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Somewhere along the information highway, we forgot about entrepreneurial freedom and value

About fifteen years ago I started writing for a publication that was transmitted to its subscribers via e-mail.  We published twice a day on regulatory events on the federal and state level.  The content we provided had great value and our clients paid us for it.  Not only did the staff get paid for the production work, but I’m sure the company had to pay an internet service vendor to transmit our content to the end user.  It’s called business.

I define business in the following way.  Business is the activity that you partake in to create, develop, market, and sell a product for income.  Business is dynamic and along your production line you are going to pay employees and contractors in order to get your product to market.  Business also requires you to look for opportunities to reduce your costs for getting your product to market and in so doing may require you to strategically partner with another entity to meet the objective of being better and faster.  That strategic partner may develop a method for helping you be better and faster and would rightfully expect to be compensated for the value their innovation bestowed on you.

The end user or consumer may observe three alternative developments resulting from the value provided by the strategic partner and all resulting in an increase in consumer welfare.  One, the consumer may see improvement in speed or quality of service with no change in the price she pays.  Two, the consumer may see an increase in price but faster service and better quality.  Although her costs have gone up, they are offset by the increase in value that she identifies in the increased quality of service.  Third, she might see her prices fall as the innovations brought by the strategic partner increase efficiencies in the way the product is delivered.

The business provider has to pay for the innovation but given the increase in consumer welfare realizes that his welfare also increases because the consumer is satisfied.

Notice in my example that the “F” word, “free”, is missing.  It’s that word that has confused content providers and consumers.  Over the past two decades, content providers and consumers have been misled by the notion that access to and delivery of information on the internet was supposed to be free.  This thought was spawned by the misinterpretation of the phrase, “open internet”, which referred not to consumption of and access to information but to the ability of application entrepreneurs to develop services that made the movement and placement of content online easier.

The edge providers, such as Google, Facebook, and Twitter, benefiting from the ability to interconnect their servers and applications with the world wide web were able to turn around and ironically compound the myth of free access by offering certain services to end users for free.  ”Free” had a network effect all on its own and open internet provocateurs such as Free Press and Public Knowledge have been milking it for years.  From free consumer access to ignoring intellectual property rights by promoting the Aaron Schwartz paradigm that all data online should be freely accessed by everyone, they have fanned the flames of contagion, creating such nausea that consumers overlook or ignore the market nature of the internet: the production and delivery of a product called information and knowledge, and like all products moving through a free market its value should be recognized and monetized and the creators of the information and knowledge should expect not only to be compensated but to pay the cost of its delivery.

Yesterday’s opinion in Verizon v. FCC failed to acknowledge the true, core market characteristic of the net neutrality debate.  Net neutrality, which has nothing to do with the open internet, denigrates the market signaling between content providers and internet service providers such as AT&T, Comcast, and Verizon.  Google, Facebook, and other edge providers have signaled the need for greater capacity and speed and internet service providers wanted to address this demand.  Rather than recognizing this demand, the Federal Communications Commission, egged on by the open internet provocateurs, preferred to disrupt the basic law of supply and demand and risk upsetting the flow of commerce.

The opinion is a mixed bag when it comes to freedom of the entrepreneurial spirit of the internet service provider.  It still leaves open the door to regulating broadband providers and, in my opinion, by leaving in place transparency rules, violates the freedom of speech of internet service providers by forcing them to communicate information for a reason that no longer exist, namely compliance with anti-blocking and anti-discrimination rules correctly vacated by the court.

Freedom got a boost yesterday, but the boost was not high enough.  Policy and the law need a change in mindset to recognize that it’s okay to allow markets to work.

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There is more to Idaho than potatoes and Debbie Austin

My son and I are apparently keeping up with some of the Joneses.  Yesterday his mother came into town to visit him and presented him with a smartphone.  Yes, a smartphone.  The old man is still in 3G la la land having upgraded from a 2G flip phone back in November 2011. (I’m still smartin’ from having my chops busted by Dr. Nicol Turner Lee for having the audacity to carry a 2G flip phone in public a couple years back).  Anyway, with two cell phones in the house and no wireline, the Chuckster and I are firmly a part of the unit of analysis evaluated by Pew Research and the National Centers for Disease Control (CDC) for determining the number of households that have snipped the cord at home and rely completely on wireless access to communications services.

According to a study by the CDC, 52.3% of adults in Idaho live in households that do not have  a wire line but have at least one wireless phone.  On the lower end, 19.4% of adults in New Jersey live in households that do not have a wire line but have gone the wireless-only way.  In my home state of Georgia, that percentage is 37% while Maryland comes in at 29.4%.

A closer look at the urban areas of Georgia and Maryland show that the percentage of adults that have opted for wireless only households is higher.  DeKalb County and Fulton County Georgia show 41.8% of adults living in households where there is a wireless phone only while the rest of the Peach State is at 36%.  In Maryland, Baltimore City comes in at 39.6% while the rest of the state registers at 27.6% of adults living in wireless only households.

If you have a penchant for old school, legacy land line usage then New Jersey is the state you want to be in, according to a Pew Research study, with 78.9% of households in Tony Soprano land have at least one land line.

Age and wealth have a bearing on whether a household cuts the cord, according to Pew.  Citing additional CDC research, Pew concluded that:

“The wireless-only lifestyle is especially predominant among the poor and the young. According to the CDC, nearly two-thirds (65.6%) of adults ages 25-29 lived in households with only wireless phones, as did three-in-five (59.9%) 30- to 34-year-olds and a majority (54.3%) of adults ages 18-24. A majority of adults living in poverty (54.7%) lived in a wireless-only household, versus 47.5% of what the CDC calls the “near-poor” and 35.3% of non-poor adults; wireless-only households also predominate among Hispanics, renters and adults living with roommates.”

Policy wise this tells me that regulators should not force broadband providers like AT&T and Verizon to continue putting resources toward maintaining old copper networks.  The country, whether for aesthetics, convenience, or financial reasons, showing its preference for mobility and regulations that go against this grain only encourages inefficiencies in resource allocation.

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Broadband connectivity and productivity go hand in hand

The following excerpt from a U.S. Telecom research brief released in March 2013 provides substance to the argument that broadband plays an important role in the future expansion of the American economy.

“Broadband networks are critical enablers of productivity and growth enhancing innovation. As noted above, Marshall Poe describes the attributes of five historical communications media: speech, writing, print, audio-visual, and the Internet.

Among these, he identifies the Internet as especially powerful in generating economic activity, spillover effects, and novelty,another word for innovation. Steven Johnson, in “Where Good Ideas Come From,” offers an even
broader perspective on the role of what he calls “dense liquid networks” in the innovative process, from the formation of the first life forms in the so-called “primordial soup,” to the biodiversity of coral reefs, to the generation of novel ideas through neural networks, to the flourishing of civilization when humans settled in cities. Johnson argues—paraphrasing—that dense liquid networks enable increasingly large numbers of innovative agents to come into contact with one another, colliding and sharing ideas, rethinking and building on existing ideas, and exploring new combinations and possibilities. 

Broadband networks are the essential fluid medium through which today’s information-based
innovative processes occur. Extensive broadband networks connect and make possible
interactions among individuals, businesses, academics, governments, connected computers and
other things, and the information generated by all of these. Broadband networks are an essential
enabler of the creation and diffusion of new ideas across the modern information-based
economy.

In the specific context of data-based innovation, promising technologies such as cloud
computing, RFID-enhanced logistics, smart electrical grids, electronic health records, social
media applications, and big data analytics all thrive in this context. Through the broadband
medium, applications are able to gather, process, and analyze information, and distribute useful
insights, products, and services. Such applications require the transmission of large and growing
volumes of data, to and from widely distributed network nodes, and increasingly in real-time.

Thus, continuous innovation and investment in broadband networks themselves will be necessary
to accommodate ever growing demand and to realize the potential productivity benefits so
essential to economic growth. Competitive investment by the private sector has generated
widespread benefits, bringing broadband to the vast majority of the country and accommodating
usage that grew by a factor of approximately 4,000 from 1996 to 2010. Providers have invested over a trillion dollars in the last decade and a half to provide the essential capacity, quality of service, and application-based innovations needed to accommodate ever increasing network demand from users at the so-called “edge.” 
Policy must now aim to encourage the maximum levels of continuing investment by broadband
providers and the widespread adoption, by consumers and enterprises, of productivity-enhancing
applications. We can accomplish this in part by removing barriers to investment by broadband
providers, removing legacy burdens and encouraging the migration to Internet Protocol networks
for consumers and enterprises.”

US Telecom’s research tells me that as demand for the efficient and fast transfer of information increases, not only will more information consumers need to maintain their connections to the Internet, they will need networks that provide the capacity or bandwidth for maintaining high-speed connections.  That can’t happen if there is the persistent threat of net neutrality petitions constantly being filed and slowing down the deployment of these networks.

Facilitating the flow of data at high-speed won’t happen if AT&T, Verizon, and other owners of legacy telephone networks are forced to spend finite resources on legacy telephone networks that cannot provide the capacity demanded by the businesses, researchers, academics, and consumers mentioned in the report.

The Federal Communications Commission will have to go beyond thinking about tweaking regulations.  The FCC will have to start thinking about repealing regulations.  Just as importantly, the FCC will have to look itself in the mirror and reconsider its overall mindset when it comes to innovation and the knowledge markets.  The question should not be what regulations do we apply.  The question should be how do we get the knowledge market to fly.

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Google, Facebook, and Amazon take bypass to another level

In the mid 1990s, the Federal Communications Commission and a number of state public service commissions were forced to notice that the moat that surrounded the Baby Bells was being breached by alternative access providers and competitive local exchange providers.  The facility based alternative providers wanted to expand from just providing by-pass networks to and for their large corporate clients.  They also wanted to provide consumers with an alternative to incumbent local providers such as GTE, Centel, and BellSouth.

The large corporate clients served by alternative local exchange and alternative access providers wanted to avoid the fees paid to incumbent local exchange carriers for moving traffic from one say a satellite office to the corporation’s headquarters.  They determined that competitive providers gave them a less expensive and more efficient alternative.  Regulators, prompted by emerging competition and calls from incumbents to remove the regulatory handcuffs, moved forward with modifying statutes to create on the state level new baskets of competitive services that qualified for alternative, non-rate based pricing.  On the federal level, by-pass services, provided by cable companies and long distance companies, contributed to the passage of the Telecommunications Act of 1996, which saw local exchange markets opened up to competition by long distance companies and cable companies.

Notice I referred to GTE, Centel, and BellSouth.  These companies are no more having been swept up in acquisition activity that succeeded the passage of the 1996 Telecom Act.  By-pass and a revamped regulatory scheme for the 1990s introduced disruption in the telecommunications markets and with this disruption came innovation in cellular telephone services, video distribution services, and broadband services.  Cable companies, legacy long distance companies, and incumbent local exchange carriers were adding reality to the convergence that AT&T’s C. Michael Armstrong envisioned in the late 1990s.

We are witnessing more convergence and disruption again; changes and innovations that will require the FCC to again loosen the shackles impeding investment in the broadband and Internet world.

Readwrite.com today posted an article describing the efforts of large Internet companies such as Facebook, Google, and Amazon to build networks with the capacity to move more data traffic across their own networks while avoiding potential fees that could be assessed by large telecoms such as AT&T and Verizon.  Instead of having CLECs build their networks, Facebook, Google, and Amazon have the cash to do it themselves.   This tells me that AT&T and Verizon will need to rely on other revenue paths to maintain their profitability; profits necessary for reinvesting in broadband deployment and spectrum acquisition necessary for meeting consumer hunger for broadband, wireless services, and app usage.  AT&T and Verizon, as well as other classic Internet providers, will also need to seek out other revenue streams if they are to compete with Facebook, Amazon, and Google’s Internet protocol-based networks.

In order to facilitate reactions to changes in the market, the FCC must take another set of handcuffs off, primarily the requirement that AT&T, Verizon and smaller telecom-based broadband service providers maintain old legacy telephone networks that cannot compete with the capacity that Google, Facebook, and Amazon are investing in.  The FCC will also have to recognize that competing on the Internet will require not just deploying higher capacity networks but also for the regulatory agency to look at these companies in a different light.  Google, Facebook, Comcast, and Verizon are no longer Internet or broadband companies.  They are morphing into something beyond being a carrier, a search engine, or a social network.  They are becoming one stop media hubs with the ability to attract consumers with content while building the networks necessary for getting the eyeballs to the content.  These evolving Internet entities are nothing the 1996 Act envisioned and the regulatory framework expressed by the 1996 Act is too confining for these new breed knowledge and information companies.

Not only are Google, Facebook, and Amazon taking network bypass to a new level, they are forcing us to bypass the traditional lenses that we use to look at these companies.

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FCC’s monopoly creates a monopoly on the H block

The Federal Communications Commission may be getting closer to fulfilling FCC member Jessica Rosenworcel’s worst nightmare for the H block spectrum auction, where instead of selling 65 megahertz of airwaves as authorized by Congress in the Middle Class Tax Relief and Job Creation Act, only 10 MHz will be sold and that sale will likely be to Dish Networks.

“I fear this approach fails the test”, Mrs. Rosenworcel stated back on 13 September 2013.  ”That is because holding a single auction of all 65 megahertz at once is bound to yield more interest, more bidders, and more revenue than dividing this spectrum up and holding an auction of the 10 megahertz H block alone.  As Wall Street analysts have noted, splitting this spectrum up for auction will likely limit interest in the H block to only one or possibly two bidders.  If that is true, we will have a retail sale–not an auction.”

Telecommunications analyst Larry Downes reiterated Mrs. Rosenworcel’s concerns in a piece for Forbes.com, arguing that not only has the expected competition for the H block been stymied, but the FCC has once again shown that picking winners and losers in a market results in failure versus letting market-based competition determine spectrum value while inviting more participants to bid.

In my opinion, the FCC is naive as to its own market power, that of a monopolist.  With the U.S. Department of Justice and the FCC playing anti trust tag team on large companies preferring to acquire spectrum in the secondary markets, the FCC is a bottleneck channel to additional spectrum.  Whatever supply signals the FCC sent out to the big four wireless carriers to ensure a multi-carrier demand, those signals probably didn’t have enough spectrum themselves.  AT&T and Verizon did not bid, which does not surprise me given their preference for the good stuff in the 600 and 700 megahertz range, and T-Mobile and Sprint decided to opt out.  Sprint, after jockeying for terms to its liking in the end decided it didn’t like the terms of the auction.  Mr. Downes writes:

“Sprint’s about-face is hard to explain.  According to an article in The Kansas City Star, Sprint CFO Joe Euteneuer surprised financial analysts in announcing that the company was walking away from the auction just a few weeks before bidder applications were due. Euteneuer ‘said the company took issue with the rules governing the auction,” according to the article, “but didn’t specify any complaints.’ “

Dish created a monopolist’s worse nightmare.  It became the only buyer of spectrum on an aggregated, national basis and with no other buyers available to bid up the per megahertz per population rate, the FCC, as Mr. Downes puts it in his article, was left holding the bag.

If this auction foreshadows the possible outcome of the reverse auction for broadcast television spectrum, the FCC should make sure that no restrictions are placed on carriers that wish to participate.