.

While real gross output increased just 1.4% for the United States in fourth quarter 2015, the information services sector saw its real gross output increase by 10.8% in the fourth quarter of 2015.  For all of 2015, real gross domestic product for the United States increased by 2.4%, but for the information services sector alone, gross domestic product increased 6.3% for 2015.

Proponents of Title II common carrier regulation and open internet rules have not given their preferred regulatory framework any credit for the performance of the information services sector. For example, a review of Federal Communications Commission chairman Tom Wheeler’s blog posts and statements at the time BEA released its report in April 2016 reveals no reference to the information services sector’s contribution to GDP. In a March 2016 blog post. Mr. Wheeler acknowledged the negative impact rate regulation could have on innovation and investment:

“But the 1996 Act did not change the basic economics of building and running large communications networks.   Whether they are wireless or fixed, operating these networks is a capital-intensive undertaking.   It requires the purchase of expensive inputs like spectrum, optical fiber, and radio antennae, plus the additional administrative and legal expenses of deploying these resources in the cities, towns and rural communities where network users live and work.  While the FCC has taken many steps over the years and is still working to promote competition among network service providers, the fact remains that the financial barriers to building these networks are formidable, and most American consumers have few or no choices when it comes to this service.   Our most recent Broadband Progress Report, for example, found that only 38 percent of Americans have more than one option for fixed advanced telecommunications technology.

One of the biggest challenges I have confronted in my time at the Commission is facing down the false choice between investment and openness.  I believe our Open Internet Order took the right approach, by protecting entrepreneurs and small businesses’ free and open access to the Internet, while also forbearing from sections of Title II like rate regulation and unbundling that might reduce network owners’ incentives to continue building out their networks and investing in new technologies like 5G.”

If Mr. Wheeler believes that forbearance from rate regulation will provide incentives for continued investment in broadband networks, then investors should expect continued positive growth in the integrated telecommunications services industry which has seen market value increase 2.69% over the past year, just as long as Mr. Wheeler keeps his word. I don’t believe Mr. Wheeler has any incentive to go back on his word to forbear. To do so would put the final dagger in the heart of the initiative to apply Title II to broadband providers and prove the anti-Title II constituency’s argument that Title II is bad for growth and investment.

So while we haven’t seen an argument that Title II regulation is responsible for information services positive contribution to growth, I wouldn’t expect to see one any time in the near future.

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One end game for broadband adoption: digital currency

The message for broadband adoption is incomplete because there is nary any mention of how adopting broadband aids capital accumulation or deployment for the consumer. I talked last week about how the only thing that slowed down capital expenditure by broadband providers is an economic slowdown. But what inroads on the consumer side should we see at the intersection of capital and broadband?

One intersection I find appealing is digital currency.  Digital currency allows users to exchange online credits for goods and services. Digital currency exchange may involve the use of a mobile app or can be conducted from a computer. With the use of a digital wallet, digital currency can be sent to or received by a consumer.

Transactions are made with no middlemen. International transactions are cheap and are currently not subject to regulation although governments are concerned about taxation and the lack of control over the currency. These concerns conflict directly with the philosophy underlying the development of digital currency; to take power out of the hands of the government and central bankers, a philosophy I believe that is much in keeping with the freedom and openness of the internet. With talk of central banks considering the issuance of digital currency, I’m concerned that the speed and freedom of transactions stemming from the use of digital currency like Bitcoin would be lost.

Digital or more accurately cryptocurrencies offer an alternative medium of exchange especially for communities underserved by traditional mediums of capital exchange. With a computer a consumer could “mine” her own currency, enter into markets where it is accepted and purchase goods and services in those markets. As more goods and services are purchased in digital exchanges with digital currency, not only will the value of the digital currency increase but so to will the value of the broadband networks that sustain these exchanges. More consumers would have incentive to get on board with broadband as broadband and digital currencies combine to give consumers increased access to local, regional, national, and global markets.

 

 

 

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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.