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Somewhere along the information highway, we forgot about entrepreneurial freedom and value

About fifteen years ago I started writing for a publication that was transmitted to its subscribers via e-mail.  We published twice a day on regulatory events on the federal and state level.  The content we provided had great value and our clients paid us for it.  Not only did the staff get paid for the production work, but I’m sure the company had to pay an internet service vendor to transmit our content to the end user.  It’s called business.

I define business in the following way.  Business is the activity that you partake in to create, develop, market, and sell a product for income.  Business is dynamic and along your production line you are going to pay employees and contractors in order to get your product to market.  Business also requires you to look for opportunities to reduce your costs for getting your product to market and in so doing may require you to strategically partner with another entity to meet the objective of being better and faster.  That strategic partner may develop a method for helping you be better and faster and would rightfully expect to be compensated for the value their innovation bestowed on you.

The end user or consumer may observe three alternative developments resulting from the value provided by the strategic partner and all resulting in an increase in consumer welfare.  One, the consumer may see improvement in speed or quality of service with no change in the price she pays.  Two, the consumer may see an increase in price but faster service and better quality.  Although her costs have gone up, they are offset by the increase in value that she identifies in the increased quality of service.  Third, she might see her prices fall as the innovations brought by the strategic partner increase efficiencies in the way the product is delivered.

The business provider has to pay for the innovation but given the increase in consumer welfare realizes that his welfare also increases because the consumer is satisfied.

Notice in my example that the “F” word, “free”, is missing.  It’s that word that has confused content providers and consumers.  Over the past two decades, content providers and consumers have been misled by the notion that access to and delivery of information on the internet was supposed to be free.  This thought was spawned by the misinterpretation of the phrase, “open internet”, which referred not to consumption of and access to information but to the ability of application entrepreneurs to develop services that made the movement and placement of content online easier.

The edge providers, such as Google, Facebook, and Twitter, benefiting from the ability to interconnect their servers and applications with the world wide web were able to turn around and ironically compound the myth of free access by offering certain services to end users for free.  ”Free” had a network effect all on its own and open internet provocateurs such as Free Press and Public Knowledge have been milking it for years.  From free consumer access to ignoring intellectual property rights by promoting the Aaron Schwartz paradigm that all data online should be freely accessed by everyone, they have fanned the flames of contagion, creating such nausea that consumers overlook or ignore the market nature of the internet: the production and delivery of a product called information and knowledge, and like all products moving through a free market its value should be recognized and monetized and the creators of the information and knowledge should expect not only to be compensated but to pay the cost of its delivery.

Yesterday’s opinion in Verizon v. FCC failed to acknowledge the true, core market characteristic of the net neutrality debate.  Net neutrality, which has nothing to do with the open internet, denigrates the market signaling between content providers and internet service providers such as AT&T, Comcast, and Verizon.  Google, Facebook, and other edge providers have signaled the need for greater capacity and speed and internet service providers wanted to address this demand.  Rather than recognizing this demand, the Federal Communications Commission, egged on by the open internet provocateurs, preferred to disrupt the basic law of supply and demand and risk upsetting the flow of commerce.

The opinion is a mixed bag when it comes to freedom of the entrepreneurial spirit of the internet service provider.  It still leaves open the door to regulating broadband providers and, in my opinion, by leaving in place transparency rules, violates the freedom of speech of internet service providers by forcing them to communicate information for a reason that no longer exist, namely compliance with anti-blocking and anti-discrimination rules correctly vacated by the court.

Freedom got a boost yesterday, but the boost was not high enough.  Policy and the law need a change in mindset to recognize that it’s okay to allow markets to work.

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The FCC needs to properly focus on the real driver of broadband demand: the content provider

Posted November 13th, 2012 in Broadband, FCC, Government Regulation, Internet and tagged , , , , , , by Alton Drew

Blair Levin and Reed Hundt collaborated on an op-ed piece for MercuryNews.com laying out some tax and regulatory policy initiatives that they hope can spur additional investments in networks that deliver not only communications, but can also be used for efficient use of our energy grid.

What caught my specific attention was an observation by Messrs. Levin and Hundt:

“The knowledge platform-the Internet and everything that rides on it – should be expanded so that the United States leads the world in delivering education, health care, public safety, and all government services from the cloud to broadband connected devices.”

I wonder if, in the argument for policies that would spur broadband adoption, we are failing to start the discussion at the very beginning of the adoption process. I wonder if we are forgetting to apply a basic supply and demand model to the discussion.

Broadband adoption begins with the supplier of content. The content producer, whether a retail service, media company, academic institution, etc., constantly seeks techniques and technology that make delivery of content less expensive. This was the case in the 1990s when Vice-President Al Gore was given the task of incorporating the Internet into the federal government’s communications system. This was the model within which Amazon was created.

On the other end of the knowledge commerce conduit is the end user or consumer of the content. Broadband is important on this end not primarily because it puts information in the consumer’s hands (the consumer has been getting information from other sources and mediums in the past), but it justifies or completes the content providers cost model.

In the middle is the carrier, the value of whose network increases with the addition of more end users, yes, but more importantly with the addition of more content providers. Consumers have to have a reason to join the network, and the value of joining is directly related to the type, amount, and quality of information circulating on the Internet.

The Federal Communications Commission’s adoption policy has been focusing on subsidizing the build-out of networks via universal service funds, expecting not only to provide a mechanism for getting broadband into underserved, unserved, or high-cost rural areas, but indirectly reducing the costs of subscribing to broadband access services. While this approach may have contributed to increased subscriber penetration for plain old telephone service, broadband is a different beast.

The best policy for broadband would be a free market, non-interventionist approach allowing all three major market participants to enter agreements for the creation, delivery, and consumption of knowledge and information passing over the net. If politics forces government intervention to create a market (an unfortunate scenario), then government should act merely as a clearinghouse for exchanging information on the pros and cons of broadband adoption, both by content providers and content consumers.

This is where the emphasis of policy should be placed. Any other intervention, including a universal service mechanism of any kind would only distort market signals and lead to inefficient pricing, the type of pricing that would not fully account for the demand for broadband in the first place.