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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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Al Franken up in arms about the false concept of competition

Posted July 22nd, 2015 in Department of Justice, economy, edge providers, Facebook, Government Regulation and tagged , by Alton Drew

Multichannel News‘ John Eggleton today reported that Senator Al Franken, Democrat of Minnesota, is up-in-arms about Apple’s streaming service.  He believes that Apple is preventing competitors to its streaming service from communicating with consumers about similar streaming products.  According to the Multichannel News:

“Apple’s licensing agreements have prevented companies from using their apps to inform users that lower prices are available through their own websites, to advertise the availability of promotional discounts, or to complete a transaction directly with a consumer within their app,” he said. “These types of restrictions seem to offer no competitive benefit and may actually undermine the competitive process, to the detriment of consumers, who may end up paying substantially more than the current market price point.”

Subject to check, if the alleged snub is the result of a licensing agreement, then tough cookies for the app developers.  They didn’t have to sign the agreements. If terms agreed upon included a “no informing customers of your service because we are afraid of the competition clause, then the app developers are obligated to follow the agreement.

I’ve discussed before how unnerving the “it’s not fair. I can’t compete” argument is.  Unless you are admitting that consumers are pieces of capital just like land, labor, and air is, then competition for consumers needs to be a mantra that goes the way of the dodo bird.  Competing for the finite resources that go into making products for end-user consumption is a valid argument.  You need financial capital in order to purchase the labor and land resources necessary for creating and distributing a product so pushing against the bottlenecks to these resources is expected.

Applying the argument to end-users gets no points with me, however.  If your product is whacked and you can’t convince the consumer to buy it in an open market as we have here in the United States, then belly-aching how unfair it is that you can’t sell said product is noise wasted on closed ears.  America’s antitrust concept is weak for this reason.  No one is guaranteed success in our economic environment.

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Why can’t broadband competition proponents focus on the real picture?

The Center for Public Integrity released a post yesterday that has me questioning their economics integrity.  In the post, the Center describes how broadband providers avoid competition by arguing that the “Internet service grew out of the old telephone and cable TV systems, where only two companies owned direct lines to U.S. households.”  Sorry, but that’s only half the story.  As I shared in my comments on the post:

“Advocates for competition in the broadband access platform market need look no further than the localities that ensure that only the provider with the deepest pockets are able to get entry into a market. Onerous financial, regulatory, and technical barriers keep ouyt smaller players. Richard Bennett makes a powerful point about legacy carriers having no incentives to go beyond service territories they negotiated for or acquired when initiating services.

In addition, there is too much emphasis on the “number of carriers” narrative. This is a capital intensive business and unless new players can muster up the cash, then you won’t see a third wireline carrier entering a market.

Finally, when will “competition proponents” come out and give a definitive number for the amount of carriers in a market necessary for a declaration of competition. Two, three, or four carriers still reflects an imperfect competitive market.”

Not only are Federal Communications Commission rules not promoting broadband deployment, but local government policies are adding to the hindrance.  No one complains about whether Interstate 4 connecting Tampa and Orlando should have a duplicate interstate running along it.  The concern is whether there is enough commerce running over the highway to spur economic growth and justify widening the existing lanes.

For example, according to comScore.com’s report , 2015 U.S. Digital Future in Focus”, in 2014, mobile app usage made up the majority of digital media activity.  Traditional television ratings fell as more Americans obtained content from emerging online platforms.    Seventy-five percent of all digital consumers over the age of 18 use desktop and mobile platforms to access Internet content.

Another sign of mobile’s encroachment on the desktop is growth in smartphone use.  According to comScore, smartphone use increased 16% in 2014.

I just started watching “House of Cards” (Okay, I’m a late bloomer) so now I’m counted as one of 7 of 8 Americans watching video content online, with half of these consumers watching content online on a daily basis.

And about that commerce moving along the roadway?  E-commerce grew 14% in 2014 with businesses raking in $268.5 billion.

All this content and e-commerce activity happening while consumers allegedly are “abused” by a lack of broadband access platform competition.  Policy makers shouldn’t waste their time on making an oligopoly a larger oligopoly.  The focus should be on clearing spectrum for greater use of the internet and ensuring that the provision of data, whether in the form of video or text, is not interfered with.

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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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The FCC has no role in creating competition

Posted June 10th, 2014 in Broadband, economy, entrepreneurship, Federal Communications Commission and tagged , , by Alton Drew

I just filed comments with the House Energy and Commerce Committee responding to their white paper on the Federal Communication Commission’s role in competition.  Here is what I filed:

  1. 1.      How should Congress define competition in the modern communications marketplace? How can we ensure that this definition is flexible enough to accommodate this rapidly changing industry?

Congress should avoid defining competition based on the number of broadband providers in a market.  Instead, Congress should base its competitive analysis on an assessment of the entire Internet eco-system based on two prongs.

First, are prices for broadband access services falling, unchanged, or not increasing by an amount greater than the annual rate of inflation?  If the answer is yes, then the FCC should declare that the consumer market for broadband access providers is competitive.  Where consumer demand is negatively responsive to an increase in prices, there should be a declaration that the consumer market for broadband services is not competitive.

Second, do we see continued entry of edge, content, or access software providers into the Internet market?  Consumers access the Internet for the purpose of accessing information they can rely on.  The value of the information sought and of the network increases where there are an increasing number of information sources.  Where the FCC finds the number of edge, content, and app developers increasing, the FCC should declare that edge provider space is competitive.

 

  1. 2.      What principles should form the basis of competition policy in the oversight of the modern communications ecosystem?

Competition policy should have as its primary principle the maintenance of a regulatory environment that encourages entrepreneurial activity in the edge provider, content provider, and app developer space.  Included in this activity is the ability for the entrepreneur to attract capital and deliver to consumers via the Internet innovative products and services.

Promoting entrepreneurial activity results in service providers entering the market and providing services that will keep the information consumer coming back.  Consumers gain protection during transactions from the entrepreneur’s delivery of the best service possible with the knowledge that there are other providers willing to occupy his space.

 

  1. 3.      How should intermodal competition factor into an analysis of competition in the communications market?

It is time for Congress and the FCC to abandon the silo approach to assessing competition in the communications market.  The communications market is experiencing what I refer to as Convergence 3.0.

In Convergence 1.0, local phone companies wanted to be long distance companies.  Cable companies wanted to be local phone companies.  Long distance companies just wanted to survive and were willing to be anything.

In convergence 2.0, traditional wireline companies also provided wireless services and broadband.  Cable companies provided wireline, broadband, and delivered video services.  Long distance companies went the way of the wooly mammoth.

Today, under Convergence 3.0, Facebook and Google are attempting innovative ways to bring broadband to consumers, with the potential and the cash to offer competitive alternatives to current broadband providers.  Apple is making content plays, its most recent being the purchase of a music streaming service.  Today’s convergence has more than blurred the lines separating platforms.  Convergence has obliterated those lines.

In short, to think about intermodal competition is to go back to the Stone Age also known as the 20th century.  Congress must legislate and the FCC must regulate in the 21st century.

 

  1. 4.      Some have suggested that the FCC be transitioned to an enforcement agency, along the lines of the operation of the Federal Trade Commission, rather than use broad rulemaking authority to set rules a priori. What role should the FCC play in competition policy?

The FCC should play no role in competition and the Communications Act should be updated to reflect that.  The FCC’s focus should be on spectrum, spectrum, and spectrum, along with streamlining regulations that facilitate deployment of infrastructure necessary for deploying the nation’s digital communications capabilities.

Its enforcement powers should be carried out to the extent currently reflected in the Communications Act, but broad rulemaking should be abandoned.  The Commission does not have a clean crystal ball and should not be in the business of trying to predict how the communications markets will look in the future.

Were the Commission good at such predictions it would not have forced Sprint to divest its landline services prior to its merger with Nextel.  Sprint, without a wireline service, in my opinion was placed in a less competitive posture with AT&T and Verizon because of the divestiture.

 

  1. 5.      What, if any, are the implications of ongoing intermodal competition at the service level on the Commission’s authority? Should the scope of the Commission’s jurisdiction be changed as a result?

Competition between service providers using different platforms should work to reduce the Commission’s authority to regulate versus address disputes between consumers and service providers.  Intermodal competition tells me that consumers can choose another provider for their broadband services with the Commission stepping in only to resolve consumer protection issues that statutes give it authority to address.

 

  1. 6.      Competition at the network level has been a focus of FCC regulation in the past. As networks are increasingly substitutes for one another, competition between services has become even more important. Following the Verizon decision, the reach of the Commission to regulate “edge providers” on the Internet is the subject of some disagreement. How should we define competition among edge providers? What role, if any, should the Commission have to regulate edge providers – providers of services that are network agnostic?

As discussed above, consumers access the Internet for the purpose of accessing information they can rely on.  The value of the information sought and of the network increases where there are an increasing number of information sources.  Where the FCC finds the number of edge, content, and app developers increasing, the FCC should declare that edge provider space is competitive.

Should the FCC regulate edge providers?  No. Edge providers already face technical and financial hurdles to entering edge provider markets.  Regulation introduces uncertainty and uncertainty scares away capital investment.

7. What regulatory construct would best address the changing face of competition in the modern communications ecosystem and remain flexible to address future change?

What would be best is for Congress to re-write the Communications Act with the flexibility needed to address changes in technology.  That I admit is a tough task and may only be doable if the Act and the Commission did not focus on trying to predict what type of services or what platform services will be provided on in the future, but puts in place an adjudicative process that allows network providers to settle disputes while passing on consumer complaints to the Federal Trade Commission.  The Commission’s focus should be on making sure the communications infrastructure is maintained.

 

8. Given the rapid change in the competitive market for communications networks and services, should the Communications Act require periodic reauthorization by Congress to provide opportunity to reevaluate the effectiveness of and necessity for its provisions?

It took sixty-two years to update the Communications Act of 1934 and 18 years after the last major re-write, Congress is barely inching toward another amendment of the Act.  Meanwhile, innovation and convergence are taking place rapidly in the communications markets raising the chance that after the next rewrite the industry will be a lot closer to the 22nd century while the Commission and Congress struggle with the changes they couldn’t keep up with in the 21st.

Periodic updating may be ineffective given the uncertainty that partisanship introduces into the Congress.  As I discussed prior, what would be best is for Congress to re-write the Communications Act with the flexibility needed to address changes in technology.  That I admit is a tough task and may only be doable if the Act and the Commission did not focus on trying to predict what type of services or what platform services will be provided on in the future, but puts in place an adjudicative process that allows network providers to settle disputes while passing on consumer complaints to the Federal Trade Commission.  The Commission’s focus should be on making sure the communications infrastructure is maintained.