If the FCC is serious about regulating the internet like a utility, then this is what it should do

The argument that access to the internet via broadband networks should be regulated like a public utility sends society the wrong message about how information moves along the internet and that it is okay to devalue information, data, content along certain interconnection points when indeed the opposite should be happening; that for the value added at these interconnection points, added value should be reflected in the price mechanism.  Access should not be priced at near zero on false premises of openness and privacy.

On the contrary, if the data consumer wants to keep the prying eyes of access providers or other data providers away from her activities, there should be an exchange of compensation that guarantees such activity won’t take place.  Rather than regulate the internet as a “public utility”, let the parties in data transactions enter into contracts that spell out each party’s rights.

Unlike an electric utility where the product, electricity, flows for the most part one way (we’ll ignore distributed energy for now), data, content, information flows two ways.  Electricity flows from an energy producer to an entity that coordinates the transmission of electricity flows to the distribution utilities that have been searching for the best price from the generators. Data, content, information flows at least two ways; from content creator/generator/aggregator to an end-user in response to the locational or other personal data the end-user provides to either her internet service provider or content provider.

The data end-user or consumer pays her broadband provider for access to the internet and may also an online entity for access to their content which may be located behind a paywall.  In most cases the information the end-user seeks is offered by content providers free of charge.  But if a public utility model is followed for participants in the data markets then consumers have been underpaying for their search activities and their bills should be adjusted upward to capture the major costs a utility incurs when delivering service.

A consumer’s utility rate includes the cost of generating electricity; transmitting electricity; and distributing electricity to its final stop.  The utility consumer may also pay environmental compliance costs, nuclear construction costs recovery, a municipal franchise fee, and sales tax.

Broadband fees are another matter. What sticks out when you look at your broadband bill is that none of your fees and charges are related to the generation, transmission, or distribution of data, content, information.  For broadband access you may pay state and local taxes and that’s it.

So while a utility’s rate reflects activities impacting the movement of product that end-users want to purchase, electricity, broadband rates, while reflecting the cost of access, include nothing else, not even the cost of generating and transmitting data, content, information. If progressive advocates for public utility-style regulation of internet access want their argument to have validity they will have to accept that along with the additional regulatory burdens they propose via Title II, customers should expect bills that capture all the costs involved in generating and sending their data, content, information to them.  Broadband providers should pay every content provider that the broadband subscriber chooses as a source of data, content, information, and broadband providers should turn around and pass on these costs to the consumer so that her bills reflect these choices.

The benefits from such an approach is that it would give the markets a much more accurate view of which content providers are providing end-users with the most value.  The net neutrality debate would end because consumers would choose content they value the most as a result of rates that reflect the cost of getting a near infinitesimal amount of data to the end-user.

That is, off course, if the FCC is really serious about regulating the internet like a utility.

Consumers will call the FCC’s forbearance bluff

Posted February 19th, 2015 in Broadband, Federal Communications Commission, net neutrality and tagged , , by Alton Drew

We are seven days away from the Federal Communications Commission’s expectedly contentious vote on its reboot of net neutrality rules.  With the support of President Obama, FCC chairman Tom Wheeler will present rules based on the Commission’s alleged Title II authority under the Communications Act of 1934.  Title II was designed to keep in check 20th century monopolies by ensuring the reasonableness of rates charged by telephone companies to their end-users; ensuring that telephone companies as carriers of last resort provided services to all American households; and placing under the Commission’s authority the review of interconnection agreements between common carriers.

President Obama and other Title II proponents are against regulating rates for accessing the internet via broadband services, but Mr. Obama will leave office in January 2017 and a new Commission chairman, should Mr Wheeler also depart, may have different ideas about the regulation of internet access rates.

The irony is that failure to regulate internet access rates may invalidate the “goodwill” Mr Wheeler garnered from a boisterous if not uninformed public of three million grass roots supporters of newt neutrality rules.  Some of these supporters see internet access companies as unfairly leveraging their alleged monopoly positions to provide less services at increasing prices.  If they suspect that the Commission will not take seriously regulating the rates of internet access providers, they may think that their support was in vain.

And it’s not like the Commission will be getting much regulatory help from the state public utility commissions, at least in the short term.  Prior to the recent National Association of Regulatory Commissioners winter conference in Washington, DC, I contacted a number of state commissions to determine if they would begin regulating broadband should the FCC’s rule survive a court challenge.  Most of those who returned my e-mail question responded that it was too early to tell.  A number of commissioners stated that state law prohibited regulation and one commissioner even stated that he saw no way that his state legislature was going to go near the topic given that the legislature had already placed a bold policy statement that the legislature and regulators were to maintain a hands-off approach to broadband.

If the states won’t regulate access to the internet via broadband then the Commission will be all alone in fielding consumer queries as to why the Commission seemingly appears to have reneged on creating a competitive framework for broadband access.

I believe the politics of grassroots activism will catch up with the Commission and that Mr Wheeler and the rest of the Democratic members on the panel will be compelled to regulate end-user rates.

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Broadband and Title II: It’s starting to feel like 1995

Federal Communications Commission chairman earlier today decided to take us back to 1995 and announced that he will issue new net neutrality rules that would bring wireline and wireless broadband providers under Title II regulation.  According to The Financial Times, investor fears were subdued when Mr. Wheeler assured the public that there would be no rate regulation on the part of the FCC.  Okay.  But that doesn’t mean that there will not be new rates implemented by broadband providers.  Mr. Wheeler in his opinion piece did not rule that possibility out.

Additional rates on the part of broadband providers wouldn’t be a bad thing either for investors, the operators, or consumers.  For investors and operators they can be assured that additional compliance costs under a new Title II regime are being recovered if operators charge additional fees.  For example, electric utilities charge different rates for different classes of ratepayer.  The typical ratepayer classes include residential, commercial, and industrial, with larger ratepayers paying a lower per unit rate because of the greater volume they consume and the decreasing marginal costs involved in generating electricity for larger consumers.  Residential consumers may pay less in total because they consume a smaller gross amounts of electricity but pay a larger per unit cost for their electricity.

Broadband providers may decide to dust off their regulatory playbooks from the period before the 1996 rewrite of the Communications Act and start charging tiered rates or even per minute rates for certain low-use packages.  Since broadband operators and content providers would be banned from entering paid prioritization agreements, what better way to manage congestion than to design packages where consumers in effect determine the speeds at which they get data based on the dollar value of the data.  It may also give wannabe broadband providers like Google and Facebook an excuse to charge for some of their services.

Yes, it’s starting to feel like 1995.

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What regulators say about the internet of things

For the past two or three days the chairmen of the Federal Communications Commission and the Federal Trade Commission have been clarifying their regulatory agendas for and approaches to the Internet.  FCC chairman Tom Wheeler plans to issue net neutrality rules around 5 February with the full FCC voting on those rules on 26 February.  Media reports have Mr. Wheeler outlining what he believes the benefits consumers would enjoy from reclassifying broadband as an old school, run-of-the-mill telephone company.  For example at the Consumer Electronics Show in Las Vegas Mr. Wheeler reportedly said the following:

“So, there is a way to do Title II right, that says there are many parts of Title II that are inappropriate, and would thwart investment, but that a model has been set in the wireless business.”

CTIA-The Wireless Association has taken the position that given the level of competition for mobile broadband that net neutrality rules should be “mobile broadband specific” and that mobile broadband has never been regulated under Title II.

Mr. Wheeler, in an attempt to keep net neutrality advocates happy, appears to be willing to use Title II regulation to strike down deals between content providers and broadband operators where content providers pay to have their traffic given higher priority over other providers.  Mr. Wheeler wants the role of determining which transactions and agreements are commercially reasonable and how that traffic should be moved from content provider to broadband provider to ultimate end user.

FTC chairman Edith Ramirez’s approach appears to focus more on transparency of participants in information markets.  Her concern, as shared with CES participants, is about privacy and the Internet of Things. As more devices connect to each other via the internet, more devices become subject to hacking and a wealth of data, thought by consumers to be private, becomes subject to misuse, theft, or fraud.

Ms. Ramirez’s focus on the consumer is not surprising given the nature of her agency’s work, but it also seems the slightly, and I mean slightly, better approach to overseeing market behavior versus individual business behavior.  The internet is a platform for information exchange between information generators and information seekers.  The more information that a provider has on how her information is going to be used in the markets helps her make better decisions not only on whether she should make it available but also on its value and how best to monetize her data. Information gatherers will simply have to provide better incentives to information providers to get them to give up their data.

What kind of growth does the market see for the Internet of Things?  According to Cisco’s Internet Business Solutions Group, some 25 billion devices will be connected to the internet by the end of 2015.  That number will climb to 50 billion connected devices by the end of 2020.  That’s a lot of broadband infrastructure for the FCC to oversee and more hacking access points for the FTC to worry about in five short years.

Investors will see the biggest gains in the infrastructure space of the Internet of Things.  Leading growth in this space will be manufacturers of processor chips, wifi networks, sensors, and software.  Investors should also be concerned with factors that impact demand for devices that talk to each other and I believe the factor that has the heaviest weight is the consumer privacy factor.  Devices aren’t just talking to each other but are gathering information on consumer likes and habits and storing this data for the information gatherer’s future use.  Privacy is an immediate and long term issue because it concerns one half of the parties involved in the information market transaction: the consumer.

As for the FCC’s open access approach it is too short-sighted.  Mr. Wheeler’s focus on competition for broadband service and equal treatment of traffic may have a nice sounding populist ring, but in the internet eco-system what matters is the consumer’s choice of product obtained through broadband.  That product is content and the price the consumer pays in exchange for that content is, ironically, content in the form of personal data.  Consumers already have wireless and wireline choices for broadband access.  The value play for consumers lies in the quality of content available online and consumers are more than capable of deciding that for themselves.

What the government can do is what it does best (albeit it is not the best at it, but work with me); government should adjudicate privacy and other consumer disputes and make available to consumers information that they may not be able to gleen readily from the private sector.  The FTC’s focus on privacy and consumer protection does a better job at this than the FCC.

I’ll go out on a limb and say that the private sector is taking care of the FCC’s mandate of ensuring a nationwide communications network.  The FCC’s focus given the growth in the mobile market and the increasing need for devices to wirelessly connect should remain on allocating spectrum and assuring the reliability and safety of wired and wireless communications infrastructure.  Any other endeavor is waste.

 

 

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Internet commerce flourishes because of market demand not regulation

One peeve I have had with the Federal Communications Commission in past and today is its penchant to describe its role in the broadband market as a facilitator of growth and innovation.  It’s like having cousin Louie visit for a weekend, overstay his welcome, and claim that he helped to build your house.  I’ve had to ask myself if I missed something during my two decades in the regulatory game.  Where did the Commission facilitate growth in the online markets?

There are probably a number of different sources to look at.  I try to keep things simple, so I decided to take a look at what professional market watchers have seen over the past four years.  Not a formal analysis that wreaks of regression analysis and all that, but an albeit cursory review of the findings from three Morningstar reports that covered a broadband provider; an online bookseller; a media company; and an over-the-top video distributor.  Since the Commission continuously refers to the entire internet ecosystem as its unit of regulatory analysis, I figured looking at companies that play in different but connected boxes in the internet ecosystem was an allowable approach.  So here goes.

First, lets go back to a Morningstar analysis of Amazon conducted on 6 December 2010.  The analysis discusses the advantages that Amazon has over brick and mortar companies such as Barnes and Nobles and Borders.  Amazon has been able to leverage the internet to deliver books at the lowest cost point, a cost point achievable because of low overhead costs.  Amazon has also been able to leverage the internet to produce and distribute e-books which, according to Morningstar, has a compelling advantage over hardcover books.  The main reason e-books have been successful is that production and distribution costs are near, if not, zero.  This ability to keep production costs near scraping the bottom has translated into lower prices for consumers.

I read through that report looking for some acknowledgment of the Federal Communications Commission.  I saw none.  Based on this report it seems that the idea of storing books in warehouses and shipping them out to consumers as the result of receiving an order online was part of a business model developed by an engineer by the name of Jeff Bezos.  No mention of the Commission or the Communications Act.

In September 2011, Morningstar sounded kind of so-so on Netflix.  Morningstar made it clear that content owners held the upper hand with the ability to enter into shorter licensing agreements for content and repricing at a higher amount.  Morningstar also noted in 2011 that Netflix faced heightened competition from new entrants and the lack of access to higher quality content.

Fast forward three years.  Netflix has built its own house of cards where orange is the new black.  Just like the Amazon analysis, Morningstar makes no mention of how the Commission’s regulation of the internet contributed to Netflix’s business model or its decision to go outside the box and not just deliver DVDs but stream video as well.

Speaking of content, Morningstar’s July 2012 analysis of Time Warner proceeded from the premise that quality content is king and that Time Warner has been able to take a strong competitive position in content.  The quality of Time Warner’s content, according to Morningstar, increases in value because it can be consumed on multiple devices, including laptops, smartphones, and tablets in addition to televisions.

The decision to deliver it via multiple platforms via multiple devices appears to have been made by private actors with no input, appropriately, from the Commission.

And how about the broadband provider portion of the ecosystem.  The Commission, along with net neutrality advocates, has been harping on the need for robust competition in the broadband space, but according to Morningstar’s August 2012 analysis of broadband provider CenturyLink, for the company to stay competitive with cable companies it would have to invest in network enhancements that facilitate faster download and upload speeds.  Not only does CenturyLink have to compete with cable in providing broadband access, they also compete with cable to distribute video.  Their provision of fiber-to-the-tower finds them competing with not just cable companies but with other competitive local exchange carriers.  CenturyLink also competes with Amazon, Salesforce.com, and Verizon in the provision of cloud management services.

Again, nothing in Morningstar’s analysis that speaks to the Commission’s requirement or even suggestion that CenturyLink enter into these markets within the internet ecosystem.

Growth and innovation have been occurring within the internet without the Commission’s persuasion or regulation and so far the Commission has not demonstrated why applying Title II regulation could add any value to the market-driven actions taken by the firms I just discussed.