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Wheeler, Franken, and Wyden show a naivete about today’s internet

In an opinion piece published yesterday in The Washington Post, Senator Al Franken, Democrat of Minnesota, Senator Ron Wyden, Democrat of Oregon, and former Federal Communications Commission chairman Tom Wheeler made the argument that planned attempts by current FCC chair Ajit Pai to remove Title II net neutrality rules would have a negative impact on consumers. The three argue that deep pocketed broadband access providers such as AT&T, Comcast, and Verizon want to take away the consumer protections that Title II of the Communications Act provides. Since broadband was reclassified as a telecommunications service by a Democratic weighted FCC under Mr Wheeler’s tenure, the privacy protections afforded to customer proprietary information connected to telecommunications customers would be lost to broadband consumers. The three go as far as to argue that net neutrality has created jobs because smaller retailers and other consumer services providers are able to get their products and services in front of the eyeballs of the everyday consumer because their traffic is now being treated fairly.

Given that there are two lawmakers authoring this piece I figured that they would at least offer an amendment to the Communications Act that defines net neutrality thus giving policy makers some firm platform from which to proceed and make good policy. The piece conveniently lacked that. Instead, Messrs Wheeler, Franken, and Wyden stuck with the lofty, airy definition of net neutrality that gives the impression that democracy is under attack. This is how the Democrats were able to scare four million consumers into putting their concerns onto postcards while blocking Mr Wheeler’s driveway.

What the opinion piece fails to explain is that net neutrality has to be defined in the context of commercialism, not as an assault on democracy. The internet has been commercialized for a quarter of a century. It provides the platform for gathering, processing, and selling information. Broadband companies are seeking out other revenue streams including processing and leveraging data for the purpose of generating advertisement revenues. Internet portals such as Google, Yahoo, and Facebook have been using customer information to attract advertisers. I sometimes refer to these sights as “legal hackers.” They get consumers to give up personal information for free and craft advertisements based on the personal information they garner. Ironically, Messrs Wheeler, Wyden and Franklin don’t discuss this disparity in treatment; that broadband providers who collect less personal information than these portals should find themselves under more statutory scrutiny than Facebook.

So dismissive of the market aspect of the internet that Messrs Wyden, Franken, and Wheeler could not even offer up a market solution for protecting consumer privacy. One solution I recommend is allowing consumers to sell their proprietary information, allowing them to trade on their info for cash or some other in-kind offering. Instead, Messrs Wheeler, Wyden, and Franken prefer stick with the “Government is a benevolent God” business model of consumer protection, usurping the individual’s power to use the markets to satisfy their own self interests.

Democracy is about the freedom of residents to choose leaders. That term has been tossed about too much by the net neutrality posse to the point where it is near meaningless. Net neutrality is not about democracy. Ron Wyden, Al Franken, and Tom Wheeler should do better than just stirring up the pot.

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Pai challenges the notion of government providing a free, open internet

Federal Communications Commission chairman Ajit Pai today laid out his vision for removing broadband access from under Title II regulations imposed in 2015 by a 3-2 Democratic majority on the Commission.  Two decades prior to the Commission’s net neutrality order that imposed Title II regulations, the internet was already free and open. Companies such as Google, Facebook, and Netflix came into being under a non-Title II regime. Title II was an archaic regulation designed in the 1930s for plain old telephone services.

Title II boiled down to a solution in search of a problem, Mr Pai further argued. Rather than energizing a demoralized Democratic Party base licking its wounds from the butt hurt of the 2014 mid term elections, Former president Barack Obama and the rest of his Title II proponents wound up disincentiving $5.1 billion in capital investment and dissuaded companies to not hire or lay off 75,000 to 100,000 laborers.

What particularly caught my attention in Mr Pai’s remarks was his highlighting the belief that Title II proponents have about government and freedom, namely that government was going to guarantee freedom on the internet. A close read of the American Constitution tells you that its framers were concerned about the natural propensity of government to squash freedom. This is why the document put in place checks and balances against attempts to usurp power over individuals. Net neutrality opponents and members in Congress who support continued imposition of the rules confuse “rights” with “freedom.” The rights issued by government are permission slips that say “a person can be, but only up to the limits we allow them to be” versus freedom which is innate.

This is not to say that freedom doesn’t have its limits. You can’t just violate another person’s spectrum without facing the consequences that result from moving into another person’s space. But how those consequences are managed should be left up to the individuals or in the case of broadband, the broadband access providers and their customers. Allow customers and access providers to define the limits, terms, and consequences of their relationship, including price and type of service. In the 21st century, this type of strategic partnership between customer and access provider is very possible.

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Has net neutrality decision impacted trading in the telecom sector?

Today the United States Court of Appeals-District of Columbia gave the Federal Communications Commission a victory, holding that the agency has the statutory authority to reclassify broadband providers as telecommunications companies as opposed to the industry favored status of information service providers. Broadband providers and their supporters have vowed that the fight is not over, telegraphing the probability of obtaining a ruling from the full bench of the appellate court or, going all the way to the United States Supreme Court.

The telecommunications services sector seemed to have shrugged off the ruling. The Thomson Reuters G7 Telecoms Sector Index registered a .06% decline at the end of the trading day. The sectors biggest players, AT&T and Verizon, saw their stock values increase .47% and .80% respectively. The response is not surprising since broadband operators such as AT&T, Verizon, and Comcast have been providing their high-speed access services pursuant to an open internet philosophy for decades. Their primary argument has been that broadband regulation should be conducted with a light touch and that throttling access speeds or discriminating against certain content or websites would be bad for business given the level of competition that they face.

Wall Street, unlike the Commission, has not been afraid to declare how competitive the telecommunications sector is. Charles Schwab analyst Brad Sorensen had this to say in a recent report about the telecommunications services sector:

“The telecom sector is certainly not what it was a couple of decades ago, although some investors may not realize it yet. The days of near-monopolistic control of landlines are long gone. These days the sector is driven by fierce competition, with new ways of communicating continually entering the market, and consistent—and expensive—upgrade cycles. To us, this reduces the traditional defensive appeal of the telecom sector.”

The court avoided the question of market power and deferred to the Commission’s predictive judgment on telecommunications companies willingness to invest in broadband network deployment. Although the sector has long left the monopoly environment existing prior to the passage of the Telecommunications Act of 1996, should traders consider not only a throwback to the regulatory world of the 1990s that the court’s ruling has cemented but reorganization of the sector that resembles the Ma Bell days?

The 1990s were the pre-convergence days. Carriers followed a silo model separating, in the case of larger local exchange companies, their long distance operations from their local exchange operations. In order to avoid the disruption that may ensure from increased complaints regarding perceived throttling, suspected paid prioritization, and misunderstood network management techniques, what if larger carriers like AT&T and Verizon decided to spin off their newly created “utility” pieces and focused on providing backbone, mid-mile, advertising, content delivery, and special access services? State public utility commissions, long shut out of the broadband regulatory game, may now view the courts ruling as permission to re-enter the regulatory fray.

Spinning off the telecommunications component and leaving them subject to state and federal regulation may allow AT&T, Comcast, and Verizon to focus on the content and data business and go head to head with Google or Facebook, edge providers, who, though subject to the Federal Trade Commission’s privacy regulation, don’t have to suffer the FCC’s Title II regulation.

A spin off may be good for traders especially if the utility components are subject to rate-of-return regulation thus providing the certainty of fixed-income behavior while the unregulated portions, while subject to the volatility of competition, may generate higher rewards that come with the greater risk.

It’s still early and in the immediate term broadband providers will be focused on continued appellate court action. The long term potential restructure stemming from this action is something traders should keep in mind.

 

With all the talk of pending recession, why implement net neutrality rules?

So far 2016 has not been the best year for the equity markets. Over the past four weeks the Dow Jones average has fallen almost three percent and year-to-date decline is approximately 8.7%.  The telecommunications, media, and technology sector hasn’t fared much better. The NYSE TMT Index has seen a fall of 13.72% over the last twelve months. In the past four weeks, the index fell 2.38%. Last month the investor adviser firm Charles Schwab rated the telecommunications sector as under-performing due in part to the sectors move away from the steady cash flow of a monopoly land line business to the cut throat competitiveness found in the wireless arena.

Just about the only thing that has slowed down capital expenditures in the digital economy has been recessions. Capital expenditure outlays in the information sector, which includes television, radio, publishing, wireless and wireline telecommunications and internet portals, peaked in 1999 at an annual $120.1 billion. The impact and aftermath of the 2000-2001 and 2007-2009 recessions were the two major economic bumps in the road that caused decreases in capex. After hitting a bottom of $87.7 billion in capital expenditures in 2009, the information sector, of which roughly 74% is made up of wireline and wireless telecommunications, has seen an uptick in investment from $97.4 billion in 2010, to $99.7 billion in 2011, to $105.5 billion in 2012.

This increase in spending has occurred when broadband while broadband has been treated as an information service. But if talk of recession becomes solidified over the next twelve months, a slowdown in spending can be aggravated where a recession is compounded by rules that go back to the depression-era 1930s.

Depression-era rules applied during a pending recession. The irony.

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The FCC’s net neutrality hole

Posted January 4th, 2016 in net neutrality and tagged , by Alton Drew

As a regulatory agency it’s impossible for the Federal Communications Commission to avoid political discourse. When the likes of John Oliver goes about explaining net neutrality to the public (and getting it wrong in the process), the result is four million American consumers applying political pressure on the Commission to ensure that the agency preserve the democratic spirit of the internet; that each piece of content stand equally shoulder to shoulder no matter who produces the content or whether the content reaches one million people or one hundred. When it comes to the economics of the internet then network management be damned.

But for all its rhetoric on equality of access, the Commission appears to have dug a hole into which to throw economically disadvantaged consumers. As Mark Jamison argues in this piece for TechPolicyDaily.com, net neutrality has a negative impact on low income consumers who may not be accessing online content because of the cost of purchasing broadband. Net neutrality hurts the poor by:

1. Prohibiting pricing plans that help the poor pay for what they can afford;

2. Imposing injunctions on the free delivery of some content or zero-pricing; and

3. Prohibiting access to net work features such as fast lanes by fledgling firms.

If the Commission is serious about furthering the closure of the digital divide then it should not allow a delusional argument that all traffic should be treated equally to stop access by the poor to some online content for free. Supporting an erroneous political position as advocated by net neutrality proponents forces the Commission to take a public policy position that is adverse not only to its stated goals but to the poor.