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What regulators say about the internet of things

For the past two or three days the chairmen of the Federal Communications Commission and the Federal Trade Commission have been clarifying their regulatory agendas for and approaches to the Internet.  FCC chairman Tom Wheeler plans to issue net neutrality rules around 5 February with the full FCC voting on those rules on 26 February.  Media reports have Mr. Wheeler outlining what he believes the benefits consumers would enjoy from reclassifying broadband as an old school, run-of-the-mill telephone company.  For example at the Consumer Electronics Show in Las Vegas Mr. Wheeler reportedly said the following:

“So, there is a way to do Title II right, that says there are many parts of Title II that are inappropriate, and would thwart investment, but that a model has been set in the wireless business.”

CTIA-The Wireless Association has taken the position that given the level of competition for mobile broadband that net neutrality rules should be “mobile broadband specific” and that mobile broadband has never been regulated under Title II.

Mr. Wheeler, in an attempt to keep net neutrality advocates happy, appears to be willing to use Title II regulation to strike down deals between content providers and broadband operators where content providers pay to have their traffic given higher priority over other providers.  Mr. Wheeler wants the role of determining which transactions and agreements are commercially reasonable and how that traffic should be moved from content provider to broadband provider to ultimate end user.

FTC chairman Edith Ramirez’s approach appears to focus more on transparency of participants in information markets.  Her concern, as shared with CES participants, is about privacy and the Internet of Things. As more devices connect to each other via the internet, more devices become subject to hacking and a wealth of data, thought by consumers to be private, becomes subject to misuse, theft, or fraud.

Ms. Ramirez’s focus on the consumer is not surprising given the nature of her agency’s work, but it also seems the slightly, and I mean slightly, better approach to overseeing market behavior versus individual business behavior.  The internet is a platform for information exchange between information generators and information seekers.  The more information that a provider has on how her information is going to be used in the markets helps her make better decisions not only on whether she should make it available but also on its value and how best to monetize her data. Information gatherers will simply have to provide better incentives to information providers to get them to give up their data.

What kind of growth does the market see for the Internet of Things?  According to Cisco’s Internet Business Solutions Group, some 25 billion devices will be connected to the internet by the end of 2015.  That number will climb to 50 billion connected devices by the end of 2020.  That’s a lot of broadband infrastructure for the FCC to oversee and more hacking access points for the FTC to worry about in five short years.

Investors will see the biggest gains in the infrastructure space of the Internet of Things.  Leading growth in this space will be manufacturers of processor chips, wifi networks, sensors, and software.  Investors should also be concerned with factors that impact demand for devices that talk to each other and I believe the factor that has the heaviest weight is the consumer privacy factor.  Devices aren’t just talking to each other but are gathering information on consumer likes and habits and storing this data for the information gatherer’s future use.  Privacy is an immediate and long term issue because it concerns one half of the parties involved in the information market transaction: the consumer.

As for the FCC’s open access approach it is too short-sighted.  Mr. Wheeler’s focus on competition for broadband service and equal treatment of traffic may have a nice sounding populist ring, but in the internet eco-system what matters is the consumer’s choice of product obtained through broadband.  That product is content and the price the consumer pays in exchange for that content is, ironically, content in the form of personal data.  Consumers already have wireless and wireline choices for broadband access.  The value play for consumers lies in the quality of content available online and consumers are more than capable of deciding that for themselves.

What the government can do is what it does best (albeit it is not the best at it, but work with me); government should adjudicate privacy and other consumer disputes and make available to consumers information that they may not be able to gleen readily from the private sector.  The FTC’s focus on privacy and consumer protection does a better job at this than the FCC.

I’ll go out on a limb and say that the private sector is taking care of the FCC’s mandate of ensuring a nationwide communications network.  The FCC’s focus given the growth in the mobile market and the increasing need for devices to wirelessly connect should remain on allocating spectrum and assuring the reliability and safety of wired and wireless communications infrastructure.  Any other endeavor is waste.



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Internet commerce flourishes because of market demand not regulation

One peeve I have had with the Federal Communications Commission in past and today is its penchant to describe its role in the broadband market as a facilitator of growth and innovation.  It’s like having cousin Louie visit for a weekend, overstay his welcome, and claim that he helped to build your house.  I’ve had to ask myself if I missed something during my two decades in the regulatory game.  Where did the Commission facilitate growth in the online markets?

There are probably a number of different sources to look at.  I try to keep things simple, so I decided to take a look at what professional market watchers have seen over the past four years.  Not a formal analysis that wreaks of regression analysis and all that, but an albeit cursory review of the findings from three Morningstar reports that covered a broadband provider; an online bookseller; a media company; and an over-the-top video distributor.  Since the Commission continuously refers to the entire internet ecosystem as its unit of regulatory analysis, I figured looking at companies that play in different but connected boxes in the internet ecosystem was an allowable approach.  So here goes.

First, lets go back to a Morningstar analysis of Amazon conducted on 6 December 2010.  The analysis discusses the advantages that Amazon has over brick and mortar companies such as Barnes and Nobles and Borders.  Amazon has been able to leverage the internet to deliver books at the lowest cost point, a cost point achievable because of low overhead costs.  Amazon has also been able to leverage the internet to produce and distribute e-books which, according to Morningstar, has a compelling advantage over hardcover books.  The main reason e-books have been successful is that production and distribution costs are near, if not, zero.  This ability to keep production costs near scraping the bottom has translated into lower prices for consumers.

I read through that report looking for some acknowledgment of the Federal Communications Commission.  I saw none.  Based on this report it seems that the idea of storing books in warehouses and shipping them out to consumers as the result of receiving an order online was part of a business model developed by an engineer by the name of Jeff Bezos.  No mention of the Commission or the Communications Act.

In September 2011, Morningstar sounded kind of so-so on Netflix.  Morningstar made it clear that content owners held the upper hand with the ability to enter into shorter licensing agreements for content and repricing at a higher amount.  Morningstar also noted in 2011 that Netflix faced heightened competition from new entrants and the lack of access to higher quality content.

Fast forward three years.  Netflix has built its own house of cards where orange is the new black.  Just like the Amazon analysis, Morningstar makes no mention of how the Commission’s regulation of the internet contributed to Netflix’s business model or its decision to go outside the box and not just deliver DVDs but stream video as well.

Speaking of content, Morningstar’s July 2012 analysis of Time Warner proceeded from the premise that quality content is king and that Time Warner has been able to take a strong competitive position in content.  The quality of Time Warner’s content, according to Morningstar, increases in value because it can be consumed on multiple devices, including laptops, smartphones, and tablets in addition to televisions.

The decision to deliver it via multiple platforms via multiple devices appears to have been made by private actors with no input, appropriately, from the Commission.

And how about the broadband provider portion of the ecosystem.  The Commission, along with net neutrality advocates, has been harping on the need for robust competition in the broadband space, but according to Morningstar’s August 2012 analysis of broadband provider CenturyLink, for the company to stay competitive with cable companies it would have to invest in network enhancements that facilitate faster download and upload speeds.  Not only does CenturyLink have to compete with cable in providing broadband access, they also compete with cable to distribute video.  Their provision of fiber-to-the-tower finds them competing with not just cable companies but with other competitive local exchange carriers.  CenturyLink also competes with Amazon,, and Verizon in the provision of cloud management services.

Again, nothing in Morningstar’s analysis that speaks to the Commission’s requirement or even suggestion that CenturyLink enter into these markets within the internet ecosystem.

Growth and innovation have been occurring within the internet without the Commission’s persuasion or regulation and so far the Commission has not demonstrated why applying Title II regulation could add any value to the market-driven actions taken by the firms I just discussed.

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Competition. The FCC’s mythical anti-innovation policy

A reality often clouded in the free market narrative is the lack of specificity as to what free market means.  There is always a price of entry into markets.  Producers have to face the cost of getting their goods and services into markets for eventual sale.  Consumers have to invest the time researching available choices so that they can negotiate the best deal that enhances consumer welfare.  Exiting markets can be costly if the time ad effort made to enter a market does not result in purchase or sale. Buyers and sellers expect these barriers to entry and can plan for them.  What most impacts the freedom to enter markets are the barriers that government can impose.  Ironically one of those barriers is the requirement of competition.

The word, “competition”, gets thrown around ad nauseum by members of the Federal Communications Commission.  It’s never defined which allows the speaker of the word to use it with the authority of a witch doctor, conjuring up images of doing the right thing for grandma and apple pie.  Per the text books, competition is short hand for “competitive markets” which means that you have multiple firms selling a similar product at some point where the marginal cost to produce the item is equated to the price.  Firms in a competitive market, in theory at least, aren’t paying much attention to what the other guy is doing but simply responding to the price signals they receive from consumers.  In reality, this doesn’t happen in either the broadband access or internet content markets and the FCC should stop pushing a policy that says that competition should be the case.

First, the broadband access market.  There are multiple firms, wired and wireless, that are providing broadband access.  For example, Comcast and Verizon provide me with broadband access to the internet and if I wanted to really go all out I could invite AT&T into the house to provide me with DSL service.  I have choice as a consumer and my choices try to distinguish themselves everyday by advertising their service speeds and prices.  The Commission continues talking about competition for broadband access but they appear to forget how capital intensive deploying new networks can be and that the barrier of cost is probably playing the most significant role in keeping potential new carriers out of a market.

In the content/information markets, it may be a bit clearer why competition”on the edge.”  In a piece in The Economist, Peter Thiel, a co-founder of PayPal, is cited as referring to competition as an indicator of failure; that success comes from providing a unique solution and monopolies, not competitive firms, are the ones occupying a once ignored space and providing a unique service.  ”A clever startup does not try to compete directly with an incumbent.  It picks a seemingly unimportant market which it can monopolise.”  Their monopoly position, according to Mr. Thiel, drives the innovation necessary for creating a unique product.

If competition, according to Peter Theil, is a relic of history that does not drive innovation, then why does the Commission push the narrative, especially with examples that abound of online startups, i.e. Facebook, Google, Amazon, that consistently bring new services while monopolising their core services?  It is probably because it goes against the grain of over a century of precedent that says abuse of dominant power is bad and that every monopoly must be automatically assumed to do or potentially do some serious abusing.  It would be political suicide for the Commission to think that far outside the box.

To me it’s economic suicide to keep innovators on the edge so constrained by the myth that competition leads to innovation.

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Value of content grows without net neutrality or Title II regulation

Pew Research Center’s Internet and American Life Project today shared some results from a survey of online adults about the benefits they receive from the information obtained via the internet.  According to Pew, 81% of online adults say that the internet and cell phones help them become better informed about products and services.  Seventy-five percent and 74% of online adults feel better informed about national news and international news respectively, while 72% feel better informed about Kim Kardashian, Paris Hilton and the rest of American pop culture via the internet and cell phones.

The vast majority of survey respondents, Pew found, believe that their use of the world wide web helps them learn new things, stay better informed about topics of personal importance, and increases their capacity to share their ideas and creations with others.

In terms of traffic generated, all this appreciation for information at the swipe of a finger or click of a mouse also means that the United States is a leader in digital traffic generation.  This is what Bret Swanson, visiting fellow at the American Enterprise Institute, described in a piece for The Wall Street Journal.  According to Mr. Swanson’s findings, the U.S. generates far more traffic per capita and per internet user than any other major nation except South Korea.  The U.S. generates 18.6 billion gigabytes of traffic per month and U.S. traffic is 2.1 times that of Japan and 2.7 times that of Western Europe.  Per capita consumption of digital goods is up 48% since 2007.  With only four percent of the world’s population, the U.S. consumes 32% of consumer internet traffic.

All this consumption and growth in the digital content marketplace happened without Title II or net neutrality regulation.  I have yet to hear an argument that says Title II increases consumer demand for data or even increases the delivery of additional infrastructure.  .

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The liberty to choose content based on value is what civil rights groups should rally on

The civil rights perspective regarding broadband access is severely misplaced.  The narrative in general has been that access to information exchanged over a medium based on internet protocol is a civil right; an enforceable right or privilege guaranteed by the U.S. Constitution which when interfered with by another gives rise to am action for an injury. Civil rights belong to an individual by virtue of citizenship, especially the fundamental freedoms and privileges guaranteed by the 13th and 14th amendments.

The last time I checked the U.S. Constitution, there was no language in there that expressly supports my access to a communications medium powered by internet protocol.  The Constitution didn’t even guarantee U.S. citizens access to communications networks powered by smoke signals, the telegraph, or even the telephone.  One could argue that in today’s modern telecommunications world that the Communications Act of 1934′s mandate that the Federal Communications Commission ensure the a nationwide communications network universally accessible by all Americans creates that right.  I would argue that it doesn’t and that the Act’s supporters in Congress got lucky in that the universal accessibility requirement of the Act was not challenged.

In some ways I’m surprised that Free Press or Public Knowledge have not turned the NAACP or the National Urban League’s “broadband is a civil right” argument into a “right to access a common carrier” argument thus buttressing their incorrect argument that broadband should be regulated as a Title II common carrier or public utility.  Ironically some civil rights groups like and the National Hispanic Media Coalition support public utility-like regulation of broadband and could likely add fuel to Free Press or Public Knowledge’s positions.  Unfortunately for Free Press and Public Knowledge their accusations that legacy civil rights groups are nothing but money-taking hacks for phone and cable companies has provided enough of a taint that most civil rights groups, no matter their position on net neutrality, would prefer stand closer to a spraying skunk that ally with Free Press or Public Knowledge.

Rather than risk getting to close to the edge of inadvertently pushing broadband into a common carrier box, civil rights should push a purer market-based consumer welfare argument when it comes to broadband in general and net neutrality in particular.  Their policy statement should be that federal and state government should not interfere with a consumer’s choice to have certain content delivered to their broadband-enabled devices and recognize that the consumer can enter agreements with internet access providers and content providers based on the value the consumer recognizes in particular content.

Rather than push a civil rights argument that has consumers asking for the government to define access rights, civil rights advocates should take the position that the liberty of consumer choice is a given and that public policy should recognize and respect that.