Will the FCC be naughty or nice when it comes to sponsored data

The Federal Communications Commission wants to determine if broadband access providers such as T-Mobile, AT&T, and Comcast, are complying with the Commission’s net neutrality rules. A report in Reuters stated the following:

“As you may be aware, concerns have been expressed about these programs, for example, some have argued that sponsored data unfairly advantages incumbent content providers,” the letter to AT&T said. “We want to ensure that we have all the facts to understand how these services relate to the commission’s goal of maintaining a free and open Internet while incentivizing innovation and investment from all sources.”

FCC Chairman Tom Wheeler hasn’t posted any official statements on the Commission’s request for a January 15, 2016 meeting with AT&T, Comcast, or T-Mobile. Nor are there any docketed items addressing the matter of sponsored programs or other initiatives that allow consumers to use streaming or other data services while avoiding the application of this usage toward their data plans.

The Commission’s net neutrality rules do not speak specifically to a “1-800-number” approach to providing broadband access. The section of the rule that comes closest to addressing the concerns that sponsored data unfairly advantages incumbent broadband access providers is section 47 CFR 8.11.  This section reads:

“Any person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not unreasonably interfere with or unreasonably disadvantage end users’ ability to select, access, and use broadband Internet access service or the lawful Internet content, applications, services, or devices of their choice, or edge providers’ ability to make lawful content, applications, services, or devices available to end users. Reasonable network management shall not be considered a violation of this rule.”

A broadband access provider interfering with an end-user’s ability to select or access a competitor’s broadband access service or lawful content is not at issue here. Edge providers are arguing that they won’t be able to get their content in front of consumer eyeballs if larger content providers can leverage their content by offering it at a discount when they decide not to apply the data used against a data plan cap.

We can’t say whether there is a definitive political risk to the telecommunications sector since the Commission has yet to take any formal action. The “sit down” with broadband access providers is not for another three weeks and speculation at this point would be built on shaky ground.

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The markets don’t tell me that net neutrality rules are working

Posted December 9th, 2015 in Broadband, Federal Communications Commission, net neutrality and tagged , by Alton Drew

The telecommunications services sector is in the red, and has been in the red for the past year. If net neutrality was such an enabler of the virtuous innovation cycle as Federal Communications Commission chairman Tom Wheeler is fond of mentioning, then the concept gets an “F.”  The market value of the telecommunications sector is down 4.14%, according to The New York Times. Within the sector, the integrated telecommunications services industry (companies that provide telecom services minus wireless) has seen market value fall 5.05% over the last year.  The wireless industry didn’t fare that badly, falling 2.09% over the same period.

The irony regarding the Commission’s application of Title II/net neutrality regulation is that it assumes that the sector’s broadband operators are monopolist deserving of utility type regulation in order to protect consumers and grow competition.  On the contrary. Investors in the sector, while historically viewing the sector as a hedge during the valley of a business cycle, are wary of the sectors performance as companies face an increasing amount of competition. Title II/net neutrality policy doesn’t appear helpful to a sector that sees declining pricing power as consumers seek out better pricing plans; falling profits that come along with decreasing pricing power; rising expenses as broadband providers spend more to upgrade their networks; and heavy debt loads, given its position as having the highest debt-to-equity ratio of any non-financial sector, according to an analysis by Charles Schwab. With the Federal Reserve expected to increase rates next week, credit markets may get even tighter for the telecom sector.

If the Commission is really concerned about a robust, competitive telecom sector, Title II/net neutrality public policy is not where you start.

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Investors should cross their fingers for the court to say no to net neutrality rules

Posted December 1st, 2015 in capital, content providers, net neutrality and tagged by Alton Drew

Online content entrepreneurs should be concerned about access to three main sources of capital necessary for producing their products and services.  Entrepreneurs want 1) access to affordable financial capital; 2) access to affordable natural capital i.e. land, spectrum; and 3) access to infrastructure.  A number of online content providers were hoodwinked by advocacy groups that extolled the virtue of openness via the Federal Communications Commission’s that net neutrality rules.

These advocates argued that prohibiting paid prioritization would level the playing field that incumbent content providers like Google and small, new entrants play on.  The net neuties also argued that, and rightfully so, that consumers should have unfettered access to the legal content of their choice. Neither the advocates or the Commission carried on a conversation as to how net neutrality rules would benefit online content providers in terms of access to capital or the direct or indirect costs online content providers would incur if broadband access providers saw increases in their costs for deploying infrastructure. Investors should know that while in the short run net neutrality rules may not have any adverse impact on network deployment, in the long run, firms may decide that the increase in operational costs do not offset the cost of increased capital expenditures. Only larger online content firms ironically with the capability of deploying their own infrastructure or broadband access firms with the ability to scale up to being media players in their own right will survive. In the long run, net neutrality would have create the very monopolies on the internet it intended to eliminate.

In a 2010 study, Stratecast, a consulting firm, concluded that net neutrality rules would discourage investment in infrastructure. Net neutrality rules would also reduce expectations regarding revenue. Increases in compliance costs would eventually be passed on to consumers at an estimated $10 to $55 a month per customer. Shutting off an avenue of revenue by prohibiting paid prioritization could result in either running up costs by building duplicative pipes or reducing the amount or type of services consumers receive. The latter would have a negative impact on broadband penetration, the opposite of the Commission’s goal of closing the digital divide and getting more Americans connected.

And while building more pipes may reduce congestion, it doesn’t mean that there will be an increase in traffic to compensate for the additional costs.  The smaller upstarts the net neuties claim to protect won’t be the ones generating any additional traffic. The 15 most visited websites include the usual suspects such as Google, YouTube, Facebook, Yahoo, and Amazon. The number of monthly visitors for these websites range from 240 million for WordPress to 1.1 billion for Google. On average, consumers spend most of their time on five websites.

If the court doesn’t vacate the Commission’s net neutrality rules, the pass-through of higher network costs to online entrepreneurs will increase their cost of business making new entrants a riskier investment.

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The FCC needs to change its mindset about capital and Title II

The politics of Washington is not commensurate with capital flow when it concerns broadband investment.  The Federal Communications Commission’s decision to apply Title II common carrier rules has resulted in a decrease in capital expenditures.

It has been reported that during the first half of 2015, AT&T saw a decrease in capital expenditures of 29% relative to 2014.  Charter Communications also saw a decline of 29% relative to 2014 while Cablevision saw capital expenditures fall off by 10% versus last year. CenturyLink was down nine percent while Verizon saw a fall in capex of four percent.

The politics pushing the FCC toward their anti-capital decision was driven by a grass roots group argument that freedom of expression was being challenged by the potential bottlenecks that broadband providers could create.  With narratives that included claims that consumers would not be able to create content on the internet or access the content of their choice, at least the three Democratic FCC members fell sway to it.

Edge providers, like Netflix, also played the “threat to democracy” card, arguing that broadband access providers , via paid prioritization, would discriminate among content providers and deny consumers access to their content.  Netflix, however, has been able to hedge its political bets by paying some of these broadband providers for fast lanes so that video traffic to its subscribers is not congested.

Now the political center of gravity lies in the Congress, at least this week, as the House committee on energy and commerce takes a look at how Title II common carrier treatment of broadband will impact investment.  Given Republican control of the committee, it’s no surprise that the committee’s leadership sees Title II as a burden on investment.  For example, the committee’s majority takes issue with the FCC’s finding that the total annual cost on all broadband providers for complying with the application of the FCC’s Title II rules would be approximately $700,000.  The majority believes the annual cost of compliance could be as much as $52 million.

Having supervised a tariff shop for a state regulator and drafting and filing tariffs as a staff attorney for a law firm, I can assure you that the cost of complying with Title II rules will well exceed the $6.95 per hour that the FCC estimates.  We are not talking flipping burgers here.

Politically, reversing the impact Title II regulation will have on broadband investment is out of the hands of Congress, at least in the short term.  Should a Republican win the White House in 2016 and the GOP maintain control of both chambers of Congress, then investors should expect a new FCC Republican majority to repeal the rules.

A repeal by the Republicans could be moot should the United States Court of Appeals-District of Columbia find that the rules have no statutory basis or that the FCC has not shown why its earlier treatment of broadband as an information service should be abandoned.

The probabilities of a court decision or an election outcome in favor of broadband providers is difficult to calculate but the likelihood of the FCC or the Obama administration changing its mindset about Title II’s impact on capital flows to broadband is definitely zero.  Both the President and the FCC’s three Democrats have invested too much political capital in steering the wrong course.

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An offer Democrats shouldn’t refuse

Internet Innovation Alliance honorary chairman Rick Boucher recommended a compromise between Congressional Democrats that favor the transparency and non-discrimination that net neutrality rules is supposed to provide and Congressional Republicans who see net neutrality rules as onerous and intrusive while hampering the level of investment ion broadband deployment.  Mr. Boucher would like net neutrality principles codified in federal statute in return for internet service providers being returned to their prior information services classification.  From a market reality perspective, Mr. Boucher’s offer in compromise makes sense.  You can read Mr. Boucher’s persuasive argument here.

I’ve argued before that Comcast, AT&T, Verizon, and a host of other broadband access providers have gone or heading beyond their old classifications as broadband providers or even communications companies.  These companies sell ad space on their portals; provide news and information; collect data from their customers that may be used to enhance the quality of the ads consumers see or any other services the broadband entity provides.  Collecting and distributing information is an increasingly important part of their business model as they compete with Google, Facebook, and Netflix for consumer eyeballs.  Classifying them as information service providers is appropriate and would show that the Federal Communications Commission has some understanding of the information market that they are trying to regulate.

Of course I’d rather the rules not even exist thus eliminating the need for Congress to come up with another statute.  Market realities and the philosophy of openness that the internet has adhered to for a quarter of a century should be enough incentive for broadband providers not to discriminate against traffic from certain websites or block their subscribers access to websites of their choosing.  The internet has always been the geeks haven for information flow and its commercialization hasn’t changed that,  If anything, keeping the tap on information flow wide open only drives up the value of a provider’s network leaving the provider with the fun challenge of monetizing that flow.

Mr. Boucher’s offer is one that the Democrats shouldn’t refuse.