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Universal service doesn’t encourage capital for entrepreneurs

Regulating commerce is one thing. Failing to encourage capital formation and distribution of capital to entrepreneurs cannot be acceptable. Section 214 of the Communications Act demonstrates how out of touch current law is with today’s technology and the entities that deliver that technology. The 115th Congress and the next Administration need to revamp universal service such that funding actually encourages new entrants into the broadband market and the innovations that come along with that entry.

Under section 214 of the Act, common carriers designated as eligible telecommunications carriers (ETC) qualify for receiving universal service funds. A common carrier is engaged in providing foreign or interstate communications by wire or radio.  The Federal Communications Commission revamped its 20th century based support program, originally designed to subsidize voice services, to now support deployment of broadband services in high cost areas, areas where broadband providers argue it is cost prohibitive to provide high-speed access services.

Among the criticisms of the program is its inefficiency. Specific concerns have been raised about funds supporting services in areas where competition already exists. On reflection why is this a problem? If a carrier sees the opportunity to take a single-digit percent of market share where garnering such a share covers her fixed and variables costs while generating a profit, so what if other choices already exists? New entrants enter the fray when they believe that they have an innovative way of providing services and eventually taking market share. This is part of the adventure of applying venture capital; digging in for a period of time a generating returns based on new ideas.

The Commission’s concerns about funding services in areas where there is already competition also stems from locking itself into an approach that results in common carriers being funded as opposed to wireless internet access providers. Again, current law paints a box where only common carriers can play. Wireless internet access providers may not want to build infrastructure for the purpose of being common carriers. It is too expensive and unnecessary to duplicate existing networks where instead their focus is rightfully on bringing value to those networks and consumers alike by providing alternative methods of accessing them. The Commission speaks of innovation too frequently to then turn around and pass up an opportunity to put its money where its mouth is.

Until the Commission decides to recognize the value that non-common carrier innovators bring to broadband deployment, the universal service fund as currently constructed will continue to be a pool of capital unavailable for use by certain new entrants.

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Try the markets, Public Knowledge. Not a failed 1990s policy

Posted September 29th, 2015 in Broadband and tagged , , , , by Alton Drew

Public Knowledge’s Gene Kimmelman and COMPTEL’s Chip Pickering recently wrote an opinion piece for The Hill arguing for the Federal Communications Commission should build on data they have gathered and push an initiative to make the marketplace for broadband more competitive.  Messrs Kimmelman and Pickering would like incumbent broadband providers to unbundle their access networks and allow alternative broadband providers “open access” to these networks.  The U.S. has been down the resale path before with phone services in the 1990s and it didn’t work then.  The companies that were able to mount a real challenge to incumbent telephone companies were cable companies. They were able to do this because they had their own facilities.

If Public Knowledge and COMPTEL really want network competition, they should enter the capital markets and raise funds for alternative providers to deploy physical networks.  They should also be willing to meet the financial, technical, and regulatory barriers put in place buy local franchising authorities.  If capital markets aren’t working, they should open up their own private equity shops and raise the funds to build an additional, nationwide provider to compete against incumbent broadband companies and newcomers like Google.

Merely asking the Federal Communications Commission to bring competition is not enough.

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The FCC and hypothetical competition

Posted September 27th, 2015 in Broadband, capital and tagged , by Alton Drew

Last week, Federal Communications Commission general counsel Jon Sallet delivered remarks to the Telecommunications Policy Research Conference where he described the circumstances behind three recently attempted broadband mergers.  The term, “competition”, raised its head during Mr. Sallet’s speech as he argued that in the case of two of the mergers, signaling disapproval of or outright disapproving the mergers the Commission believed negatively impacted consumer welfare.

Reading Mr. Sallet’s remarks it was clear that the Commission still prefers turn a blind eye to the changes everyone else is seeing in the industry; that broadband companies are becoming content delivery, media companies, data analytic companies, or a combination of the three.  Verizon’s purchase of online legacy media company AOL and AT&T’s purchase of DirecTV are two examples of convergence 2.0.

In addition, not only are AT&T and Verizon ready and able to use their wireless networks to deliver content for consumers and eyeballs for advertisers, they are collecting and selling to third-parties the data they collect on their access networks.  The data they sell to third-parties may be used to better define a subscriber’s user experience or to determine buying habits such that better, more targeted advertising can be created.  The openness of internet infrastructure architecture is such that other data analytics and data broker firms are competing with broadband providers to gather, collate, and sell this very same consumer information. This along with content, in my opinion, is the closest thing to competition involving internet players.

But what about a competitive market for consumer access services via broadband?  While the number of choices for networks that get you online may differ based on whether you are a rural, suburban, or urban dweller, it still remains that you have a choice involving more than one carrier.  Progressives often cite how much better European and Asian countries are doing in terms of subscribers per capita when analyzing the “dearth” of choice in the U.S.  Some will argue that a European style mandate that opens up the last mile to competitors may do the trick. What progressives consistently overlook is that the Commission’s authority to open up the last mile with a European-style mandate is dead on arrival because permission to deploy in the last mile depends on local or state authority.  Franchise agreements and certificates of public convenience and necessity are the biggest bottlenecks to the very competition progressives and the Commission continuously choose to ignore.

So, if consumers aren’t happy with the quality or quantity of broadband access choices, they may have to include in their residential decision matrix, along with good schools and tax schedules, the amount of broadband choice available in a locality.

The irony is that progressives may have further shot their broadband access competition argument in the foot by advocating for onerous net neutrality rules.  Even if state and local governments further loosened franchise restrictions for entering local markets, there are for now network management, transparency, no blocking, and no throttling rules that new entrants will have to comply with.  Net neutrality has raised another barrier to entry that may serve to dissuade the very competition its proponents allegedly want.

What Mr. Sallet left out of his remarks was any discussion on capital flow.  This is one of the downsides of too many lawyers and not enough economists at the Commission.  While broadband networks have benefited from many billions of dollars in investment, that investment is tapering off.

According to U.S. Telecom: The Broadband Association, broadband capital expenditures totaled $78 billion in 2014.  Since 1996, total broadband capex was $1.4 trillion. But, according to one member of the Commission, broadband capex is falling.  In remarks to the American Enterprise Institute, Commission member Ajit Pai noted that major wireless companies saw a decline in capex of 12% during the first half of 2015.

Compounding Commissioner Pai’s observation is another observation by former Commission member Harold Furchtgott-Roth.  Mr. Roth shared in a recent piece that annual growth rates in capital expenditures in the information sector, the sector most impacted by broadband spending, has been running below the national rate for capital expenditure. While capex in the information sector has been running at an annual rate of 8.2% between 2010 and 2013, the average for overall capex is 10.7%

Broadly speaking, the only competition that matters is competition for resources and capital. Onerous regulations with a negative impact on capital expenditure growth rates will make investors go the other way.


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The FCC is still opaque on commercially unreasonable standards

Recently Federal Communications Commission general counsel Jon Sallet introduced the concept of “jurisprudence of innovation” at a Federal Communications Bar Association function.  Jurisprudence and innovation doesn’t come off at first glance as two concepts that should mix.  Jurisprudence is defined as the philosophy or science of law while innovation is defined as the process of introducing new devices or methods.

I hear jurisprudence and I think of intellectual meandering locked within a mental ward.  When I hear innovation, I think of entrepreneurial freedom meeting the needs of an expansion of consumer welfare.  Bottom line, Mr. Sallet’s remarks were an attempt to put fresh paint on a regulatory prison cell the FCC seems so desperately eager to keep building with entrepreneurs as unwilling guests.

Here is the framework laid out by Mr. Sallet for jurisprudence of innovation.  The mandate for a jurisprudence of innovation framework is that entrepreneurship, competition, innovation, and consumer benefits are to be maximized with the goal of permitting the creation of new markets while subjecting old markets to the challenge of creative destruction.  Public policy tools for achieving this social policy include the certainty emanating from balancing potential public interest benefits against potential public interest harms; development of flexible standards for assessing the public interest; and access to resources.

The problem with Mr. Sallet’s model is that it still assumes that the FCC has a crystal ball that it can use to determine what innovation will look like in the future and whether this future will be disturbed by an acquisition applicant’s actions today.

Yes, the markets thrive on certainty, flexibility, and access to resources because these are the ingredients that entrepreneurs need to succeed.  The consensus held by entrepreneurs and producers is that they need clear rules of the regulatory road so that they can do business and best gauge the flexibility they have in developing and deploying new products and services.  The model Mr. Sallet presents adds no clarity as to how far the FCC would intervene on the front end of the innovative process.

Either the FCC will wait for a substantiated complaint to be filed (versus one based on a consumer’s feelings) so that it can weigh actual facts before crafting a resolution or it will step in along certain points or milestones during the innovation, marketing, and deployment process and hinder the very innovation it professes to want.

If the latter course is the one the FCC plans to take, I have a hard time seeing why an investor would be confident in leveraging capital in the broadband or Internet space.

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Broadband and the global brain

I don’t remember where I saw this quote and I may not have it written correctly, but to summarize, “In the future, work will be about learning.”  I believe the speaker was trying to get across that we are moving steadily out of an economy that focused on what we could do physically and into one where the measure of our value will be placed on what we can learn and how we communicate it.  We are going to be relied on more for our brains, less on our brawn, and more on our broadband.

Just think of ourselves as mini encyclopedias connected to everyone and everything else via a digital connection, uploading our knowledge into a processing system that uses our know-how to design, construct, test, re-construct, market, and sell product.  As we quickly move to an Internet of Things, we will see that the  new eco-system will be about machines and servers talking to each other and how integrated human beings will be in the production process the Internet of Things supports.

In a report released last month, GE discussed how the process behind the development, construction, and delivery of products will change where each step along the production change will be tied by digital networks and advanced design and construction devices such as 3-D printing.  Playing an important role in the new approach to production is a concept called the “global brain.”  The global brain is defined as the collective intelligence of human beings across the globe integrated by digital communications networks.  The hope is that as more people connect to the Internet that the global stock of knowledge will increase with each human beings connection.

The expectation is that as more physical, menial work is off loaded onto  machines, people will be freed up to exercise more of their creative and entrepreneurial sides.  The ideas that newly freed minds come up with can be uploaded into cloud-based data platforms for use in building product and providing services.  This is a lot more appealing than and should not be confused with the villages created by companies such as Facebook, Instagram that add nary anything to true public knowledge.

“We are witnessing the rise of the global brain, when a buzzing hive of knowledge, connectivity, technology and access unites the human and the machine, the physical and the digital, in previously unimaginable ways,” says Beth Comstock, GE’s chief marketing officer. “Scientific discovery, information sharing and sheer ingenuity are giving us the ability to hack our human brains to learn, do, be more. At the same time, we can model human intelligence into machines to help us gain insights, increase speed and know more.”