November 2009 Archives

November 27, 2009 8:52 PM

Net Neutrality: Down the Rabbit Hole (Vertical Integration Ignored)

"In another moment down went Alice after it, never once considering how in the world she was to get out again.
The rabbit-hole went straight on like a tunnel for some way, and then dipped suddenly down, so suddenly that Alice had not a moment to think about stopping herself before she found herself falling down what seemed to be a very deep well.

Either the well was very deep, or she fell very slowly, for she had plenty of time as she went down to look about her, and to wonder what was going to happen next. First, she tried to look down and make out what she was coming to, but it was too dark to see anything . . .

'Well!' thought Alice to herself 'After such a fall as this, I shall think nothing of tumbling down-stairs! How brave they'll all think me at home! Why, I wouldn't say anything about it, even if I fell off the top of the house!' (which was very likely true.)

In keeping with our Adventures in Wonderland approach to the Net Neutrality NPRM, it only seemed appropriate to keep the long quote from Down the Rabbit Hole (Chapter 1) intact--especially when discussing vertical integration.  As noted in the last post, we'll look at real harms caused by vertical integration in one market--and not addressed by the Commission--and compare these circumstances to the empty theories posited in the NPRM.

You see, so many of the potential "threats" to the public that are postulated in the world of Internet commerce are only speculative in the NPRM . . . BUT . . . the Commission is in possession of a great deal of "data driven" information on the harms to consumer welfare resulting from unhealthy vertical integration.  Where?  Why in the only communications market where prices have been escalating in both real and nominal terms since Congress passed the Telecommunications Act of 1996--the market for subscription TV services.  This is a market characterized by unchecked price hikes resulting from a lack of competition in the programming and distribution markets.  We've been over the Commission's data before, and don't need to repeat it in this post.

Suffice it to say, though, that the Commission could look back on their previous failure to pursue a "data-driven" pro-consumer approach to much steeper prices caused by vertical integration in a real industry subject to the FCC's regulation, and (rather than sound the alarm about consumer welfare concerns related to vertical integration in any Internet-related market)--like Alice--say "[a]fter such a fall as this, I shall think nothing of tumbling down stairs!"  Later on, I'll put on my Nostradamus hat and predict--but with much more specificity--why the first problem, the real, data-driven, harms to consumers in the subscription TV business--may well continue to go unaddressed, as the Commission thinks nothing of "tumbling down the stairs" of imagined vertical integration in the Internet ecosystem.

Not to beat a dead horse, but take a look at the "data-driven" chart in the post addressing the consumer harms of vertical integration ignored in the subscription television market. There is considerable concentration in both the cable programming, and cable distribution markets.  These facts have been documented in this blog in multiple posts (look at the tag cloud under "high subscription TV prices."  Moreover, according to some of the same parties supporting the Net Neutrality NPRM, this concentration is only increasing with the recently proposed Comcast-NBC merger. Comcast is already the largest single owner of cable television programming, and, unlike Internet backbone services, there does seem to be some scarcity/exclusionary value in vertical integration through ownership of cable programming, rather than simply purchasing it through contract.

Continue reading Net Neutrality: Down the Rabbit Hole (Vertical Integration Ignored)
November 24, 2009 5:17 PM

Net Neutrality: Through the Looking Glass Pt.2

Here, we continue to explore the flawed premises, faulty reasoning (resulting from those premises), and the unintended (and frequently ironic) consequences of the proposed rules that result from this combination of either no "data", or unsupported assumptions disguised as facts.  Regardless of how unsupported, though, the Commission clearly believes.  Indeed, the Commission's certainty about these "facts" can be established by the lack of questions that go to central pieces of the Commission's theory.   One can only hope that, at least, Commissioner Copps will stick with the principle he so eloquently articulated a little over 5 years ago, "[w]ith the international economy increasingly dependent on broadband facilities, faith-based approaches to advanced telecommunications are insufficient."

NPRM: Unsupported assertions regarding the incentives and ability of broadband service providers to use alleged market power in the broadband Internet access market to extract supracompetitive prices in less competitive retail markets.  Alternatively, the Commission makes equally unsupported speculations regarding the incentives for vertically integrated broadband service providers to unfairly disadvantage firms in adjacent markets, such as the market for content delivery networks. See ¶¶ 7-9, 104-106.

Fact:  First, neither theory is supported by facts, or even theoretical citations that fit the facts in a way that would support the rules the Commission wishes to impose on the broadband service providers.  The reason is not that there is no set of facts upon which a firm would have the incentive and ability to act in an anticompetitive manner.  To the contrary, these are well-established single-firm theories of competitive harm; the logic underpinning the theories breaks down when you have multiple firms or the inability to practice location-specific price discrimination.  

The facts aren't here, because there is no evidence that any particular broadband Internet access providers: 1) have widespread market power vis-à-vis their retail customers, or potential wholesale competitors, 2) can use that market power, if it does exist, to practice price discrimination on a geographic market basis (for example, if one broadband provider faces no competition in a few small towns but offers and prices its service throughout a much larger territory, consumers of broadband Internet access services are not disadvantaged), 3) will maintain market power in the face of continued 4G expansion by incumbent wireless carriers and the new national wireless broadband provider, Clearwire, or 4) will unfairly disadvantage competitors in adjacent business or wholesale markets, because, to do so, a firm must have market power in both vertical markets--the input market and the retail market.

Continue reading Net Neutrality: Through the Looking Glass Pt.2
November 19, 2009 2:31 PM

Net Neutrality NPRM--Through the Looking Glass (Pt. 1)

"Contrariwise," continued Tweedledee, "if it was so, it might be; and if it were so, it
would be; but as it isn't, it ain't. That's logic."

As I mentioned in the first Net Neutrality post, I'm going to discuss some faulty premises in the NPRM and the contradictory results we can anticipate from the proposed rules, before we get to the suggestions on how the FCC could actually make their supposed premise work.  The first few will be a little hard on the Commission.  

Why?  Because I have to be . . . the Chairman ignored my first "rule" for living up to his potential!  He "got played" and went for the "next big thing" right out of the box, rather than prioritizing policies that have slid to dangerous levels of neglect--in other words, going to the place that smart, Ivy-league guys go to find out they're not that special.  I'm sorry, Mr. Chairman, but sometimes you've got to be cruel to be kind.  Here's a little more in-depth discussion of an internal contradiction in the NPRM that was discussed in the previous post.  

NPRM:  The NPRM "builds" on the FCC's 2005 Internet Policy Statement, but the proposed rules are only intended to "address user's ability to access the Internet."  ¶¶ 14, 5-6 (emphasis in original)

Fact:  The Commission's 2005 Internet Policy Statement asserts "that the Commission has
jurisdiction necessary to ensure that providers of telecommunications for Internet access or Internet Protocol-enabled (IP-enabled) services are operated in a neutral manner." [emphasis added]                                                                                                       

Unintended Consequence:  As mentioned in the last post, the Commission has moved from the original, consumer-oriented, principles it established in 2005.  Instead, the new rules, by distinguishing between providers of IP-enabled services on the Internet, have created a set of obligations from one group of businesses to another group of businesses, and, in doing so, placed the Commission's judgment above the choices of consumers.  

Among the companies newly "off the hook" from the 2005 Internet Policy Statement are firms like Google, that own plenty of network--just not last mile broadband--and that can offer "free" applications to "manage" and generate telecommunications.  These services are not regulated, but yet are inserted between PSTN to PSTN calls, allowing their CLEC partner(s) to collect access charges where none would otherwise be due.  Other companies newly freed from the obligation to enhance consumer welfare simply provide "free" telecommunications-centric applications as pervasive as VoIP.  How providers of free IP-enabled services pay for these services is a subject that is not explained in the NPRM, but we can guess, for at least some of the companies.

Continue reading Net Neutrality NPRM--Through the Looking Glass (Pt. 1)
November 19, 2009 2:08 PM

The FCC's "Net Neutrality" NPRM--Rhetoric Realized, Resisting Rationale

As I mentioned in my last post--my "relapse" post--I have never been comfortable with the term/concept/policy of "net neutrality", and here's why:  as a term, a concept, or proposed policy, it had no definition.  There was nothing to discuss, because if you asked 10 people what it meant, you might get 10 different answers; "net neutrality" was a religion without a dogma.  This is no longer the case.  On October 22nd, the FCC defined "Net Neutrality" and it truly is neither "fish nor fowl" in that the Commission's proposed rules, and their explanation for them, create a sui generis regulatory framework.  Given a tangible form, Net Neutrality can now be discussed on its own merits as a public policy, rather than fought over on religious terms.  Because this subject has been defined, and articulated as a proposed set of rules, let's first consider this definition: what is "Net Neutrality?" 

The Net Neutrality NPRM is complex, partly because the Commission misapprehends what it is regulating, how it works, and how the proposed rules will achieve the purported outcome.  So it is not possible to cover the NPRM in just one or two posts.  Instead, we'll look at Net Neutrality, as proposed, over a series of posts, starting with the definition.  In the next few posts we'll look at some of the unintended, paradoxical results that would obtain if the proposed rules, produced by the incomplete understanding of how the Internet works, as explained in the NPRM, were adopted.  Then, we'll consider whether the proposed rules are written in a manner that makes them likely to be enforced by the Commission in a timely manner. Finally, we'll look at whether there might be some other, more reasonable rules to ensure that the Internet remains accessible to all users on fair terms, which is supposedly the goal of the "Net Neutrality" advocates. 

Indeed, the Commission states its own characterization of the proposed rules as purportedly consistent with prior policies, "government action, where needed, should support a "predictable, minimalist, consistent and simple legal environment" for online activity.  Nothing we have done over the past several years or that we propose today alters that commitment."  NPRM, at para. 47.  There is no reason to doubt the Commission's sincerity, or good intentions.  However, in order to believe that the proposed rules are necessary, one has to believe that the Internet, which can act as an economic, social, and political "equalizer", cannot perform this role unless the Internet, itself, becomes subject to some "equalization."  Yet, this notion itself is a paradox; if the virtue of the Internet is its dynamic, evolving nature, then rules that cement the status quo, are only good for the largest firms that benefit from the status quo.  Thus, the Commission's perception of the Internet--and the need for the "cure" of the proposed rules, even the very term "Net Neutrality"--should invite some healthy skepticism. 

The first thing that stands out is that this NPRM does not propose rules that would reinstate some form of "common carrier" regulation on some portion of broadband Internet access.  In fact, the Commission supports the decision of previous Commissions to treat high speed Internet access as one integrated service.  So, while the NPRM does not seek a return to "Title II" or "common carrier" regulation--which requires service providers to offer services to the public on terms that are just, reasonable, and not unreasonably discriminatory--the NPRM curiously seeks to impose stricter burdens on access providers [than are imposed by Congress under Title II of the Communications Act ("the Act"].  The Commission seems to believe that the broad, plenary grant of regulatory authority over communications by wire or radio that Congress grants in Title I of the Act supersedes the more specific, limited authority that Congress grants the Commission in the subsequent sections of the Act.   A regulatory framework built on this premise is almost certainly illegal, and it is definitely irrational to believe that such rules would end up having any practical relevance.
Continue reading The FCC's "Net Neutrality" NPRM--Rhetoric Realized, Resisting Rationale
November 14, 2009 12:35 PM

Broadband Team Finally Gets It Right! New NPRM on USF and Intercarrier Comp

Yeah, like I'm one to talk about someone finally "getting it right?"  I've posted exactly 0 blog entries in one month (but it was a long month and we did go off daylight savings time), and I get to be a critic?  Seriously, though, if they had such a thing as a "license to blog", mine would have already expired for lack of use.   But, in my defense, I haven't posted anything in a while, because the big telecom policy talk of the day has been the FCC's proposed "Net Neutrality" Rulemaking, which was released on October 22nd.  And, the fact is, I'm really uncomfortable with the subject of "net neutrality"--for several reasons, not the least of which is that I've always been kind of confused and intimidated by the subject, because it always meant something different to different people.  However, now that the FCC has given it a concrete meaning, I have no excuses, so I'll hold my nose and start writing on it very soon. 

The point of this post, though--because I'm not one of those "hater" bloggers (not all the time anyway)--is to give credit to the Broadband Team over at the FCC for their appropriately named 19th [Nervous Breakdown] NPRM where they ask about how the role of the current state of USF funding and distribution, and intercarrier compensation, can effect broadband deployment.  As I am wont to do, I will take credit for prompting this NPRM--even though the subject was inescapable for the Broadband Team if they were going to do a comprehensive report (which they seem to be striving for)--because I wrote a post on this same subject two months ago (back when I was blogging). 

The NPRM seeks, in my opinion the most important information of the inquiry, because, unlike a lot of panels and inquiries, this information could really end up setting the FCC's substantive agenda for the next year or more--after the report is issued.   The reasons these issues are so big is that they are so pervasive, and so relevant to broadband deployment to rural and low income areas, and have been neglected for far too long.  Moreover, in a broadband/Net-centric world, these two key policies remain firmly stuck in the pre-Telecom Act days.  Additionally, it must be noted that it is impossible  for the Commission to tackle my new favorite subject of Net Neutrality without first figuring out the effects of imposing "neutrality" on the two of the pillars of regulation that are currently built on discrimination.  The FCC really can't think about imposing system-wide "neutrality" on a system that was never built to accommodate that principle (beyond common carriage--which the FCC's proposed Net Neutrality rules go well beyond), until the Commission understands how the current system promotes, or discourages, broadband Internet usage. 

Think about it.  Universal service was to be achieved on the theory that long distance (voice) subsidizes local, urban subsidizes rural, and business subsidizes residential.  Similarly, interconnection prices (for originating and terminating specific calls) range from "free" (wireless termination) to 6-7 cents a minute or more (rural or intrastate toll landline terminations).  Where discrimination is the law, economic incentives run counter to the law--and unproductive regulatory arbitrage is rewarded.  This is the system that we have and that is crumbling.  It certainly merits a look by the Commission as to how this system--and potential reforms--might promote broadband deployment in places where deployment is stuck, but subsidies persist to flow. 

Finally, I think this NPRM will lead to the most long lasting effects on the Commission's agenda in the near future because these matters are the biggest matters affecting broadband deployment that the FCC has the most control over.  I said it before, but these are the biggest issues from the past, that will be the biggest issues for the near future--if the FCC gets it right.  Yesterday's announced NPRM assures that these issues will be accounted for in the report to Congress, and will probably produce more pressure from Congress to work on these matters for the sake of establishing a platform for economic growth. 

So here's to you, oh conjurers of the Congressional Report, crack open a cold Bud Light, and . . . get back to work. . . you don't have a lot of time left!