Can the FCC afford a public utility tax on an emerging mobile payments industry

The Economist last month published an article describing how consumers can use social media like Twitter and Facebook and mobile apps like Snapcash to send payments to businesses or other consumers.  The Person-to-Person or P2P market is expected to reach $5 billion this year and grow approximately 26% per year to reach $17 billion by the end of 2019.

Although mobile payments has been around in Kenya since 2007, what’s changing, according to The Economist, is that mobile payment services are getting easier and faster to use.  As new business models for mobile payments evolve the issue of monetizing those models raises its head.  Some platforms charge a fee for completing mobile payments.  Other platforms introduce premium services that they can probably charge a fee for but some platforms will remain free of fee charges to consumers, at least in a non-Title II world.

Why did I add a qualifier?  Because with Title II regulation, which would treat broadband internet access providers like old school common carriers, consumers may find their broadband services subject to a number of additional fees that may make consumers think twice about adopting and using broadband access.

According to a study by Hal Singer and Robert Litan, the average annual increase in state and local fees for wireline and wireless broadband access services will be $67 and $72, respectively.  The annual increase in federal fees will be approximately $17.  Messrs. Singer and Litan estimate that consumers will pay approximately an additional $15 billion in fees.  As Messrs. Singer and Litan correctly point out, broadband internet access providers won’t eat the federal, state, and local taxes or franchise and gross receipts taxes they are assessed.  They will, as they do with good old fashioned telecommunications services pass these taxes on to consumers.

That’s $15 billion in lost personal consumption expenditures going down the black hole of government coffers and not being circulated in the general economy.

Can consumer welfare afford a Title II reclassification by the Federal Communications Commission?  I don’t think so.

The liberty to choose content based on value is what civil rights groups should rally on

The civil rights perspective regarding broadband access is severely misplaced.  The narrative in general has been that access to information exchanged over a medium based on internet protocol is a civil right; an enforceable right or privilege guaranteed by the U.S. Constitution which when interfered with by another gives rise to am action for an injury. Civil rights belong to an individual by virtue of citizenship, especially the fundamental freedoms and privileges guaranteed by the 13th and 14th amendments.

The last time I checked the U.S. Constitution, there was no language in there that expressly supports my access to a communications medium powered by internet protocol.  The Constitution didn’t even guarantee U.S. citizens access to communications networks powered by smoke signals, the telegraph, or even the telephone.  One could argue that in today’s modern telecommunications world that the Communications Act of 1934′s mandate that the Federal Communications Commission ensure the a nationwide communications network universally accessible by all Americans creates that right.  I would argue that it doesn’t and that the Act’s supporters in Congress got lucky in that the universal accessibility requirement of the Act was not challenged.

In some ways I’m surprised that Free Press or Public Knowledge have not turned the NAACP or the National Urban League’s “broadband is a civil right” argument into a “right to access a common carrier” argument thus buttressing their incorrect argument that broadband should be regulated as a Title II common carrier or public utility.  Ironically some civil rights groups like ColorofChange.org and the National Hispanic Media Coalition support public utility-like regulation of broadband and could likely add fuel to Free Press or Public Knowledge’s positions.  Unfortunately for Free Press and Public Knowledge their accusations that legacy civil rights groups are nothing but money-taking hacks for phone and cable companies has provided enough of a taint that most civil rights groups, no matter their position on net neutrality, would prefer stand closer to a spraying skunk that ally with Free Press or Public Knowledge.

Rather than risk getting to close to the edge of inadvertently pushing broadband into a common carrier box, civil rights should push a purer market-based consumer welfare argument when it comes to broadband in general and net neutrality in particular.  Their policy statement should be that federal and state government should not interfere with a consumer’s choice to have certain content delivered to their broadband-enabled devices and recognize that the consumer can enter agreements with internet access providers and content providers based on the value the consumer recognizes in particular content.

Rather than push a civil rights argument that has consumers asking for the government to define access rights, civil rights advocates should take the position that the liberty of consumer choice is a given and that public policy should recognize and respect that.

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Mr. Obama drinks the net neutrality kool-aid

Posted November 10th, 2014 in Federal Communications Commission, net neutrality, Obama and tagged , , by Alton Drew

Mr. Obama, unfortunately, has fallen for the #TitleII argument for regulating the #internet, erroneously arguing that the internet has been operating via net neutrality since the beginning of time. Wrong.

Certain traffic has always been sent before others because of the traffic’s makeup i.e. e-mail versus video. Title II would create various levels of internet service just like it did for telephone service. Also, Title II regulation means FCC and state approval of new services, just like Title II required of telephone services.

For those of us who worked in telecommunications regulation, we witnessed first hand how long and burdensome the approval process is for new services. Bottom line, if you want to see a slow down in the introduction of new internet services, go ahead and throw your support behind the President and Title II/net neutrality.

The President may have been a great constitutional law professor, but on telecommunications law, he needs to do his homework…..

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If Netflix was attempting rent seeking, any success may be short-lived.

Gerald Faulhaber and David Farber today published a post questioning the need for open internet rules.  The authors expressed a sense of irony that after decades of successfully running a communications platform built on open network architecture that technologists and engineers today would need the help of the Federal Communications Commission in keeping said network of networks open.

Online video distributor Netflix has been documented as thinking that the Commission should be riding to the rescue of content providers by advocating that the Commission implement strong net neutrality rules.  By strong net neutrality rules Netflix means that the Commission should prohibit the payment of tolls by content providers to broadband operators such as AT&T, Comcast, or Verizon. According to Netflix:

“Without strong net neutrality, big ISPs can demand potentially escalating fees for the interconnection required to deliver high quality service. The big ISPs can make these demands — driving up costs and prices for everyone else — because of their market position.”

Netflix tried to invoke a little altruism asking the Commission to imagine the plight of smaller content providers facing the threat of escalating toll charges assessed year of year at an increasing rate by broadband providers.

It appears the real plight that Netflix is concerned with is the uptick in competition resulting from an HBO or ESPN streaming their content.  For example, an analysis last week by Morningstar questioned the long term profitability of Netflix in the face of competition from content owners.  According to Morningstar:

“Video distribution firms (cable, satellite, phone) have suffered from inertia in building out TV Everywhere, which would allow customers to stream current channels on the device of their choice. Aside from HBO GO and Watch ESPN, the ability to stream channels is much weaker than we would have expected in the present day. Still, we view this service as inevitable within the next two to three years and believe the market is underestimating the potential negative impact on Netflix when most cable channels with fresh content can be streamed.”

This competitive threat, in my opinion, has Netflix seeking rents with net neutrality and Title II as the vehicle.  According to Investopedia, rent seeking is defined as when a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.  An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don’t create any benefit for society; they just redistribute resources from the taxpayers to the special-interest group.

Time Warner’s HBO, Disney’s ESPN, and Viacom’s CBS apparently recognize the need to respond to Netflix’s disruptive model with a little innovation of their own, thus their proposed streaming services.

Would consumers of video content via the internet benefit if competing online streaming providers were ensnared by additional regulations flowing from Title II or net neutrality rules?  No, they would not because fewer online content providers would step up to challenge Netflix and consumer welfare would shrink because of reduced access to video content.

The Commission should recognize that net neutrality and calls for Title II regulation are nothing but attempts at rent seeking.  If Netflix and other content providers believe their content or services are of value to the consumer, they will not need the Commission to intervene in this market.

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Broadband, capital, and the politics of the ignorant

Broadband is capital that is used by information service providers to produce an information service.  It is the copper, fiber, cable, electronics, and software created, deployed, and used as capital inputs in the production of information services that end-users eventually consume.  By extension the Internet is also an input in the production of information services.  The cables, routers, and servers on the Internet connect over 67,000 global networks making it possible to create and sell information.

By information services, I refer to services that either generate, store, or provide end-user access to content.  This would include broadband access operators such as Verizon or Comcast; router and server providers such as Cisco; back haul providers such as L-1; Internet search engines such as Yahoo or Google; and content providers such as Netflix or Hulu. They all use broadband capacity and the Internet as inputs for the production of information services.

End users or consumers buy information services for final consumption.  They are not using fiber, cable, copper, software, or network electronics to create anything.  They have no property claim or property interest in these components.  Many end-users have no clue as to how these inputs are used much less could define them.  All they know is that they point and click on a link to get their information on current events, gossip, or the recipe for making holiday season rum cakes.

Unfortunately the noise from net neutrality proponents, specifically those pushing Title II regulation of the subset of information services providers known as broadband operators, has obscured this view of broadband as a capital input.  In addition claiming that broadband is a civil right or platform for promoting social justice is also misleading and clouds the discussion.

And the Federal Communications Commission is doing nothing to clear the air on the issue, choosing instead to fan the flames of ignorance surrounding what broadband truly is, a mere input in the production of a service.

The Commission and net neutrality/Title II proponents make this mistake easily because they fail to identify the appropriate market for analysis; the information market.  We develop, deploy, and maintain our communications networks for that sole purpose, to facilitate information exchange.  Because information is a prime component in our knowledge economy, public policy’s main focus should be on how best to promote the deployment of capital so that the exchange of information becomes easier and faster.

Net neutrality/Title II proponents may rebut this line of reasoning by saying that putting into code the principles of transparency of network management, non-discriminatory treatment of content traffic, and no blocking of access to websites of choice based on Title II is the best way to ensure information flows across 67,000 globally interconnected networks.  I beg to differ.

Title II regulation does not address the basic market components of demand and supply for information.  Demand for news, entertainment, and advice drives the supply of information.  A priori, this demand never recedes.  It continually increases.  The economy, in particular the information markets, have created a way to supply increasing demand for information by funding the development and deployment of capital inputs that make accessing and delivering information easier and more efficient.

Title II’s focus is on price regulation and transparency of agreements between network operators.  Title II’s language says nothing about the demand for information services.  Title II does not say anything about encouraging the supply of information services nor does it speak to leveraging of capital inputs to supply services.

Title II’s primary objective is to ensure that in a monopoly market for voice telecommunications that the consumer of voice communications gets a fair and reasonable rate for her voice service and the Commission is aware of all network operators involved in delivering voice services.

Title II is not a public policy tool for the 21st century.  It’s time for the Commission to diffuse the narrative that end users have the right to tell private parties how to leverage capital inputs used for providing a commercial service in a free market.  Diffusing this narrative is easier if the Commission properly describes what broadband and the Internet really are and focus on the true market for analysis: the information markets.

Once the Commission realizes that this is the market that should be promoted and that the private sector has been doing a great job in building the networks necessary for information to flow, maybe then we’ll start moving in the right policy direction.