Award Winning Blog

Sunday, December 17, 2017

A Deep Dive into the FCC’s Circulated Restoring Internet Freedom Document

             Press accounts and the FCC’s own summary, provide a general sense of how the Commission rationalizes its abandonment of network neutrality.  See https://www.fcc.gov/restoring-internet-freedom.  However, a deeper dive can provide further insights and perhaps identify areas of vulnerability in terms of judicial review and future conflict.

Set out below, I offer such an analysis.

Thinly Disguised Disgust Coupled with Supreme Confidence

            On balance, I am surprised at the lack of humility and decency in such an important document.  As perhaps never before, the Pai-led FCC makes it clear that it must correct grievous shortcomings in the legal interpretation, evidence interpretation, economic philosophy and overall perspective of the Wheeler-led, but Obama-controlled Commission and its Open Internet Order. 

            The new Commission comes ever so close to asserting that its predecessor distorted the truth.  The document states that the prior Commission engaged in “results-driven” decision making (¶21) and “manipulated” service definitions to “engineer[] a conclusion” (¶43).  That comes across as disingenuous in light of the paucity of unimpeachable empirical evidence in the Pai document and the heavy reliance on cherry picked conjectures of preferred commenters who repurpose sponsored research.

            Despite a commitment to empirical data collection, fair-minded cost/benefit analysis and transparency, the nearly 200 page document comes up remarkably short on facts and stands at parity with the Democrats on result-driven decision making.

Doubling Down the Telecommunications/Information Service Dichotomy

            The Restoring Internet Freedom document relies heavily on the questionable conclusion that the FCC can and should create mutually exclusive regulatory classifications, despite technological and marketplace convergence.  Throughout the document, the FCC relies on a number of dichotomies whose air tightness supports divergent regulatory treatment, despite the reality that the telecommunications and Internet ecosystems do not support such neatness.

            The document supports extension of a view that the FCC must separate its treatment of telecommunications and telecommunications services, on one hand, and information services, on the other hand.  The Commission expressed such a need in 1998 in response to a Senate query (the Stephens Report) and implemented this air tight strategy in the Computer Inquiries.

            While such a dichotomy might work in a world where dial up common carriers provided a stand-alone link to information services, conduit and content now converge.  For example, smartphones offer voice telephone service, regulated as common carrier, Commercial Mobile Radio Service.  These carriers also offer data services, including access to the Internet cloud.  Consumers expect to have access to both types of services regardless of their different regulatory classifications.  A Republican majority FCC agreed when it mandated data roaming, at a time when such a service qualified for light-handed, information service oversight.

            Put another way, on functional equivalency grounds, consumers understand voice as different from data only insofar as how much the carrier charges, not how the carrier provides either service.  Similarly, consumers don’t quibble about whether a mobile broadband service is public or private, interconnected or not and whether the Public Switched Telephone Network and telephone numbers are used.

Misreading the Venerable Justice Scalia

            To legitimize its reclassification of broadband Internet access as an information service and wireless broadband as private, not commercial carriage, the FCC now must return to the rationale that bit and packet transmission cannot be distinguished and carved out from the information service it carries.  The Commission blithely ignores that Justice Scalia, dissenting in the Brand X case, rejected the view that the telecommunications element could not be carved out and recognized for what it is: publicly available conduit functionality.

            Justice Scalia recognized that deference to the FCC on its interpretation of conduit and content severability would promote deregulation in one instance, but could just as easily be used again by the FCC—having a different political party majority—to justify more government oversight:

Finally, I must note that, notwithstanding the Commission’s self-congratulatory paean to its deregulatory largesse . . . what the Commission hath given, the Commission may well take away—unless it doesn’t. This is a wonderful illustration of how an experienced agency can (with some assistance from credulous courts) turn statutory constraints into bureaucratic discretions {to regulate or deregulate based on the agency’s legal interpretation and politics]. . . . Such Möbius-strip reasoning mocks the principle that the statute constrains the agency in any meaningful way.

Self-Inflicted Wounds on the VoIP Regulatory Question

            Without a doubt, Chairman Pai must be basking in the limelight and congratulating himself for delivering an unimpeachable document that will survive judicial review.   Perhaps, but I would like to raise the VoIP question.

            Until now, the FCC has managed to avoid classifying VoIP so that it can mandate universal service contributions from VoIP services that access the PSTN.  The reemphasis on mutual exclusivity between basic telephony and enhanced, information services may force the Commission’s hand.  How can the FCC emphasize access to the PSTN, use of telephone numbers, the degree of accessibility by the public and the nature of interconnection to justify the unregulation of wireless broadband even as these factors pretty much line up in favor of treating VoIP as the functional equivalent of common carrier, regulated voice telephony?

 Employment, Innovation and Investment

            The document reiterates how network neutrality and the Title II classification decimated the telecommunications ecosystem with all sorts of disincentives.  However, the Commission never proves causality, nor does it have evidence that it, or the sponsored research it chose to embrace, can prove causality: that network neutrality and/or common carrier status constituted the direct cause for any and all reduction in employment, innovation and investment.

            Ironically, while the document obsessively invokes the gospel of disincentives, later the Commission emphasizes that ongoing investment in plant constitutes one of the major reasons the broadband marketplace is robustly competitive. 

            Compare these two conclusions:

The Commission has long recognized that regulatory burdens and uncertainty, such as those inherent in Title II, can deter investment by regulated entities . . .. The balance of the evidence in the record suggests that Title II classification has reduced ISP investment in the network as well as hampered innovation because of regulatory uncertainty. ¶88


With the advent of 5G technologies promising sharply increased mobile speeds in the near future, the pressure mobile exerts in the broadband market place is likely to grow even more significant.¶130

            Let me get this straight.  Without identifying evidence of causality and generating or identifying anything close to peer review worthy data, the FCC concludes that the Obama era Network Neutrality regime singularly caused a woeful decline in broadband plant.  Yet at the very same time, during the Obama-managed FCC, carriers like AT&T and Verizon expedited 5G plant investment, unimpeachable proof of how competitive the broadband marketplace has become, particularly in light of the functional equivalency of wired and wireless networks.


            Can the FCC have it both ways, or might a reviewing court question the science, economics and lawfulness of the FCC’s rationales for reclassification?  That’s the Trillion Dollar question.

Wednesday, December 6, 2017

“Restoring” Internet Freedom for Whom?

            Recently, a colleague in the Bellisario College of Communications, asked me who gets a freedom boost from the FCC’s upcoming dismantling of network neutrality safeguards.  He noted that Chairman Pai made sure that the title of the FCC’s Notice of Proposed Rulemaking is: Restoring Internet Freedom.  See https://www.fcc.gov/restoring-internet-freedom. My colleague wanted to know whose freedom the FCC previously subverted and how removing consumer safeguards promotes freedom.

            With an evaluative template emphasizing employment, innovation and investment, one can see that deregulation benefits enterprises that employ, innovate and invest in the Internet ecosystem.  However, the Pai emphasis lies in ventures operating the bit distribution plant reaching broadband subscribers.  The Chairman provides anecdotal evidence that some rural wireless Internet Service Providers have curtailed infrastructure investment because of regulatory uncertainty, or the incentive-reducing impact of network neutrality.  If the FCC removes the rules, then rural ISPs and more market impactful players like Verizon and Comcast will unleash a torrent of investment, innovation and job creation.

            O.K. let us consider that a real possibility.  Let’s ignore the fact that wireless carriers have expedited investment in next generation networks during the disincentive tenure of network neutrality requirements.

            To answer my colleague’s question, I believe one has to consider ISPs as platform intermediaries who have an impact both downstream on end users and upstream on other carriers, content distributors and content creators. My research agenda has pivoted to the law, economics and social impact of platforms; see https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2935292.

            Using the employment, innovation and investment criteria, the FCC also should have considered the current and prospective freedom quotient for upstream players.  Does nearly unfettered price and quality of service discrimination options for ISPs impact upstream ventures’ ability to employ, innovate and invest more?

            Assume for the sake of discussion that ISPs can block, throttle, drop and prioritize packets.  A plausible, worst case scenario has an innovative market entrant with a new content-based business plan less able to achieve the Commission’s freedom goals.  Regardless whether you call it artificial congestion, the potential exists for an ISP to prevent traffic of the content market entrant from seamless transit.  The ISP could create congestion with an eye toward demanding a surcharge payment, even though the market entrant’s traffic had no possibility of itself creating congestion.  The ISP also might throttle traffic of the innovative newcomer if its market entry might adversely impact the content market share and profitability of the ISP, its affiliates and its upstream content providers that previously agreed to pay a surcharge.

            Of course network neutrality opponents would object to this scenario based on the summary conclusion that an ISP would never degrade network performance, or reduce the value proposition of its service.  The airlines do this and so would an ISP if it thought it could extract more revenues given the lack of competition and the inability of consumers on both sides of its platform to shift carriers.

            ISPs do not operate as charities.  The FCC soon will enhance their freedom which translates into higher revenues and possibly more customized service options for consumers willing to pay more. 

            Before the FCC closes shop and hands off any future dispute resolution to the generalist FTC consider this scenario.  Subscribers of Netflix, or the small content market entrant discussed above, suddenly see their video stream turn into slide shows.  The FTC lacking savvy as to the manifold ways ISPs can mask artificial congestion and network management chicanery orders an investigation with a “tight” six month deadline for reported findings. 

            Just how long after the onset of degraded service will video consumers get angry and cast about for a villain?  Might the list of candidates include Congress, the FTC and FCC?


Friday, December 1, 2017

The Misguided Wisdom in Substituting the Generalist FTC for Sector-Specific FCC Expertise

            A number of important, fundamental questions about the scope and nature of government oversight lie within the broad and breathless debate over network neutrality.  Does the public benefit from government oversight by an agency with particular expertise in the industries overseen, or can a generalist agency do a better job?  A related question asks whether ex ante regulations, which anticipate problems, can better serve the public than ex ante remedies occurring after investigation.

            I firmly believe in the essentialness of sector specific expertise, but see ex ante network neutrality regulations as possibly constraining customized services that meet specific subscriber requirements.  For example, I believe the FCC would have the necessary expertise to differentiate between an ISP tactic that hurts consumers and competition and one that does not, e.g., many types of zero rating.

            To the best of my knowledge, no critic of the FCC—even ones keen on shutting it down—have gone on record stating that a generalist agency can and should assume responsibility for spectrum management.  Shifting that essential task to the Commerce Department, for example, probably would heighten the bias favoring retained government “ownership” of choice spectrum with less likelihood for consideration whether government agencies can do more with less.

            The Office of Chairman Pai has endorsed the generalist FTC in lieu of FCC investigation and sanctioning of anticompetitive, or consumer harming practices:

MYTH:  The Federal Trade Commission is not well equipped and has far fewer powers to protect consumers from misconduct by Internet service providers.

  • FACT:  The Federal Trade Commission has broad authority to police unfair, deceptive, and anticompetitive practices online and has brought over 500 enforcement actions to protect consumers online, including actions against Internet service providers and some of the biggest companies in the online ecosystem.  And unlike the FCC, the Federal Trade Commission can order consumer redress (such as refunds) for violations of federal law.


            If I read this correctly, Chairman Pai would pass off an important safeguarding function to a “sister agency” with no concern about impact on budget, staff numbers and jurisdictional wingspan.  Such magnanimity from someone whose position typically requires vigilance against reduction in function, relevance and budget.

            Perhaps Chairman Pai honestly believes the FTC has a better handle on the situation.  Alternatively, he does not think this, but considers it politically wise to abdicate responsibility so the problem will go away.
            The problem will not go away, but the cop on the beat will lack sector-specific expertise.  A particularly glaring deficiency will lie in content carriage issues at the lower layers of the stack of Internet Service Provider functions.  The FTC has greater experience with obvious snookery by content con artists.  Now it will reinvent the wheel on the many ways an ISP might use its platform intermediary function  and content/app carriage activity in anticompetitive and other harmful ways. 

            One last point: Chairman Pai appears to imply that the FTC can generate remedies to harmful behavior with financial and other sanctions that the FCC cannot.  The FCC surely can fine ventures under its jurisdiction.  Perhaps the Chairman has rushed to the conclusion that a reclassification of ISPs as information service providers removes any opportunity to sanction and penalize ISPs making the FTC the government agency of first, last and only resort.


            How humble.

Tuesday, November 21, 2017

Regulation as a Manageable Cost Center: The Example of Network Neutrality and the AT&T Acquistion of Time Warner

            Moving in for the kill, incumbent carriers have stretched their home team advantage.  With millions in lobbying, campaign contributions and sponsored research, along with a like-minded FCC majority, the unpleasantness of the prior 8 year Obama stretch largely will evaporate very quickly.

            Money well spent.

            Rather than frame regulatory debates in terms of midlevel issues of economic theory and political philosophy, think lower tier: cold hard cash money. Follow the money.

            Regulation impedes businesses like AT&T and Verizon from achieving even greater profitability, unless of course a captive regulator can be persuaded to tilt the competitive playing field by disadvantaging one or more competitors.  Incumbents have convinced decision makers that when regulation prevents profit maximizing behavior, there better be a damn good reason.  Notions of equity and level competitive playing fields will not suffice even though the advocates for deregulation do not have to meet a similar burden when claiming existing rules “stifle innovation” and “kill jobs.”

            The incumbent camp waxes poetic how regulation has preempted billions in investment, hurt employment and reduced innovation. But how can they prove this?  Answer: they don’t have to.

            No decision maker—certainly not the FCC—has called upon AT&T, Comcast, Verizon and others to show how network neutrality singularly has prevented incumbents from making investments, or that there are fewer patent applications and workers because network neutrality has poisoned the ecosystem.

            Where are the economics, empiricism and analysis that FCC Chairman Ajit Pai claims his management will deliver?  It’s nowhere to be seen, unless you accept conjecture as sufficient.  From the FCC across to incurious, deadline worrying reporters, the prevailing network neutrality frame is that somehow eliminating it will “free” stakeholders to do more good than what they now can do.  Exactly how does a non-discrimination requirement stifle profitability?  How is this requirement resurrection of old school public utility regulation of a non-existent monopoly? 
           
            No one has to answer such questions.

            As to the other big issue of the news cycle today, no one asks whether AT&T’s acquisition of Time Warner’s content has impacts outside the vertical food chain of content creation and distribution. So this $85 billion deal is nothing more than your garden variety vertical merger which “everyone knows” is both benign and always permissible.

            Ask creators and distributors of content who compete with AT&T what the merger will do.  If they can overcome their fear of retaliation, you might see the AT&T mothership able to extract concessions from upstream content sources seeking access to AT&T satellite, cellular and wireline customers.  And you might see how raising costs of doing business for competitors makes it highly likely that churning customers might beat a path to one of the 3 content distribution flavors AT&T has to offer.

            But you have to ask.

Thursday, November 16, 2017

The Ambivalently Federalist FCC

            With all this talk about draining the Washington, D.C. swamp and its entrenched federal government occupants, the FCC remains quite enamored with federal preemption of state and local initiatives. I cannot see a coherent rationale for depriving non-federal actors of their role as laboratories for innovative regulation and better, on-site agents.  Instead, the FCC--with increasing frequency--seems to embrace preemption more often than deference to states and municipalities.

            On the federalist side, Chairman Ajit Pai fiercely endorsed the right of states to regulate inmate intrastate calling rates, even if the rates reach extortionate levels.  The Chairman gladly defers to states that have enacted barriers or prohibitions on municipal Wi-Fi and fiber optic networks.  

            On the federal preemption side, both Democratic and Republican majorities at the FCC frequently foreclose state and local initiatives.  Sometimes preemption prevents extortionate behavior, such as when cities delay or condition market entry.  But other times, I wonder if the FCC takes a partisan stance rather than a principled one.

            I am onboard when the FCC attempts to expedite state and local administrative procedures in granting franchises, access to rights of way and necessary permits.  However, the FCC also wants to constrain, if not prohibit, non-federal involvement in such diverse matters as privacy, universal service funding and tower siting.  


            If state and local regulators are closer to the people and perhaps better versed in the issues, why is the FCC so keen on preventing them for serving?

Tuesday, November 14, 2017

AT&T-Time Warner: More than a Vertical Merger


            Proponents of AT&T’s $85 billion acquisition of Time Warner simplistically frame the deal as vertical integration by a content creator and a conduit provider.  Such combinations of non-competing enterprises typically trigger less antitrust concern and regulatory scrutiny.  However, such a characterization ignores the potential for this combination to harm consumers and both competing content providers and carriers. 

            Even opponents to the deal miss a major harmful consequence having the potential for equal or greater impact than the usual reference to raising competitors’ costs and denying access to “must see” content.

            Consider a scenario where AT&T seeks to extract even higher content carriage payments from competing cable, satellite and streaming operators.  Even if the company could demonstrate that it is not gouging, but retaining existing profit margins, AT&T can accrue two benefits from having the Time Warner content inventory, coupled with multiple content delivery services.  First, AT&T can use its multiple conduit buying power to extract bulk discounts.  Having DirectTV, UVerse wireline broadband and wireless broadband offer three delivery options for “must see” content.  Second, AT&T has multiple carrier flavors to offer a service alternative to disgruntled subscribers of competing conduit operators.

            In a time when video content subscribers have grown weary of triple digit monthly bills, some facing even higher rates, will migrate from an AT&T competitor to an AT&T video conduit option.  Rather than lose revenues from cord shavers, AT&T stands to gain new subscribers when a Comcast or Cox subscriber migrates to AT&T’s DirecTV, UVerse or broadband streaming using an AT&T wired or nationally available wireless option.

            Note also that the FCC Republican majority has disclaimed any reason—or jurisdiction—to investigate the acquisition.  This stand offish FCC does have jurisdiction to investigate disputes about the availability and cost of content to AT&T competitors and also channel placement and tiering issues.  The Commission has displayed little interest and competency to resolve disputes.  Can you recall the last time the FCC conducted a full evidentiary hearing?  Did you know the full Commission reversed the findings of an Administrative Law Judge addressing program access issues?


            It looks like AT&T wins even if it has to make structural accommodations to secure regulatory approval.         

Tuesday, October 10, 2017

What’s a Fair Burden of Proof in Forecasting Future Benefits, or Harms?

           On many occasions, the FCC and reviewing courts have to decide who bears the burden of proving something, what they have to prove and how convincing they have to be. Far too often, this process lacks science, or any semblance of discipline.  The various stakeholders march their researchers who offer economic “rules,” specific to the last dime cost or benefit estimates and vicious attacks on the credibility of other experts with opposing views.

            This high stakes game has profound impacts on consumers and the degree of competitiveness in various sectors of the economy.  In many instances the burden lies with the party opposing a merger and other types of official blessings required before a commercial transaction can take place.

            Consider this real world scenario.  Comcast has an ownership interest in the Golf Channel.  It stands to reason that Comcast would want to maximize viewership of this network.  It can benefit the Golf Channel, itself and its cable television subscribers by including this network in the basic service tier, rather than a more expensive one having fewer subscribers and a higher monthly subscription price. Arguably, we have a win/win/win situation.  So far, so good.

            Along comes another specialized sport network in which Comcast does not have an ownership interest.  In this scenario, Comcast has to undertake a more granular financial analysis: does adding this channel generate more revenues for the company in the basic tier than in a more expensive sport tier?  Comcast presumably uses math and “real economics” to calculate the financial benefits in any advertising revenue sharing with the network, plus revenues from advertising it sells, plus any possible increase in the basic tier monthly subscription rate, plus savings in its costs of carrying the network in the sports tier.  If Comcast can generate such a composite figure, it then must subtract the per subscriber per month cost of adding carriage of this network in the basic tier.  Bear in mind, the cost of carriage can vary as a function of tier placement.

            In reality, there are additional factors, not easily quantified even if Comsat wanted to undertake the calculation (which it most certainly would not want to do so if obligated to share it with the FCC).  Comcast benefits on both sides of its cable television platform when it places the Golf Channel in the basic tier.  Comcast Cable pays Comcast the programmer of the Golf Channel.  Comcast Cable also receives payments from its cable subscribers.  For sport networks, which Comcast does not have an ownership interest, only one revenue flow exists: subscription payments from cable subscribers.

             It does not take an economist, antitrust expert, or rocket scientist to infer that Comcast has a vested financial interest to favor its golf programming over other sports programming generated by unaffiliated ventures. Some might call it a conflict of interest.  At the very least, a simple “smell test” detects a disincentive to carry competing content which does impose some minor additional programming cost for the basic tier.

             However, the appellate court considering the merits of tennis versus golf programming established a near impossible set of burdens on the unaffiliated network relegated to the more expensive sports tier. § 616 of the Communications Act unambiguously prohibits multichannel video programming networks (like Comcast) from “unreasonably restrain[ing] the ability of an unaffiliated video programming vendor to compete fairly.” Notwithstanding this mandate, the D.C. Circuit Court of Appeals imposed a remarkably high burden of proof on the Tennis Channel (which previously had convinced an FCC Administrative Law Judge that discrimination had occurred only to have that finding overturned by a majority of Commissioners.)  See https://www.cadc.uscourts.gov/internet/opinions.nsf/EC6B700AE22F118585257B790052AFB0/$file/12-1337-1438011.pdf; and https://www.cadc.uscourts.gov/internet/opinions.nsf/AFBD6CE03C0BF51585257FE7005038A6/$file/15-1067-1622957.pdf.

             The court-imposed burden required the Tennis Channel to prove that Comcast would accrue a financial benefit by changing the tier location of the network.  How can one meet that burden of proof?  The experts retained by the Tennis Channel would have to come up with a plausible mathematical equation proving that Comcast would earn more money if it re-tiered the Tennis Channel, i.e., that Comcast could raise the basic tier rate, or accrue more advertising revenues that would offset the cost of placing the network in a cheaper, but more heavily subscribed tier.

             I do not see how counsel for the Tennis Channel could create a formula and an accompanying narrative showing how increased viewership of the Tennis Channel and a commensurate increase in advertising rates would satisfy the financial benefit to Comcast burden of proof.

             The bottom line: Comcast can handicap a competing sport network through a seemingly innocent and business-driven program tiering decision.  Of course corporate non-affiliation had nothing to do with such decision making.

Would You Pay a 400% Surcharge for Connected Networks?

          With the well past due retirement of America Online’s Instant Messenger, I thought about  interconnectivity concerns in light of AOL’s market dominance.  Years ago, advocates worried that AOL could bolster its market share simply by refusing to interconnect its networks and large subscriber base with market entrants.  The AOL-Time Warner merger provided a basis for the federal government to impose some connectivity requirements that in retrospect appear unnecessary.

          Currently, I am experiencing the consequences when health networks do not interconnect and no government agency has legal authority, or the inclination to require connectivity.  My Primary Care Physician and all specialty doctors I see have an affiliation with Medical Practice Group One.  This Group is affiliated with the only hospital in town.  My employer has its own Medical Practice Group Two which predictably cannot share medical information, including blood tests, with other Groups.  Additionally, my employer has negotiated quite attractive blood test prices with an unaffiliated Large Diagnostic Facility which predictably has no direct document links with either Medical Practice Groups.

          In this “balkanized” environment, test results do not get delivered to physicians and the Medical Practice Groups cannot share results.  With repeated prodding, the Large Diagnostic Facility will use 1960s facsimile technology to send results to the Medical Practice Groups.

          I can reduce, if not eliminate the prospects for non-delivery of results if I opt to use the Local Diagnostic Facility affiliated with both the local hospital and Medical Practice Group One.  This option typically costs 300-400 percent more.

          Would you pay the premium to reduce or eliminate hassles, uncertainty and anxiety?  For many months I resisted and have paid the consequences.  However, I cannot help thinking that intentional “unconnectivity” serves business interests at the expense of consumers.  Economists can explain the situation in terms of network effects and externalities, but they do not seem to factor in higher consumer costs for joining the dominant network. 

Friday, September 22, 2017

Winners and Losers in the Sprint-TMobile Merger

            In this age of easily borrowed billions, outdated antitrust policy and largely libertarian regulatory oversight, the information, communications and entertainment (“ICE”) marketplace will get even more concentrated.  Despite President Trump’s occasional bluster opposing corporate gigantism, the Federal Communications Commission rarely sees a merger it cannot conditionally approve.  Pushback from the court of public opinion may arise, but the parties will have consummated the deal.

            Fait accompli?  I think yes for the wireless marketplace and let’s add Sinclair’s broadcast market grab.  AT&T’s merger with Time Warner poses some questions, primarily because of the President’s visible hatred of CNN.  Nevertheless, the results-driven FCC will find a way to rationalize how consumers benefit.

            All that remains is a prospective assessment of the winners and losers.

Winners

The Usual Suspects

            It does not take a brilliant buy-side Wall Street analyst to predict that Sprint, TMobile, involved financiers and lawyers and shareholders win.  A concentrated market makes it easier for the Big Three to eschew competition, innovation and enhanced value propositions for subscribers.

            Combining the two mavericks in the mix removes a clear motivation to compete aggressively.  Why not take the path of least resistance and allow the AT&T and Verizon to set a price and feature umbrella?  Why upset the apple cart and spend sleepless afternoons innovating and competing?

            Consider this commercial aviation thought exercise.  Southwest offers passengers the opportunity to check a bag for free.  The other major carriers have not matched this offer.  If Southwest merged with any other carrier with even a few percentage points of market share, do you think the free checked bag feature would remain?

            More broadly, how’s the concentration of the commercial aviation market working for you?

AT&T and Verizon

            Merger advocates typically resort to the bogus bromide that a financially stronger competitor enhances the public interest by ensuring that the company will survive and offer a compelling alternative to the major incumbents.  The FCC regularly embraces this rationale as occurred when it permitted the two satellite services Sirius and XM to merge.

             Maybe the combined Sprint/TMobile will retain their maverick proclivities despite major incentives to go along and get along.  In any event, AT&T and Verizon will have significantly less incentives to enhance the value position of their services.  Can you think of anything these two carriers introduced, rather than copied?
 
             BTW, both carriers got a significant bump in stock price on new of the prospective merger. 

Sponsored Researchers

             Yet another big—I mean HUGE—payday awaits the numerous academics and quasi-academics willing to generate advocacy documents masquerading as research.  I predict that one or more of these “scholars” will come up with a new economic and legal “Rule of Three.”  They will creatively generate all sorts of rationales supporting the simple premise that no market really needs more than three competitors to operate well.

            Gosh, it just so happens that the Sprint-TMobile merger will result in three national wireless competitors, so no harm, no foul.

            Perhaps some markets can operate competitively with three or even two ventures.  Commercial aviation manufacturing has a market comprised of two robust competitors: Boeing and Airbus.  But does the number three have some magical features applicable to all industries?

Losers

Anyone Reliant on a Robustly Competitive Internet Ecosystem

            A concentrated broadband wireless marketplace reduces the prospects for a robustly competitive and innovative one.  As just about everyone increasingly relies on a single broadband conduit to the Internet cloud, we should worry about vesting so much access control in three carriers.

            Recently, bipartisan concerns have arisen about the excessive market control by firms such as Google, Facebook and Amazon.  No such bipartisanship exists when the ICE marketplace becomes even more concentrated.  Positions continue to cleave on a political party fulcrum, even though people on both sides stand to suffer big time.

            Consumers capture limited surplus when a few players control access to an essential and irreplaceable conduit.  Increasingly, consumers will rely on a wireless conduit instead of a wired one.  Already sponsored researchers and the Republican FCC Commissioners preach the gospel of functional equivalence between the two transmission technologies.  Despite such assume competitiveness, incumbents like AT&T and Verizon have abandoned fiber optic and hybrid copper/fiber optic expansion.  Most Digital Subscriber Lines cannot handle two or more simultaneous video streams.  Even Goggle has abandoned major expansions of its fiber initiatives.

 
            You should not buy the party line that wired options can fully offset any collusion in the wireless market.  Why does wireless congestion exist, so much so, that carriers need to throttle subscribers of so-called unlimited service?

            Perhaps the aforementioned Rule of Three will claim that increases in profits and Average Revenue per User constitutes a win/win for carrier and subscriber.  Referring back to the commercial aviation in the U.S., domination by 3 or 4 carriers seems only to stimulate innovation in Business Class seat comfort with a race to unbundle and reduce the value position of Economy Class.

            Another day, another instance where consumers get screwed.

Thursday, August 31, 2017

Plausible Deniability and Its Role in Sponsored Research

            Readers of this blog know how much I detest sponsored research, particularly the undisclosed kind.  An even more pernicious strain discloses a sponsor in the form of a thank you note contained in a footnote, coupled with a disclaimer stating that policy prescription contained in the “research” results solely from the author.  Put another way, the author wants readers to believe that the financial sponsorship in no way affected the findings and recommendations of the work.

             This insistence on self-generated products, does not pass my smell test, even as sponsored researchers protest their innocence. They invoke what I call plausible deniability: the possibility exists that it just so happens that great minds think alike and both sponsor and sponsored researcher coincidentally share the same viewpoint without any collaboration.  Outsiders, including peer reviewers, have no way to confirm this assertion, so the possibility remains uncontested.

            Yesterday’s firing of open market researchers at the New America Foundation provides a case study on plausible deniability.  See https://www.nytimes.com/2017/08/30/us/politics/eric-schmidt-google-new-america.html?_r=0.  The researchers favored a position quite unfavorable to a major donor.  A senior executive at the donor contacts the foundation head to express dissatisfaction.  The foundation head shuts down the group.  Of course neither the donor, nor the donee ever acknowledge cause and effect.  NAF President Anne-Marie Slaughter attributes the firing to “repeated refusal [of Barry Lynn] to adhere to New America’s standards of openness and institutional collegiality.”  She adds—of course—that closing down the group had nothing to do with the content of it studies, etc.

             So what does “standards of openness and institutional collegiality” mean?

             I’m reading a classic book on writing that suggests the authors of words like these do not want readers to understand, or infer a single meaning.  See William Zinsser, On Writing Well: The Classic Guide to Writing Nonfiction.  Such ambiguity provides a plausible conclusion that Mr. Lynn was a difficult person who made life miserable for all around him.  Another, perhaps more likely conclusion, points to the controversial nature of Mr. Lynn’s work, something Ms. Slaughter explicitly exempted from her consideration whether to fire him and his staff.

            It appears that Ms. Slaughter shut down a group that she believed might jeopardize a substantial flow of funding.  Pragmatics and expediency drove this decision even if nothing more than a generalized telephone call triggered the outcome.  If a major funder stays “jump,” grantee administrators respond with “How high?”

            I get this, but what I cannot accept is the window dressing that attempts to retain some notion of independence and nobility.  Remember the Golden Rule: “She who pays the gold, makes the rules.”

Friday, August 25, 2017

Wireline vs. Wireless Broadband: Alternative or Complementary Technologies?

            If a market has many facilities-based competitors, the justification for regulatory oversight abates and the invisible hand of the marketplace can do wonder for consumers.  Few would disagree with that premise.

            The problem lies in whether competition exists right now, not something hypothetical, or prospective.  Sponsored economists, serving incumbent carriers, have long argued that regulators should start disbanding on the prospects of future, “contestable markets,” because the process of disengaging may take a long time.

            I prefer to see quantifiable, empirical evidence that competitors, operating their own installed networks, seek to serve the same consumer population right now.  FCC Chairman Ajit Pai has a more liberal standard leading to an unequivocal conclusion that wireless and wireline network operators robustly compete already.  Having reached that conclusion, it then follows that the FCC can announce “Mission Accomplished” and proceed to eliminate any and all regulatory safeguards in place to remedy, or abate market shortcomings.

            Is the broadband marketplace robustly competitive?  Do consumers readily and frequently choose between and among wireless and wireline broadband carriers?  Here’s my litmus test: when broadband consumers cut the wireline cord at home and rely solely on their “unlimited” wireless subscriptions, we will have reached the Promised Land.  Put another way, wireless and wireline technologies will compete as “functional equivalents” when consumers shut down their Wi-Fi wireless routers at home and remove smartphone instructions to look for and switch to Wi-Fi networks.  Why bother if the wireless subscription provides the same bit rate, data allowance and performance?

            Just now, who other than sponsored researchers and FCC Commissioners believe that wireless networks offer the same bitrate, data allowance and performance as wireline networks?  These two technologies complement and augment, rather than offer a substitute. 

            If you don’t believe me, consider what the wireless carriers write in their service contracts. The transmission bit rate—even for 4G service--does not match wireline speeds.  Wireless carriers warn that even advertised transmission speeds may decline under real world demand. Even so called unlimited wireless plans have soft usage caps triggering throttled 2G service when a power user requires service from a congested tower, or simply exceeds a 20-30 Gigabyte cap. Wireline broadband service typically has no cap and in markets where carriers like Comcast have introduced caps, the allowance ranges up to 1 Terabyte (1000 Gigabytes). Bear in mind that wireless carriers throttle video streams, because their networks cannot operate as robustly as wireline networks having no such limitation.


            Yet again, I am reminded that there are lies, damn lies and statistics.  But now even the statistics can be falsified to support a party line.

Tuesday, August 22, 2017

Seven Questions About Wireless Carrier Throttling of All Video Streams

            Verizon has joined the ranks of wireless carriers in the U.S. that degrade video screen resolution even if nearby tower congestion has not occurred.  See https://gizmodo.com/verizon-will-totally-start-throttling-customers-video-t-1798302947.  Here are some questions that come to mind:

1)         If ISPs have a lawful claim to First Amendment speaker status, do content providers have a similar, or stronger freedom of expression link when ISPs purposefully distort and degrade the high definition video feed they receive and deliver in standard definition or worse to broadband subscribers?

2)         When, if ever, can an ISP invoke reasonable network management as justification for continuous and deliberate throttling of video traffic even when congestion has not occurred?

3)         Should the FCC impose the same no meddling/no degradation of “must carry” content Congress mandated the Commission establish for cable television operators?

4)         While arguably consumers may not see perceive much video presentation degradation on their smartphone screens, will many wireless broadband subscribers in the future try to “sling” video content from handsets to television sets where the degradation would appear significant?

5)         Is service pricing on the basis of video screen resolution much the same as tiering on the basis of bit transmission speed, or monthly data allowances?

6)         Do wireless carriers give with one hand and take with the other when offering conditionally “unlimited” service subject to standardized throttling of video traffic?  Is this reasonable marketing and puffery, or a deceptive business practice?

7)         Do wireless carriers intentionally, or inadvertently bolster the video on demand market share held by cable television operators when offering inferior screen resolution?

            In a future post, I will provide answers, but for now I would appreciate your thoughts.

Wednesday, August 9, 2017

Thought Experiment: What Would You Do If You Saw an "Inoperative" Sticker on a Jet Exit Row Window?

Soon after I took my exit row seat on an long flight from Germany on Monday, I saw this sticker:

Here's a closer look at the text on the sticker:

Which of the following most closely fits how you would react:

A) Have confidence that safety regulatory oversight would guard against any risk of calamity;

B) Rely on market forces to support self-regulation and timely aircraft maintenance;

C) Worry that U.S. airlines can't resist the financial gain from deferred maintenance; or

D) Consider the "inoperative" label as an overstatement for something minor.

I opted for answer D, but only after conferring with the Lead Flight Attendant who conferred with the Captain. 

There is no single "correct" answer.  Each letter might offer insights on your regulatory perspective.

Saturday, July 22, 2017

The High Cost of Independence in Telecommunications Policy Analysis

            For over 25 years, I have strived to find the truth without regard to political party and economic doctrine.  My work fits no definitional template, or litmus test.   This fierce independence comes at a significant price.

            In these partisan times, the failure to make a team commitment places on in either, or both of two undesirable camps: 1) unreliable, “not one of us”; and 2) ignorable and invisible.

            For so many years, I though independence offered the opportunity to provide the “straight dope,” i.e., to offer unsponsored insights, the real deal.  On the plus side, independence has enhanced my qualifications to serve as an unbiased industry observer, legal analysist and forecaster.  On the negative side, few stakeholders and even the media want transparent analysis.  Stakeholders want advocates and they handsomely pay to use scholar-created “research” to promote their legislative and regulatory agenda.  So much sponsorship money sloshes around that the refusal to tap in generates questions about the value of one’s work.

            In light of a 24 hour news cycle, most journalists now appear content, or resigned, to interview and quote from scholars with a particular, often financially sponsored, viewpoints.  They offer no analysis leaving it up to consumers to make their own determination of the truth.

            Recently the Wall Street Journal had a front page article reporting on the breadth and reach of Google-sponsored, academic work.  See http://www.wsj.com/podcasts/google-academic-influence-campaign-paying-professors/832B4701-43E8-498E-B527-76AD0D54E553.html.  The list contained far too many “false positives,” but it does provide ample evidence of what Google does to affect policy, just like more established ventures such as AT&T, Comcast and Verizon. 

            I did not make the list.  I should note that Google did provide financial support for one project, but the scope of editorial oversight proved uncomfortable.

            I don’t know whether to revel in this confirmation of independence, or to regret not joining the ranks of some very impressive scholars. Are scholars not on this and similar lists nobodies, because no one paid for their work making it close to valueless?

            I continue to hope that there will remain a place for unsponsored research which can have financial support, but no explicit or implicit expectation of outcome.  Of course there will always be well-funded place for sponsored advocacy that masquerades as research.  The policy making process –and sadly most media outlets as well—function largely on the assessment and balancing of divergent viewpoints. 

            But unsponsored, independent research continues to dwindle in volume, significance and impact at a time when industry, government and the learned community need it to offer, fair-minded strategic planning insights.

Thursday, July 20, 2017

Wireless Carrier Ambivalence about Wi-Fi and What This Tells Us About Competition and Incentives

            Once upon a time, well over a decade ago, most wireless carriers saw Wi-Fi as a technological competitor.  The carriers always metered traffic then and wanted their subscribers to “use their minutes” rather than conserve them.  Subscribers could not “bring their own device, because the carriers managed a closed distribution link, selling most handsets and restricting the resale market.  Because the wireless carriers had a shared monopsony (buyers’ monopoly), they could dictate terms and conditions, including a prohibition on Wi-Fi access.  Nokia determined it could disable an installed Wi-Fi chip rather than redesign some handsets.

            Time passes and now wireless carriers adore Wi-Fi.  The carriers want subscribers to offload traffic onto Wi-Fi.  Better yet, U.S. carriers have lobbied the FCC to permit them to use unlicensed Wi-Fi spectrum for their commercial, licensed services.  Note what a sweet deal this would be as the carriers could avoid having to competitively bid and pay for some spectrum.

            Obviously the complete 360 degree reversal of position reflected changed circumstances.  But does the integration of a Wi-Fi option show how robustly competitive marketplaces operate, or are their other factors in play?  It gets murky, particularly in this partisan and contentious time.  A free marketer could use this reversal of position as evidence of how competition destroys business plans and forces ventures to enhance the value proposition for consumers. 

            I readily accept that marketplace competition imposes discipline and forces “sleepless afternoons.”  However, the free marketer overstates her case, because of other factors that either have nothing, or little to do with competition. 

            First, one should consider spectrum supply and demand.  As wireless service demand grew and bandwidth requirements expanded, e.g., streaming video, wireless carriers considered Wi-Fi a free and easy way to offload traffic.  Wi-Fi abated spectrum scarcity.  Additionally Wi-Fi provided network access where dead zones existed, because of zoning restrictions, particularly difficult terrain and perhaps the financial burden from having to install ever more cell tower sites.

            Competition does pay a major role in stimulating demand for service, but one has to look at the market structure of the industry.  You might not know that the FCC first created a wireless duopoly with a guaranteed license and market head start for incumbent wireline telephone companies.  Back then, Republican and Democratic FCC Commissioners had no problem collectively agreeing on this sweet deal. 

            Over time, two more facilities-based carriers entered the market.  As late entrants, often using spectrum at higher frequencies having less geographical coverage, these carriers had to offer a better deal to acquire market share.  But these late to market entrants had to think quite strategically about how much of a better deal to offer.  Carriers like Sprint used the prices of the two major incumbent wireless carriers, Verizon and AT&T, as a price ceiling.  Sprint was more likely to match or slightly discount the price of the incumbents, relying on features to stimulate churn and new subscriptions.  Sprint offered handset subsidies, offered not to start metering until the second minute of use and provided free automatic number identification, a feature that cost carriers virtually nothing to offer.   

            Remarkably the wireless marketplace did not show much price competition until quite recently.  I used to compile charts showing the near identical terms, conditions and prices of the four national carriers.  So much for robust price competition; the carriers have mostly competed on features.

            TMobile has aggressively used feature competition to acquire market share.  This “uncarrier” maverick has provided most of the consumer friendly feature innovations, including lower roaming fees, particularly abroad, the option to buy and use your own phone, zero rating, etc.

            Simply put, wireless carriers compete because they have to, not because they want to.  Their initial reaction to Wi-Fi was to block its use.  They embraced the technology, because they had to, not because they wanted to enhance the value position for subscribers.

            Wireless carriers are not charities, nor are they role models supporting an unregulated telecommunications marketplace.

             

Friday, July 14, 2017

Degrading Customer Quality of Experience as a Successful ISP Business Strategy

            In a recent New York Times article, the head of the cable television trade association, Michael Powell, made a curious observation about Internet Service Provider business strategy.  He sees no revenue enhancement possibilities in deliberately lowering the value proposition of broadband Internet access by blocking or degrading specific content deliveries: 

            “They’re as self-interested as Google or anybody else, but they believe they’ve found a good business selling internet access on open, unobstructed pipes. They don’t see how one could create a profitable business model by degrading the experience of their consumers.” See https://www.nytimes.com/2017/07/13/business/net-neutrality-broadband-companies-fcc.html?_r=0 

            Mr. Powell may have made a plausible observation about the broadband market, but there is another big transport market where a rush to the bottom enhances a carrier’s bottom line: commercial aviation.  Three of the four major carriers in the U.S. have created a new Economy Minus service option where previously bundled features are prohibited, or available at a surcharge.  United even prohibits “Basic Economy” passengers from carrying onboard a small bag. 

            Economists and others might welcome the proliferation of pricing options where consumers have to reveal preferences by paying for specific service enhancements.  But in most cases, the legacy carriers offering this new degraded service option have not lowered the fare.  They have reduced the service bundle and now priced out specific elements.   

            So much for not profiting from a degradation in the value proposition. 

            An ISP already has experimented with unbundling and separately pricing specific service elements.  For a brief time in selected markets, AT&T floated a new $29 monthly fee for enhanced privacy protection for broadband customers.  See https://arstechnica.com/business/2015/02/att-charges-29-more-for-gigabit-fiber-that-doesnt-watch-your-web-browsing/.  Most consumers thought privacy protection constituted an integral part of their subscription, but of course they haven’t read their subscription agreements that would disabuse them of that presumption.

            ISP service diversification, unbundling and pricing experiments evidence a maturing market.  As part of this transition, absent an explicit prohibition, expect these carriers to follow the airlines’ lead in pushing the envelope on price increases and service element unbundling.

Wednesday, July 5, 2017

The 5G Wireless Utopia Just 6 Months After the Obama Investment Downer

            Today’s Wall Street Journal continues the commitment to framing a fake, alternative reality in the telecom/Internet ecosystem.  See Holman W. Jenkins, Jr. Comcast vs. the 5G Frenzy; available at: https://www.wsj.com/articles/comcast-vs-the-5g-frenzy-1499188939.

            Just months after President Obama allegedly engineered an unprecedented decline in broadband infrastructure investment, Mr. Jenkins sees a “frenzy” in superfast fifth generation wireless network rollouts and a “dramatic restructuring of the cable and mobile broadband industries.”

            Wow!  Just a few months ago, the Journal and various sponsored researchers bemoaned the decline in broadband capital expenditures, solely generated by the FCC’s insistence on Mr. Jenkin’s characterized “1934-style utility regulation.” Now, wireless carriers like AT&T and Verizon have opened their pocketbooks to invest in new plant, at the same time as they spend billions to acquire content providers like AOL, DirecTV, Time-Warner and Yahoo.

            Here are some inconvenient and ignored truths: Congress mandated common carrier regulation of wireless carriers and that designation has NOT created any investment disincentive.  Broadband carriers have spent billions on content providers surely based on the assumption that ample capacity and transmission speed can accommodate ever growing video demand.  These very same carriers have spent additional billions on radio spectrum.

            So much for the FCC’s frenzy killing network neutrality regulation on investment, innovation and employment.

            Mr. Jenkins implies that the telecom/Internet marketplace will grow even more competitive, apparently not likely to suffer when additional acquisitions reduce the number of national wireless carriers to three and other mergers further concentrate other markets.  If not now in the new 4G environment, the future 5G environment will make wired and wireless networks interchangeable.

            Maybe, but Mr. Jenkins seems to ignore additional inconvenient truths.  Unlimited wireless—now and in the future—does not truly fit the term.  Unlimited plans have limits which if exceeded result in a major degradation of service to second or third generation network speeds that cannot provide video carriage. This occurs when a subscriber exceeds a cap of 20-30 Gigabytes and when the top few percentage power users take service from a congested tower. Wireless carriers also down-convert high definition video streams from 1080 lines of resolution to 480 lines.

            Currently, wireless carriers do impose hard and soft data caps while wireline carriers do not, or have a soft cap at more than 500 Gigabytes. Now, wireless carriers charge substantially more than wireline carriers on a per Gigabyte rate. We will see true intermodal competition when wireless broadband subscribers do not bother to program their smartphones to shift from their wireless carriers to available Wi-Fi options.


            So for the time being, Mr. Jenkins has lobbed yet another canard to discredit skeptics of an unregulated marketplace and to vilify network neutrality advocates.

Monday, June 5, 2017

Handicapping the Odds for Perpetually Full Voice Mailboxes


            The FCC will consider whether ringless voicemail messaging falls within a law that generally prohibits the transmission of unconsented voice and text messages (other than those from charities and political parties) to wired and wireless telephones.  See https://apps.fcc.gov/edocs_public/attachmatch/FCC-16-88A1.pdf.  Until now, the FCC has sided with the court of public opinion and interpreted the Telephone Consumer Protection Act, (codified at 47 U.S.C. § 227; see Telephone Consumer Protection Act of 1991, CG Docket No. 02-278, Report and Order, 27 F.C.C.R. 1830 (2012)) in ways that provide support for curbing the cockroach-like infestation of spam calls, faxes and text messages.

            The FCC may reverse course this time, largely because the two Republican Commissioners have plenty of incentives to embrace something the Republican National Committee and the U.S Chamber of Commerce supports.  See https://www.recode.net/2017/5/23/15681158/political-campaign-robocall-ringless-voicemail-without-ringing-cellphone-republican

            This issue presents itself as something of a litmus test for an FCC, tightly managed by Chairman Ajit Pai.  Despite rhetoric about making the Commission more disciplined by fact finding and sound economics and law, Chairman Pai has evidenced a penchant for results-driven decision making that supports his agenda.  In this matter, he has very little rhetoric, rationale, law and evidence to support what his Party and the Chamber of Commerce endorse.  Allowing spammers to overload mailboxes will not create many jobs as the messages are software generated, often by foreign manufactured devices.  Framing spam as First Amendment protected commercial speech defies common sense and disregards the congressionally recognized rights of subscribers to be left alone.  Ignoring the clear and unambiguous language and mission of law would lend credence to the view that Chairman Pai is not the transparent and honest broker he claims to be.  Defying and frustrating just about every cellphone user does not seem a smart move.  The assertion that ringless voice mail does not trigger costs to carrier, or consumer simply does not pass the smell test.

            Despite plenty of reasons to determine that ringless voice mail falls within the Telephone Consumer Protection Act of 1991, it would not surprise me if the FCC finds a clever, weaselly way to accommodate the spammers.  I can envision a lofty invocation of regulatory forbearance, claims of statutory ambiguity and trust in the wisdom of the marketplace, despite a clear legislative mandate to regulate and unequivocal evidence that telephone subscribers cannot participate in a spam marketplace. 

            On the other hand, the FCC might restrict, or prohibit such calls largely because of consumer pushback and evidence that ringless voicemail does trigger costs for both subscribers and more importantly for carriers, despite not having to route calls all the way to a subscriber handset.   Subscribers incur costs in accessing their mailboxes, and in scrolling through and erasing the messages, particularly when something serious and personal follows a slew of spam.  Similarly, subscribers experience frustration when their mailboxes reach capacity and carrier surely incur some costs in having to generate recorded announcements that another voicemail message cannot be stored.

            Few at the FCC may recall another instance where carrier network resources were used without compensation.  When international telephone toll rates often exceeded $1.00 a minute clever entrepreneurs created a “call-back” device (later software) that converted an expensive inbound call into a lower priced outbound call.  Someone seeking to establish a voice connection initiated a call to the United States, but cut the call before completion and the start of metering.  Because signaling preceded the meter, one could provide the foreign telephone number that the device, or software would immediately use to initiate a call.

            International telephone companies like AT&T opposed the use of their networks without compensation.  Remarkably, the FCC rejected their complaints and sided with consumers who benefitted from lower international toll charges through arbitraging the difference between inbound and outbound rates.


            For ringless robocalling, both carrier and customer interests align, because both stakeholder incur costs.  Still it remains to be seen whether the FCC will find a way to accommodate key benefactors, e.g., the Republican Party and all types of spammers, to the detriment of other benefactors it usually serves, e.g., Verizon and other carriers.