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.

Comments Off

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.



Comments Off

What I heard Tom Wheeler say yesterday

Yesterday, Federal Communications Commission chairman Tom Wheeler delivered remarks to the organization, 1776, on the future of broadband competition.  What I took away from Mr. Wheeler’s remarks was an attempt by the Chairman to flesh out the role of Title II in a regulatory framework for broadband access.

In its notice of proposed rulemaking addressing the protection of Internet openness, the Commission states that:

“The goal of this proceeding is to find the best approach to protecting and promoting Internet openness.  Per the blueprint offered by the D.C. Circuit in its decision in Verizon v. FCC, the Commission proposes to rely on section 706 of the Telecommunications Act of 1996.  At the same time, the Commission will seriously consider the use of Title II of the Communications Act as the basis for legal authority.”

I believe, based on Mr. Wheeler’s comments, that he would like the Commission to apply Title II primarily to consumer protection issues hence creating a competitive environment for broadband access.  While Mr. Wheeler appears uncertain as to whether a competitive broadband access industry exists for consumers that are choosing broadband for the first time, he is less convinced that there are competitive alternatives available for consumers who want to switch carriers.

A truly competitive broadband market will see consumers being able to switch between broadband access providers with the relative ease that consumers changed long distance carriers during the 1990s long distance carrier price wars, according to Mr. Wheeler.  Mr. Wheeler argues that consumers may be foreclosed from pursuing competitive alternatives when deciding to switch carriers due to high switching costs in the form of terminating fees and equipment rental fees.

While section 706 speaks primarily to encouraging advanced services deployment, interpreted as broadband deployment, it doesn’t expressly discuss consumer protection mechanisms.  Title II doesn’t expressly claim to be a consumer protection portion of statute but given its heavy emphasis on pricing and contractual relationship disclosure and its call for the application of just and reasonable rates, a Commission order that emphasizes using Title II to protect consumers would not be surprising.

A hybrid system would create regulatory uncertainty because of the potential clash between what section 706 provides in options to pursue increased innovation and deployment versus Title II’s restrictions on common carriers.

For example, it may be a challenge to forbear from certain pricing methodologies pursuant to section 706 while requiring a broadband access provider who has been reclassified as a common carrier to file tariffs and while making showings on a frequent, case-by-case basis why its rates are just and reasonable.

In order to reduce uncertainty, what investors and broadband access providers should continue arguing for and what the Commission should seriously consider is a regulatory scheme based solely on section 706.  Again, section 706 focuses on broadband deployment by encouraging modifying regulatory action in order to incentivize investment and deployment.

To address consumer protection issues, the Commission should take an ex-ante approach to consumer complaints of discrimination or blocking, taking each complaint on a case-by-case basis.



Comments Off

What would a mid-term election loss by Democrats mean for the Open Internet

Based on the latest prognostication of election poll watchers, House congressional initiatives to rein in the Federal Communications Commission’s attempts to further regulate broadband access may be in for a small boost.  That boost may be tempered, however, by presidential veto power.

A post in The Economist blog, Democracy in America, cites a number of polls giving the Republican Party a chance in this November’s mid-term elections to win the U.S. Senate while keeping the U.S. House of Representatives.  That may provide initiatives promoted by House Republicans Marsha Blackburn of Tennessee and Robert Latta of Ohio some additional ammunition in their attempts to prevent the FCC from reclassifying broadband access providers as Title II common carriers.

Last July, Mrs. Blackburn secured an amendment to the fiscal year 2015 financial services appropriation bill designed to retard FCC attempts to preempt state laws that regulate municipal broadband.

Meanwhile, Mr. Latta introduced H.R. 4752, a bill that would limit the authority of the FCC over providers of broadband access.  Specifically, the bill would prevent the FCC from reclassifying broadband access providers as common carriers under Title II of the Communications Act of 1934.

H.R. 4752 would amend the Act by clarifying that the term “common carrier” would not include a provider of information service or of advanced telecommunications capability.  The bill is currently in the House sub-committee on communications and technology but is not on the House agenda for hearing, markup, or vote.

There doesn’t appear to be any movement in the Democratic controlled U.S. Senate on legislation that would have the opposite effect of what Republicans in the House are proposing.  While Senate commerce, science, and transportation committee chairman John D. Rockefeller, Democrat of West Virginia, has been an ardent proponent of the Open Internet and Senator Al Franken, Democrat of Minnesota, an equally strident advocate for reclassifying broadband access providers as Title II common carriers, there are no bills scheduled for hearing, vote, or markup, that would implement the Title II regulatory framework.

If the prognosticators are correct, the Republicans maybe biding time until after this November’s mid-term elections.  A number of forecasts are giving the GOP anywhere from a 51% to 60% chance of winning the U.S.Senate while keeping the U.S. House.

But even if the Republicans were to take both chambers and pass legislation similar to H.R. 4752, they would face the stiff challenge of a presidential veto.  They would need at least 290 votes in the House and 67 votes in the Senate to override a veto by President Obama and even with the chance of winning both chambers, I don’t see those numbers materializing.

Without statutory authority, open Internet rules are dead.  Adherence to open Internet principles, as evidenced by past broadband access provider behavior, will continue, however.

Comments Off

There is no such thing as a telecommunications provider

If the Federal Communications Commission assessed the Open Internet or net neutrality within the framework of the knowledge and information market, I think it would be easier for them to recognize that broadband operators, content delivery networks, and edge providers are all information service providers making reclassification of broadband operators as common carrier, telecommunications companies inappropriate.

Law established in two cases, National Cable & Telecommunications Association v. Brand X (2005) and Verizon v. Federal Communications Commission (2014) provide the FCC with the cover they need to make that leap.

In Brand X, the U.S. Supreme Court described characteristics that make broadband operators information service providers. A broadband provider offers its subscribers information services in the form of e-mail accounts and personal web pages.  I would even add any news content that the broadband provider aggregates on its website.  In addition, they may even provide links to other sources of online information that subscribers can access.

In Verizon v. FCC, the U.S. Court of Appeals for the District of Columbia describes YouTube as an information services provider.  In discussing edge providers, the court provided this example:

“When an edge provider such as YouTube transmits some sort of content — say, a video of a cat — to an end user, that content is broken down into packets of information, which, in turn, transmits the information to the end user, who then views and hopefully enjoys the cat.”

Can an end user be an information services provider?  Why not?  Individuals are writing applications for use in processing information everyday.  In Verizon, the court observed that:

“End users may often act as edge providers by creating and sharing content that is consumed by other end users, for instance by posting photos on Facebook.”

My question is, why should broadband operators be treated differently from other information service providers?  The standard answer from net neutrality or Open Internet proponents is that as the broadband pipe provider, a broadband operator could discriminate against certain traffic flowing to end users or block end user access to other information service providers.  End users should dismiss this fear of the unknown for three reasons.

First, end users have choices, whether wired or wireless, for access to information service providers.  In Atlanta, an end user can get wired broadband access through Comcast or AT&T.  They can also get wireless access via Verizon, AT&T, C-Beyond, T-Mobile, or Sprint.  I currently have access with two providers, one wired and one wireless.

Second, it’s bad business.  Comcast makes its money as an information services provider.  The value of its access platform increases where end users have confidence that they can access information via Comcast’s platform.  If end users don’t have this confidence, they will take their business to another provider.

Third, a broadband operator’s role as an access provider or gatekeeper doesn’t negate its primary role as an information services provider.  The court in Brand X made it clear that broadband operators do not provide a transparent ability to transmit information as a telecommunications carrier does.  From the end user’s perspective they receive an integrated service that gets them access to information online.

The FCC needs to understand that the telecommunications market of voice providers and voice subscribers is shrinking.  This is a new information market made up of information service providers and consumers of content with consumers enjoying the increasing ability via innovative technology to sit on both sides of the market.

The crafters of Title II never envisioned this convergence instead viewing the telecommunications market as a demilitarized zone sitting between voice providers and telephone subscribers.  That wall has crumbled and rebuilding it using Title II makes no sense.