Comments Off

I don’t see how the FCC set top box policy adds value to content

On 27 October 2016 the Federal Communications Commission will take up the issue of competition in the navigation device or set top box space. The Commission wants to see the video content distribution industry move from requiring subscribers use of set top boxes to the use of free apps to find content. The main driver of the proposed policy, according to the Commission, is subscriber avoidance of onerous set top box fees that allegedly average $231 a year. With today’s app and internet technology, argues the Commission, subscribers should be able to find content without paying navigation device fees.

The process for getting to a decision is driving some content developers bonkers.  According to a report in Broadcasting & Cable, some content developers are concerned about the proposal’s lack of transparency and whether the Commission will play an intrusive oversight role in contracts between content distributors and content programmers.  Contracts lay out terms for compensation and channel placement, items I would think that the Commission should not really be interested in. Rather, the Commission should be interested in whether the telecommunications sector is bringing value to the overall economy. While content creation is ancillary to the sector, without information, data, or knowledge flowing over networks, the network itself loses value.

From the content programmer’s perspective, while concerned with carving out a niche in a competitive content space, the content developer, where he can seize the opportunity, wants to recover as much of a premium as he can from his product. That means cashing in on as much exclusivity as he can. He will do this in two ways. One, produce content that generates traction. Two, make sure that given the traction, he makes the content as exclusive as possible so that he can extract higher rents. Free apps do not meet either of these conditions. Free apps providing you navigation to licensed and unlicensed content eliminates exclusivity. Content competition is increased which drives down the prices content programmers can charge. This leads to lower returns on capital. If returns on capital are seen as too low, no investment is made, no infrastructure deployed, no workers hired.

All this to save $231 a year.

Comments Off

FreedomPop applies to FCC to resell services at all international points

On 29 July 2016, STS Media doing business as FreedomPop applied to the Federal Communications Commission to provide resold services from all international points. FreedomPop provides free mobile broadband plans, devices, digital services, and social sharing that allows its subscribers to share data across accounts.

The company was formed in 2011 and counts among its investors Mangrove Capital, DCM, and Atomico. According to its website, the company provides services in the United States and the United Kingdom and plans to roll out services to a dozen more countries this year.

FreedomPop uses Clearwire’s 4G WiMax data network and Sprint’s 4G LTE network.

The California-based start-up has avoided being acquired so far opting instead for raising private capital in a number of rounds. In June of 2015 it was reported that FreedomPop would invest $50 million in raised funds to invest in European and Latin American markets while expanding here in the United States.

STS Media’s application is filed under ITC-214-INTR2016-01757.

 

Comments Off

Let a private capital business model meet un-served, underserved broadband market

Federal Communications Commission member Ajit Pai yesterday sent a letter to the chief executive officer of the Universal Service Administrative Company, the not-for-profit entity designated by the Commission to administer the universal service program. In the letter, Mr. Pai questions apparent waste in the Lifeline program arising from certain households receiving more than one Lifeline subsidized service and the application of exceptions used to to allow additional members of household to qualify for a subsidy.

USAC administers four programs: high-cost and low-income; rural health care; Lifeline; and schools and libraries.  Universal service is premised on the principle that all Americans should have access to a baseline of telecommunications services. These principles were recently expanded by the Commission to include high-speed internet access.

To meet these goals, a federal universal service fund has been established where telecommunications providers and voice-over-the-internet service providers make contributions to the fund and telecommunications companies may apply to receive reimbursement of the expenses involved in meeting universal service goals. According to USAC, in 2014, $7.9 billion in funding were disbursed from the fund to telecommunications providers.

My bird’s eye view of the extension of Lifeline to mobile broadband here in Atlanta tells me that mobile carriers are focusing on lower income neighborhoods. Here in the West End sector of Atlanta there appears to be a table and tent pushing free phones on every other corner. Assurance Wireless, a subsidiary of Virgin Mobile  is pretty busy pushing its Lifeline wireless services here. Fraud and waste as discussed above has been a big issue with policymakers. Rather than a government program where a private company is being required to act as a social welfare agency determining whether a consumer is eligible for a government aid program and rather than telling households how many phones they should be limited to having, why not let entrepreneurs and private capital identify and sell to underserved markets for cell phones.

The technology is there where cell phones, capable of accessing the internet, can be provided to lower income consumers at prices a fraction of what it costs to get an iPhone. Technology continues to innovate where low cost phones can be provided. For example, Verizon offers smartphones at retail prices ranging from $94 to $120. Plop down the cash and for the monthly data plan fee a consumer can make calls or surf the internet.

If private capital sees returns from investing in a company that can provide handsets and data plans to low income households, private capital will make the investment. The problem is the premise that everyone should have access to the internet via mobile broadband. That premise is faulty because it assumes a value to the consumer and forces that value into Commission rule. Yes, commerce benefits from the deployment of a telecommunications infrastructure that facilitates the flow of data, knowledge, and information, but those providing and extracting this value should be ready to compensate the providers of services or invest in its deployment out of their own pockets or with funds raised in the capital or credit markets.

Yes, telecommunications networks may increase in value with an increase in end-users accessing it, but spreading the cost of facilitating access by one consumer who probably brings no value communications wise to other consumers is an externality that I view as negative. Not only will we see fraud in the current government-based universal service, but a taking of consumer property via the taxes paid by consumers to support universal service.

Comments Off

A public utility is regulated for what it provides, not for how it provides it.

FPL, known to us old heads as Florida Power & Light, is a public utility under Florida law.  Section 366.02, Florida Statutes, defines a public utility as ” … every person, corporation, partnership, association, or other legal entity and their lessees, trustees, or receivers supplying electricity or gas (natural, manufactured, or similar gaseous substance) to or for the public within this state …”   In declaring its rationale for regulating public utilities, the Florida Legislature, in section 366.01, F.S., states that:

“The regulation of public utilities as defined herein is declared to be in the public interest and this chapter shall be deemed to be an exercise of the police power of the state for the protection of the public welfare and all the provisions hereof shall be liberally construed for the accomplishment of that purpose.”

In other words, Florida believes that because the products provided by utilities; electricity, water, natural gas, are of such necessity to its citizens, that regulating how they are provided and the rates they are provided at is essential to the well being of the states’s citizens.  Imagine the levels of disease or hunger that would emanate from a prolonged loss of electricity, water, or natural gas.  Commerce would come to a grinding halt without the electricity needed for energizing transportation facilities and the transfer of financial assets.

The economic reasons for regulating public utilities stem from their roles as natural monopolies.  Richard A. Posner wrote in his text, Economic Analysis of the Law, that natural monopoly presents three problems that warrant regulation in some form or the other.  One is monopoly pricing.  The second is inefficient market entry resulting from the natural monopoly’s reaction to potential entrants.  The third is the difficulty of devising an efficient pricing structure.

Judge Posner’s answer to the natural monopoly dilemma is public utility regulation, an approach to regulating a natural monopoly based on three elements: profit control, entry control via some license or certificate of necessity and convenience, and control over price structure.

At this point every investor should be sucking air in great pause  were this type of framework be applied to broadband access providers.  The framework introduces another level of uncertainty for broadband providers especially where regulation may lessen rates of return on capital or equity.

What I also find curious is why net neutrality proponents do not get this granular in their advocacy for common carrier or public utility regulation, preferring to stick to the narrative that broadband providers should be regulated because they might do something wrong that negatively impacts the consumer’s ability to get to a website.

I’m equally curious as to why net neutrality advocates never bother explaining why communications or broadband companies are not included in the statutory definition of a public utility.  Some academics have tried.  For example, Fordham University professor Rick Geddes includes communications firms in the definition of public utilities.  He cites as a common thread between telecoms, electrics, and natural gas firms three components: production, transmission, and distribution.  The problem with his analysis is that telecommunications firms don’t produce anything.

Whereas an electric company generates electricity, a secondary form of energy, and transmits and distributes the energy over its facilities, all a broadband or telecommunications firm does is transmits the messages or data that I request it to send.  My original message gets to its recipient in the same form that I send it in; in the form I generated it in.

From a social perspective, while I am basically shy, I can warm up a bit and be pretty sociable.  However, while I do need to eat properly cooked food and take a bath everyday, I don’t need to talk to anyone everyday.  Broadband adds efficiency to my ability to gather, process, and disseminate information, but I don’t need it in order to collect or send information.  It’s not a necessity.

Yes, that runs completely counter to the narrative pushed by the net neutrality types; that without broadband the whole world will come to an end and for that reason we should regulate the crap out of Comcast and Verizon, but that narrative is not steeped in law or the common view, not when you have fifteen to twenty percent of the American population getting along just fine without broadband.

The net neutrality narrative that broadband should be regulated like a public utility exposes another fatal flaw.  If the true product being generated is information then in order to apply the public utility model the information generators i.e. end-users and edge providers, will have to be dragged into the regulatory eco-system.  Privacy concerns and law may keep the hands of the Federal Communications Commission off of end-users, but edge providers such as Amazon, Facebook, and Google would be fair game, especially given their market dominance in publishing, online advertising, and search.

It’s no wonder they have been sitting on the fence during the net neutrality debate.  Hopefully for them the wire is not barbed.

Bottom-line, broadband providers are not public utilities.  They lack the generation component typically associated with a public utility.  They are, for the most part, connectivity providers.  One could argue that their portals provide news and information, but until they declare themselves media companies, providing a portal does not make you an information generator.  If anything they are merely aggregating information from other sources that you can go directly to yourself.

 

Comments Off

John Thune will need some help in November for his telecom initiative

The Hill reported last week on U.S. Senator John Thune’s desire to update the Communications Act of 1934, making it a 21st century law for a 21st century world.  While we have 86 and half years left in this century, Mr. Thune, Republican of South Dakota, only has four and a half months to set the stage for a 2015 re-write.  The Republicans will have to hold the House while trying to capture the Senate.

The House Energy and Commerce Committee, under the leadership of U.S. Representative Fred Upton, Republican of Michigan, has already started addressing an update of the Communications Act by issuing a series of white papers, seeking public comment on the white papers’ issues, and holding a number of hearings.

“The only way to provide the certainly that [Internet service providers], edge providers, content publishers and end users need and want is for Congress to legislate,” Mr. Thune said. “My colleagues and I need to roll up our sleeves and figure out how best to promote an open, competitive and free Internet.”

Mr. Thune and his colleagues on the left and the right of the aisle may have to work on the art of compromise if anything close to a re-write is to be accomplished by 2015.  I expect U.S. Senator Al Franken, Democrat of Minnesota, to lead a charge against any language in a re-write that attempts to negate net neutrality rules.  Mr. Franken has been making the media rounds arguing for an open Internet, expressing his fear that broadband access providers will only seek to block access to content or discriminate against certain content producers by favoring their content over a non-affiliate’s content.

In the immediate term I don’t see any new regulatory threats to edge providers.  I believe Congress’ initiatives will move slower than the innovations we see coming from edge providers.  The only way Congress can catch up to the broadband and Internet industries is to put a moratorium on innovation and that will never happen.