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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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How can the FCC help expand the broadband economy

Yesterday Michael O’Rielly provided a definition of the internet economy during remarks made before the Internet Innovation Alliance.

“Here is a simple truth.  The Internet thrives today on aggregating information for the purposes of increasing advertising revenues and the use of data analysis for multiple purposes.  Data and advertising are why Internet-related companies are valued so highly by investors and Wall Street, and why those companies that cannot monetize such activities face harsh realities and uncertain futures.”

In other words, regulators need to understand that the commercial internet is an infrastructure that facilitates data trade and that the regulations they implement can limit the type of data collected over the internet by internet-related companies.  Broadband operators are involved in this data trade.  For example, Comcast collects non-personally identifiable data that they may share with third-parties for the purpose of targeting advertisement.  This non-personally identifiable data may include IP and HTTP header information; a consumer’s device address; a consumer’s web browser; or a consumer’s operating system when using Comcast’s web services.  Where a Comcast subscriber is trying to personalize the use of Comcast’s web services, the consumer may provide to the broadband provider for storage the consumer’s zip code, age, or gender information.

The competition that gets ignored by regulators is the competition broadband providers face in the capture and sale of consumer data.  This competition includes cloud storage companies, content creators, and app developers.  It also includes companies in the internet, publishing, and broadcasting industry with familiar names like Facebook, Google, and Yahoo. According to Hoover’s, these companies publish content online or operate websites that guide information consumers to the content they are seeking.

Demand for this industry’s services is driven by consumer or business needs for information and other forms of content. Profit is created when these companies deliver relevant information to consumers while offering advertisers a targeted audience.  According to Hoover’s, sales of online advertisements account for just over half of U.S. industry revenue with 75% of advertising revenue coming from search and display advertising formats.

Comcast was hoping to make major inroads into advertising with its proposed acquisition of Time Warner.  Writing for Adage.com in February 2014, Jeanine Poggi wrote:

“Assuming the deal is approved, however, it will make Comcast become a more important partner for advertisers, said Ken Doctor, affiliate analyst, Outsell. Its expanded role as both a content producer and content distributor will make it all the more competitive for ad dollars with companies like Yahoo, AOLGoogle, and Facebook. “It will become more of an ad competitor as selling of TV [and] digital inventory blurs,” he said.”

Writing further, Ms. Poggi points out that:

“A merged Comcast reaching 30 million U.S. households, along with the national reach of DirecTV and Dish Network, creates an alternative to buying national advertising from the TV networks, said Jason Kanefsky, exec VP-strategic investments, Havas Media.”

Unfortunately for Comcast investors, the Federal Communications Commission and the U.S. Department of Justice bought into the pseudo net neutrality argument pushed by grassroots groups and Netflix that mergers such as Comcast and Time Warner would somehow thwart the average man’s ability to express themselves online and that a larger Comcast would be a detriment to competition in broadband access.  Allowing the merger it appears would have given advertisers, from large corporations to small entrepreneurs, alternatives for online advertising.  The economies of scale that a Comcast-Time Warner marriage would have produced may have lead to lower advertising rates especially for smaller companies.  The FCC’s new Title II rules for broadband companies may only serve to further foreclose such scale.

The issue is, under the current rules and statutes, should broadband providers be prohibited for sharing data with advertisers or other third-parties seeking to target ads at a broadband provider’s subscribers?  I believe the answer is no and investors should lobby the FCC to ensure that no such rules are drafted.

47 CFR 8 of the FCC’s rules for protecting the open internet provides no explicit prohibition on a broadband operator providing third-parties with subscriber data that could be used to deliver advertisement.  Section 8.11 of the rules, in my opinion, gives broadband operators an argument for providing customer data to third-parties, particularly edge providers.  Specifically, the rule says:

“Any person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not unreasonably interfere with or unreasonably disadvantage end users’ ability to select, access, and use broadband Internet access service or the lawful Internet content, applications, services, or devices of their choice, or edge providers’ ability to make lawful content, applications, services, or devices available to end users. Reasonable network management shall not be considered a violation of this rule.”

Section 222 of the Communications Act does not expressly prohibit use of consumer information for advertising purposes, but given that the statute is written for telecommunications companies, Congressional action would be needed to amend the section with language that reflects how broadband and other internet companies use consumer information.

If the FCC wants to help expand the broadband economy, it will have to persuade Congress to make these language changes lest leave investors in a state of uncertainty.

 

 

 

 

 

 

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Should investors be concerned about FCC Lifeline funding policy? No

Posted June 8th, 2015 in Uncategorized by Alton Drew

Back on 28 May 2015, Federal Communications Commission chairman Tom Wheeler announced a policy initiative to target the Lifeline $9.25 per household subsidy toward broadband services for low-income consumers.  Lifeline was established in 1985 during the Reagan Administration and was designed to help low-income consumers maintain telephone services on a monthly basis.  The subsidy is funded via a monthly charged assessed on telephone subscriber phone bills.

Lifeline is not a threat to the typical telephone company’s business model.  If you take a look at AT&T or Verizon’s 10-K filings you will not find mention of Lifeline eating into company profits in any meaningful way.  Instinctively one would think that a program that encourages an increase in wireline or wireless subscribers would be a good thing anyway, especially when that increase is being funded by the vast majority of consumers.

The Commission is slated to discuss Mr. Wheeler’s initiative on 18 June 2015 during their monthly open meeting.

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Communications law’s imbalanced approach to the broadband market

If Congress and the Federal Communications Commission want to manipulate the broadband market, they should take a balanced approach. Balance is missing particularly when it comes to the universal service subsidies directed toward broadband carriers. That’s my take away from a study of broadband service competition conducted by Steven Titch, an independent communications policy consultant formerly of the Reason Foundation.

In his report, Mr. Titch studies the effect of wireless and satellite services on rural universal service policy. He concludes that these subsidies, which are fueled by universal service fees assessed on consumers of telecommunications services, are no longer needed. Innovation in broadband services made available by wireless and satellite providers has increased competition in the availability of data and voice services in rural areas. Citing data from the FCC, Mr. Titch notes that 99.9% of all Americans have access to some form of broadband with download speeds exceeding 3 Mbps and that for rural consumers with no access to cable or FiOS, broadband services can be obtained from digital subscriber line services via existing copper lines.

What would be the effect of continued subsidization of wired broadband deployment from universal service programs such as the Connect America Fund? According to Mr. Titch broadband providers in rural areas would have little if any incentive to invest in infrastructure which eventually leads to fewer people being able to access high-speed Internet services.

Of the four areas where subsidies are directed, low-income support; schools and libraries support; rural health providers support; and high-cost support, Mr. Titch is most concerned about high-cost support. While admitting that lower density of buildings and businesses increase the cost of broadband deployment in rural areas, the idea that rural services cannot be delivered at a profit is pretty outdated, says Mr. Titch. Satellite and wireless providers may be able to provide broadband services to rural consumers at lower capital costs, providers that the FCC’s universal service policies ignore. Inefficiencies arise when costlier broadband delivery platforms are subsidized versus consumers using less costly, at least in terms of capital outlay, services provided by wireless and satellite providers.

Addressing the problem with high-cost support being directed to inefficient broadband delivery platforms may lie in an imbalanced approach that policy takes the communications market overall. If the broadband eco-system, like the overall economy, is truly consumer driven, why should the fourth leg of universal service policy direct any funds to providers at all?

The overall policy underlying the Communications Act is to make available “so far as possible, to all the people of the United States” a nationwide communications network. Even the Act recognizes that there will be limits to getting communications or advanced communications to all Americans, but the emphasis in Section 151 of the Communications Act was on consumer access to a network.

This focus is continued in the policy rationale for universal service as spelled out in Section 254 of the Communications Act. Low-income support (Lifeline); rural health care support; and schools and libraries support are representative of consumers of communications services. Low-income consumers, rural health care providers, and schools and libraries receive direct or indirect support from universal service programs so that they may access and consume services. While you can argue that unless broadband providers are subsidized so that there are services available for consumption, the counter to that, based on Mr. Titch’s analysis, is that lower capital cost alternatives such as wireless and satellite services, remove the need for subsidies as a result of the innovation these alternative providers bring to the market.

Congress should consider, at a minimum, removing high-cost support from universal support resulting in the FCC getting rid of the Connect America Fund geared toward broadband. In an eco-system where high-cost support no longer exists, wired providers will be forced to develop delivery platforms requiring lower capital costs in order to compete with encroaching wireless and satellite providers with consumers benefiting from lower communications bills.

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Time for Atlanta to use broadband to create an intellectual depot

Detroit’s bankruptcy took up plenty of space in the media over the past couple of weeks. It made me wonder what type of outside-the-box thinking policy makers employed in figuring out how to bring more revenue into the city.

I’ve also been doing a little thinking about the knowledge economy, specifically how a city can take advantage of the intellectual capital of its residents and provide the world access to that capital while bringing in additional tax revenues. That would call for increases in incomes received by the possessors of intellectual capital.

Experts face two dilemmas. First, they need to be found by people seeking knowledge. They have to be made available. The second dilemma is what they have to share must have a certain level scarcity. In other words if a large number of people already possess the information held by the expert, the value of the information decreases.

There may be a way to resolve both dilemmas using broadband. Broadband access makes easy finding a group of experts. Rather than having to visit the websites of various think tanks, university academic departments, and consultancy offices, a city could create an online intellectual property depot or exchange. Using some program or algorithm, experts can be displayed under certain categories of expertise, side by side, displaying their names, credentials, years of experience, and appointment times for in-person, telephone, or on-line consults.

Here is where the scarcity comes in. The consultant may list on the exchange two main products. First she may list her appointment times where she invites bids for certain slots. The starting bids for each slot increases based on the opportunity costs of meeting with someone during the slot. For example, maybe the consultant prefers working out from 11 am to 1 pm so to ensure that window stays open, she increases the starting bid for that slot.

Another way to create scarcity would be to provide licenses for the one-time and non-exclusive use of patent or copyrighted material owned by individuals, businesses, or universities. This is already being done by The Intellectual Property Exchange International, a trading platform located in Chicago where patents are placed in unit license rights contracts and sold in primary or secondary markets as financial instruments. The concept appears relatively new and there may be more room for entry into the exchange business.

Between Georgia Tech, Emory, Georgia State, Morehouse and Clark Atlanta, there are plenty of professors with consultancies or holding patents that could probably do with the exposure.

About two years ago I participated on a panel during a conference of the National Association of Black Mayors. In describing broadband and its benefits to cities, I argued that cities should act like harbors within the stream of electronic commerce. The knowledge economy is seeing an increasing exchange of intellectual capital, capital needed to address a myriad of problems across the globe. A city that can showcase its intellectual property by making its holders available in that stream is bound to attract more talent and increase its tax revenues garnered from the increasing output that talent can generate.