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Netflix, Tumblr wanted 1995 not 1934

Internet Innovation Alliance’s Bruce Mehlman wrote an insightful blog post last Friday about the second thoughts companies like Netflix are having about the Federal Communications Commission’s decision to reclassify broadband services as plain old telephone service.  Netflix’s befuddlement over the FCC’s decision to use Title II to drop the regulatory hammer on the internet ecosystem has me wondering how much on the same page were these net neutrality proponents?  The push for net neutrality may be an example of how dysfinctional the left can be when it sells a narrative to multiple classes within its big tent and has the manage the disappointment that ironically occurs when it gets what it wants.

Netflix’s insistence that heavy Ttle II regulation was not a part of its end game has me wondering if progressives had really settled down on a definition of a “fair and open” internet.  The left apparently has not.  To Netflix and other Silicon Valley giants, fair and open appears to mean an internet where they can interconnect in a pre-1996 manner; under some bill and keep methodology with any type of technology they deemed appropriate regardless of a broadband provider’s discomfort.

To the end-users, the four million confused members of the masses, “fair and open” was a rallying cry of the democratic wish; that a fair internet will respect their rights to communicate with whatever website of their choice and move data equally to the end-user no matter the source of the content.

Narrative managers like Public Knowledge and Free Press were successful in conflating the two narratives but were probably inept in educating their supporters, like Tumblr‘s David Karp, as to the downside of using Title II as a mechanism for reconciling the two narratives.  Title II, Mr. Karp and the rest of his Silicon Valley cohorts should have been told that their content operations, particularly the agreements that they enter into to connect to broadband networks, were not guaranteed to escape fees for the exchange of data nor was privacy from prying consumer or competitor eyes or noninterference from the government going to be avoidable.

The FCC may find itself a big loser resulting from its participation in a disingenuous conflation of varying narratives.  It must now deliver on a basket of promises to the consumer as it answers complaints from an an ill-informed electorate regarding every perceived slight in service practice and rate assessments.  It won’t be able to tell consumers or the markets that it never intended to regulate rates.  Consumers won’t stand for that because improving their consumer welfare calls for what they believe is a long awaited initiative to regulate rates.

You wanted 1995?  You may have to settle for 1934.

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Quick note on the Federal Communications Commission’s inconsistency on rate regulation

I just finished delivering a presentation before the National League of Cities infrormation technology committee.  Cities and towns are taking an interest in how the Federal Communication Commission’s reclassification of broadband may impact their decision to deploy commercial broadband facilities.  It’s one thing for the FCC to say that it will preempt state laws that prohibit a city from expanding broadband services from beyond its electric utility’s boundaries.  It is quite another to run the risk of having those services regulated by Tom Wheeler and Associates.

I pointed out to attendees that there is an inconsistency stemming from two sources.  First is the FCC’s proclamation that it will not apply public utility style rate regulation to broadband providers and that it will forbear from applying tariffing requirements to broadband carriers.  The problem is that the FCC is ready to apply “core requirements” of Title II.  Those core requirements, as found in sections 201 and 202 of the Communications Act, require that the rates charged by telecommunications firms be just and reasonable.  How will the FCC ensure just and reasonableness without a rate review?  In addition, “rate regulation” need not take the form of the traditional methodology where a regulatory body determines what the appropriate rate base is i.e. the assets needed for providing a service and, after applying a government-determined rate of return, calculating revenue and rates.

Rate regulation, as I shared with the committee, may take the form of determining rate bands, implementing price caps, or some other form of incentive regulation.  Also, while traditional tariff requirements might be foreborne, simple price schedules, as required for cable companies, may also be an option for making rates transparent and publicly on file with the FCC.  Simply sayng there will be no “public utility-style” rate regulation does not mean that broadband operator rates will not be regulated.

Second, the FCC and its net neutrality proponent allies sold consumers a level of expectation, a bill of goods, by arguing that need for regulating the internet was imperative to maintaining an open internet that would facilitate consumers’ abilities to freeluy express themselves on the printing press of the 21st century.  Notwithstanding a lack of any threat to the consumers’ ability to express themselves, the FCC, Free Press, Public Knowledge, and other groups insisted on Title II as a ready source of necessary consumer protections.  To the consumer, protection takes the form of rate and services regulation.  If the FCC is going to forbear from rate regulation, then what was the point of the net neutrality exercise?

As I relayed to the atendees, net neutrality was never about consumers and their rights to rant, vent, and watch videos.  Net neutrality is and always be a battle about content providers attempting to push their costs for transmitting content to a zero rate.  Uncertainty has been created by the FCC with its reclassification of broadband as a Title II, common carrier service.  That’s a quagmire that municipalities should stay out of.

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If the FCC is serious about regulating the internet like a utility, then this is what it should do

The argument that access to the internet via broadband networks should be regulated like a public utility sends society the wrong message about how information moves along the internet and that it is okay to devalue information, data, content along certain interconnection points when indeed the opposite should be happening; that for the value added at these interconnection points, added value should be reflected in the price mechanism.  Access should not be priced at near zero on false premises of openness and privacy.

On the contrary, if the data consumer wants to keep the prying eyes of access providers or other data providers away from her activities, there should be an exchange of compensation that guarantees such activity won’t take place.  Rather than regulate the internet as a “public utility”, let the parties in data transactions enter into contracts that spell out each party’s rights.

Unlike an electric utility where the product, electricity, flows for the most part one way (we’ll ignore distributed energy for now), data, content, information flows two ways.  Electricity flows from an energy producer to an entity that coordinates the transmission of electricity flows to the distribution utilities that have been searching for the best price from the generators. Data, content, information flows at least two ways; from content creator/generator/aggregator to an end-user in response to the locational or other personal data the end-user provides to either her internet service provider or content provider.

The data end-user or consumer pays her broadband provider for access to the internet and may also an online entity for access to their content which may be located behind a paywall.  In most cases the information the end-user seeks is offered by content providers free of charge.  But if a public utility model is followed for participants in the data markets then consumers have been underpaying for their search activities and their bills should be adjusted upward to capture the major costs a utility incurs when delivering service.

A consumer’s utility rate includes the cost of generating electricity; transmitting electricity; and distributing electricity to its final stop.  The utility consumer may also pay environmental compliance costs, nuclear construction costs recovery, a municipal franchise fee, and sales tax.

Broadband fees are another matter. What sticks out when you look at your broadband bill is that none of your fees and charges are related to the generation, transmission, or distribution of data, content, information.  For broadband access you may pay state and local taxes and that’s it.

So while a utility’s rate reflects activities impacting the movement of product that end-users want to purchase, electricity, broadband rates, while reflecting the cost of access, include nothing else, not even the cost of generating and transmitting data, content, information. If progressive advocates for public utility-style regulation of internet access want their argument to have validity they will have to accept that along with the additional regulatory burdens they propose via Title II, customers should expect bills that capture all the costs involved in generating and sending their data, content, information to them.  Broadband providers should pay every content provider that the broadband subscriber chooses as a source of data, content, information, and broadband providers should turn around and pass on these costs to the consumer so that her bills reflect these choices.

The benefits from such an approach is that it would give the markets a much more accurate view of which content providers are providing end-users with the most value.  The net neutrality debate would end because consumers would choose content they value the most as a result of rates that reflect the cost of getting a near infinitesimal amount of data to the end-user.

That is, off course, if the FCC is really serious about regulating the internet like a utility.

Consumers will call the FCC’s forbearance bluff

Posted February 19th, 2015 in Broadband, Federal Communications Commission, net neutrality and tagged , , by Alton Drew

We are seven days away from the Federal Communications Commission’s expectedly contentious vote on its reboot of net neutrality rules.  With the support of President Obama, FCC chairman Tom Wheeler will present rules based on the Commission’s alleged Title II authority under the Communications Act of 1934.  Title II was designed to keep in check 20th century monopolies by ensuring the reasonableness of rates charged by telephone companies to their end-users; ensuring that telephone companies as carriers of last resort provided services to all American households; and placing under the Commission’s authority the review of interconnection agreements between common carriers.

President Obama and other Title II proponents are against regulating rates for accessing the internet via broadband services, but Mr. Obama will leave office in January 2017 and a new Commission chairman, should Mr Wheeler also depart, may have different ideas about the regulation of internet access rates.

The irony is that failure to regulate internet access rates may invalidate the “goodwill” Mr Wheeler garnered from a boisterous if not uninformed public of three million grass roots supporters of newt neutrality rules.  Some of these supporters see internet access companies as unfairly leveraging their alleged monopoly positions to provide less services at increasing prices.  If they suspect that the Commission will not take seriously regulating the rates of internet access providers, they may think that their support was in vain.

And it’s not like the Commission will be getting much regulatory help from the state public utility commissions, at least in the short term.  Prior to the recent National Association of Regulatory Commissioners winter conference in Washington, DC, I contacted a number of state commissions to determine if they would begin regulating broadband should the FCC’s rule survive a court challenge.  Most of those who returned my e-mail question responded that it was too early to tell.  A number of commissioners stated that state law prohibited regulation and one commissioner even stated that he saw no way that his state legislature was going to go near the topic given that the legislature had already placed a bold policy statement that the legislature and regulators were to maintain a hands-off approach to broadband.

If the states won’t regulate access to the internet via broadband then the Commission will be all alone in fielding consumer queries as to why the Commission seemingly appears to have reneged on creating a competitive framework for broadband access.

I believe the politics of grassroots activism will catch up with the Commission and that Mr Wheeler and the rest of the Democratic members on the panel will be compelled to regulate end-user rates.

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Broadband and Title II: It’s starting to feel like 1995

Federal Communications Commission chairman earlier today decided to take us back to 1995 and announced that he will issue new net neutrality rules that would bring wireline and wireless broadband providers under Title II regulation.  According to The Financial Times, investor fears were subdued when Mr. Wheeler assured the public that there would be no rate regulation on the part of the FCC.  Okay.  But that doesn’t mean that there will not be new rates implemented by broadband providers.  Mr. Wheeler in his opinion piece did not rule that possibility out.

Additional rates on the part of broadband providers wouldn’t be a bad thing either for investors, the operators, or consumers.  For investors and operators they can be assured that additional compliance costs under a new Title II regime are being recovered if operators charge additional fees.  For example, electric utilities charge different rates for different classes of ratepayer.  The typical ratepayer classes include residential, commercial, and industrial, with larger ratepayers paying a lower per unit rate because of the greater volume they consume and the decreasing marginal costs involved in generating electricity for larger consumers.  Residential consumers may pay less in total because they consume a smaller gross amounts of electricity but pay a larger per unit cost for their electricity.

Broadband providers may decide to dust off their regulatory playbooks from the period before the 1996 rewrite of the Communications Act and start charging tiered rates or even per minute rates for certain low-use packages.  Since broadband operators and content providers would be banned from entering paid prioritization agreements, what better way to manage congestion than to design packages where consumers in effect determine the speeds at which they get data based on the dollar value of the data.  It may also give wannabe broadband providers like Google and Facebook an excuse to charge for some of their services.

Yes, it’s starting to feel like 1995.