The Federal Communications Commission will issue a notice of proposed rulemaking on 31 March 2016 providing requirements that internet service providers should follow in order to protect personal information of consumers. Commission chairman, Tom Wheeler, describes the proposed rules as an initiative that gives consumers the “tools they need to make informed choices about how and whether their data is used and shared by broadband providers. Mr. Wheeler has constructed his rules within a framework of three principles: 1. Consumer choice, where consumers exercise meaningful choice over what data an ISP can use and how it can be shared; 2. Transparency, where consumers are made aware of what types of information an ISP is collecting and how that information is being used; and 3. Security, where ISPs have an obligation to protect information where ever it is carried over a network and stored. While consumers can “opt-out” from having their personal information used by ISPs in order to market additional services to the consumer, the consumer must opt-in to the use of their information for any other purposes. Anyone following the Commission since Mr. Wheeler’s ascent to the chairmanship acknowledges that this is a partisan commission and leading the opposition on this notice of proposed ruling is Commissioner Mike O’Rielly. Mr. O’Rielly refers to the proposed rules as “troubling and conflicting” given that these rules may not apply to other internet companies like Google and Facebook. Mr. O’Rielly also takes issue with the Commission flirting with issues such as data security and data breach, issues, he argues, that are not covered by the Communications Act. And Mr. O’Rielly is correct. Data breach and security are not covered by the Communications Act. Nor does the Communications Act describe broadband access providers as telecommunications companies. In addition, ISP access to consumer proprietary information is limited, according to research conducted by Peter Swire, Justin Hemmings, and Alana Kirkland. Also, other companies have access to more information and a wider use of personal information than ISPs. Mr. Wheeler is playing with judicial uncertainty betting that the U.S. Court of Appeals-District of Columbia will uphold the Commission’s reclassification of broadband services as telecommunications services thus extending the 20th century protections of Section 222 of the Act for telephone customer personal information to consumers subscribing to 21st century broadband access services as well. Will Mr. Wheeler’s rules lead to an increase in deployment of broadband facilities? I don’t see it. Ironically, Mr. Wheeler’s rules may cause a conflict between sections 1302 and 222 of the Communications Act. Why would ISPs, pursuant to the Commission’s directive under section 1302 of the Act, want to increase deployment of broadband access platforms if their ability to gather, package, and sell consumer information is going to be heavily regulated by rules, supported by section 202 of the Act, that don’t apply to social media networks that are increasingly gathering more consumer data than ISPs?
On 18 February 2016, the Federal Communications Commission issued a notice of inquiry asking for comments on how regulation can best address reducing barriers to entry to the video content provider market. The Commission believes that cable companies and other multi-channel video programming distributors are in a position to impede the entry of smaller video content providers into the video market. But do video content providers really need the Commission’s help to enter the content provider market? I don’t think so. Rather than going through the twists and turns of a legal argument on whether the Commission has the authority to address the question, why not let the markets determine what content gets offered and accepted by its participants?
Take for example Netflix. Netflix started out as a supplier of rented DVDs distributed via the U.S. mail. While the company still rents out movies in DVD format, it’s its online format that Netflix is best known for today. Consumers now download video content that Netflix has a license to present or can download content produced originally by the online content provider. While its stock has taken a beating over the last twelve months, traders still look at the online video provider as competing ably with the likes of a Comcast or Time Warner’s video product.
From the programming perspective, Netflix produces original content i.e. “House of Cards”, “Orange is the New Black”, and “Marco Polo”, as a hedge, according to Morningstar analyst Neil Macker, against other content programmers that may be holding back their own content from distribution. Netflix, as a result of data captured from its user base, is able to develop or purchase content that suits its viewers’ needs. In other words, Netflix has properly reinvested its capital and other resources to provide a superior content experience as well as built rapidly on an older business model after recognizing and taking advantage of new technology.
Other content providers are going down Netflix’s path. Amazon not only distributes content via the internet but also produces its own content. Hulu is reportedly purchasing original content for distribution as well.
The Commission is running the risk of promising a more open environment for all content imaginable; sending a message that all content is created equally. The Commission is ignoring the fact that there are limited number of distribution channels, whether via cable or over-the-top, and that this natural limit in distributors will create a bottleneck through which only the content deemed attracting the greatest demand will be able to wiggle through. Content that attracts the greatest demand will draw the most see capital investment creating the vicious cycle that smaller entrants will face and the Commission naively assumes it will regulate away.
The message for broadband adoption is incomplete because there is nary any mention of how adopting broadband aids capital accumulation or deployment for the consumer. I talked last week about how the only thing that slowed down capital expenditure by broadband providers is an economic slowdown. But what inroads on the consumer side should we see at the intersection of capital and broadband?
One intersection I find appealing is digital currency. Digital currency allows users to exchange online credits for goods and services. Digital currency exchange may involve the use of a mobile app or can be conducted from a computer. With the use of a digital wallet, digital currency can be sent to or received by a consumer.
Transactions are made with no middlemen. International transactions are cheap and are currently not subject to regulation although governments are concerned about taxation and the lack of control over the currency. These concerns conflict directly with the philosophy underlying the development of digital currency; to take power out of the hands of the government and central bankers, a philosophy I believe that is much in keeping with the freedom and openness of the internet. With talk of central banks considering the issuance of digital currency, I’m concerned that the speed and freedom of transactions stemming from the use of digital currency like Bitcoin would be lost.
Digital or more accurately cryptocurrencies offer an alternative medium of exchange especially for communities underserved by traditional mediums of capital exchange. With a computer a consumer could “mine” her own currency, enter into markets where it is accepted and purchase goods and services in those markets. As more goods and services are purchased in digital exchanges with digital currency, not only will the value of the digital currency increase but so to will the value of the broadband networks that sustain these exchanges. More consumers would have incentive to get on board with broadband as broadband and digital currencies combine to give consumers increased access to local, regional, national, and global markets.
Last week the Federal Communications Commission released a report that measured the quality of broadband services offered in the broadband access market. It’s overall assessment was that the market offered significant growth in broadband speeds although growth was not uniform across all platforms, i.e. digital subscriber line (DSL), data over cable service interface specification (DOCSIS), satellite, fiber. The disparity is such that DOCSIS and fiber are leaving DSL in the dust. Also, actual download speeds were either close to or exceeding advertised speeds in most cases.
Fortunately, neither the report or individual commissioners discussed tinkering with the market for broadband access based on these findings. The telecommunications sector has been up just over one percent over the past 12 months, according to The New York Times. Other than encouraging technology improvements in DSL or asking telecoms to come up with incentives that encourage subscribers to move from DSL to fiber or some other platform, there appears to be nothing else the Commission can do.
Nor should the Commission be increasingly engaged. A politicizing of investment priorities isn’t necessary when competitors such as cable are offering consumers greater download speeds as a result of deploying a superior DOCSIS platform and making the choice on their own to deploy this platform.
Free Press has been calling on its constituents to encourage the Republican-controlled Congress to vote against a House appropriations bill that would significantly reduce funding for the Federal Communications Commission. For Fiscal Year 2016, the FCC asked Congress for $388,000,000 in offsetting collections. This represents a $48 million increase over the FCC’s request for Fiscal Year 2015, which ends tonight at midnight.
House Republicans have been blatant about their unwillingness to fund the FCC’s net neutrality regime. So serious are they about taking the wind out of the so called open internet that they have a budget bill that would provide the FCC with only $314,844,000 for Fiscal Year 2016. If federal budgets represent national priorities, it is clear that net neutrality is not a priority for the GOP, whose members have railed against how onerous the rules are.
While the rules are burdensome, what is more telling is the FCC’s unwillingness to get out of the narrow vision box. The FCC is still stuck on the concept of encouraging competitive telecommunications networks. In the 21st century why would the FCC be concerned about a concept calling for a multiple number of firms providing point-to-point voice communications services via wire or wireline?
What the FCC should be concerned about is promoting the development of the information and data markets that are being created and transacted in over internet infrastructure. Information and data are the currency being exchanged on digital networks. Also the returns on stock that investors are seeing should be an indication as to where the economy via the internet is going.
According to data from Morningstar, the telecom services industry saw one-year returns on stock at 8.42%. Three-year returns were 9.82% while five-year returns were at 9.64%.
In the information technology services industry, one-year returns amounted to 10.93%; three-year returns came in at 10.41%; and five-year returns were 12.16%.
The internet content and information industry saw first-year returns of 17.04%; three-year returns of 23.90%; and five-year returns on 18.70%.
I don’t pretend to be a stock analyst but if the FCC really wants to encourage competition on the internet, shouldn’t the agency promote entry into the higher performing industries? If the FCC wants to convince me that they are interested in economic growth, their analysis should be based on the current reality of the internet economy and the data and information markets.