This morning, FCC Chairman Wheeler and Commissioner Pai spoke to the House Appropriations Subcommittee on Financial Services and General Government to make a formal request for the agency's FY 2015 budget allocation. View hearing here. Today's hearing was a more formal re-run of the briefing that the Chairman and Commissioner Pai gave the Subcommittee on Tuesday, when the FCC provided information on the agency's request for a $36 million increase in the FCC's allocation in the FY 2015 budget. The Commission's total budget request for 2015 was $375 million.
First among the FCC's budget priorities was securing an additional $10.8 million for USF improvement, directed mostly at policing the Lifeline program (which is intended to provide discounted telephone service for low income Americans). As this Bloomberg BNA article reports on the Tuesday briefing, the Chairman told the Subcommittee,
"We need more muscular enforcement about what is going on in universal service," Wheeler said. "The Lifeline program has been abused. My line from day one is, 'I want heads on pikes' and we need enforcement capability we don't have."
The Chairman's statement that he "want[s] heads on pikes" is a nice, political thing to say, given that the program has been under scrutiny, after ballooning in the wake of the Commission's decision to allow program participation by wireless carriers in 2008. The Commission took major steps to reform the Lifeline program rules in 2012, which led to a decline in total (non-Tribal) Lifeline subsidies from a peak of $2.13 billion in 2012 to $1.77 billion last year. See app. LI07 here.
The Commission, however, has yet to complete the most basic part of its Lifeline reform NPRM initiated in 2011--determining the correct subsidy for wireless carriers. Given that the growth in the Fund has come entirely from wireless services, one would think that getting the wireless carrier subsidy correct would be job #1.
The FCC Is Required to Establish Prudent Carrier Reimbursement Costs
The Lifeline program subsidizes consumer discounts through reimbursement payments to the consumers' service providers. The relevant statutory provision that deals with Lifeline provider reimbursement is 47 U.S.C. Section 214(e), which says,
A carrier that receives such support shall use that support only for the provision, maintenance, and upgrading of facilities and services for which the support is intended. Any such support should be explicit and sufficient to achieve the purposes of this section.
(emphasis added). The plain language of the statute indicates that Congress didn't want the FCC to be deliberately spending more than was necessary for the provision of the relevant facilities/services.
This only makes sense. After all, if the subsidy is in excess of wireless carrier costs, then the Commission is not only failing to implement the law, but is (effectively) subsidizing wireless carrier profits rather than merely reimbursing service costs. The distorted incentives that excessive subsidies create also contribute to an even greater need for the enforcement resources the Commission is currently seeking.
Wireless Reimbursement Costs Should Be Lower than Current (Wireline) Subsidies
In this post from several months ago, I explained--with numbers--how the wireless lifeline business is able to make money off "free" service. The 2012 Lifeline Reform Order retained, but simplified, pre-existing average "per customer" reimbursement rates of $9.25--which were originally established to offset costs to serve wireline customers.
As I explained in more detail in the earlier post, the average wireless Lifeline customer will have a direct wholesale cost of $4.875/month to serve. In return, the carrier receives $9.25 from the USAC. If we estimate indirect costs at around $2.00/line (say $1.875/line), we can see that it is not out of the question for a fairly typical wireless Lifeline provider to earn around $2.50 per line served per month ($9.25-$6.75).
How Much Could the FCC Save Consumers by Fixing Wireless Cost Subsidies?
Last year there were about 14 million non-Tribal Lifeline subscribers. See LI08 appendix. About 80% of Lifeline consumers use prepaid wireless service, which amounts to about 11.2 million wireless Lifeline subscribers. If the FCC should be reimbursing these subscribers' carriers $6.75/month instead of $9.25/month, then the USF and its contributors would save $22.4 million/month--or $268 million/year.
In other words, if the FCC simply finished the part of the Lifeline Reform Order that the FCC should have addressed first, the Commission could annually save consumers about 70% of the projected costs to run the entire agency. It goes without saying that the Chairman's next budget briefing would be an easier "ask" if he could assure lawmakers that the Commission is putting most of that number right back into consumers' pockets--while still supporting the vitally important benefits provided by the Lifeline program.
On Sunday, the Wall Street Journalreported that Apple was in talks with Comcast to provide a new type of streaming TV service. The report was vague on the specific service except to note that: 1) the parties were "talking," 2) an Apple device-to-be-named-later was going to be used, 3) the service would involve a "managed" (or guaranteed bit-rate) transmission path over Comcast's ISP, and 4) would require a significant investment by Comcast.
Predictably, the Twittosphere erupted with the swift condemnations due any speculative service that whiffs of net neutrality blasphemy. If the speculation involves Comcast, then it wreaks of blasphemy.
The Meandering Meaning of Net Neutrality
But, what is the "dogma" of net neutrality? Is it the FCC's 2005 Internet "Freedoms?" Is it the Open Internet Rules that were vacated--no blocking and no unreasonable discrimination? Public Knowledge just told the FCC that the two biggest "threats" to the Open Internet are ISP data caps and "peering"/interconnection disputes. PK at pp. 6-10.
If net neutrality can be said to have any consistent premise, it is best depicted metaphorically in this 14 second, Geico commercial.
The ISPs are like "Mr. Tickles." The whole rest of the Internet stakeholders are represented as the man in the portrait holding Mr. Tickles.
Yet, firms like Cisco, who on Monday announced a 2 year and $1 billion commitment to cloud services, as well as competitive over the top companies like Amazon, Hulu, and yes, Apple TV, continue to want to invest in cloud services. In other words the leading Internet infrastructure equipment maker fully expects that--even without rules--the ISP (Mr. Tickles) will continue to "hold still" and not "git all cattywampus" on them.
The Flimsy Factual Bases for "Concerns" About the Open Internet
First, let's acknowledge one point on which everyone should be able to agree. The "open Internet" is valuable to every consumer, and every seller, that touches the Internet economy. In fact, the rise of the Internet economy seems to be proof that the "open Internet" is so important that virtually every aspect of that "openness" is already guaranteed by existing contracts between the thousands and thousands of Internet stakeholders.
But, those that think rules must be necessary to ensure the continued openness of the Internet must have some reasons, right? Well, if we look closely, the concerns that have been advanced in past FCC proceedings have been largely based on theoretical predictions that haven't really materialized.
The first FCC concerns about "peering" (i.e., settlement-free Internet interconnection) vs. "transit" (i.e., "paid" interconnection) were expressed by Internet backbone competitor GTE in the MCI/WorldCom merger. See paras. 147-150. The FCC adopted GTE's concern, which was that the combination of WorldCom's UUNet and MCI's backbone would have had no "peers." Thus, because a combined WorldCom/MCI would have been able to require "paid peering" by any other ISP or backbone seeking to use its network, the post-merger firm could raise the costs of any new entrant.
This disaster was averted when MCI agreed to divest its Internet backbone to Cable and Wireless. In fact, the divestiture to C&W was considered a huge failure, and MCI's alleged bad faith failure to satisfy the concerns of the Department of Justice was a primary concern behind the DoJ's challenge to WorldCom's proposed acquisition of Sprint 2 years later. In short, the remedy didn't work, but was apparently unwarranted, anyway.
"Net Neutrality, Broadband Discrimination"
In 2003, Professor Tim Wu argued, in the above-titled paper, that "[c]ommunications regulators over the next decade will spend increasing time on conflicts between the private interests of broadband providers and the public's interest in a competitive innovation environment centered on the Internet." With the exception of Comcast's protocol-specific BitTorrent throttling in 2007, these concerns have largely failed to materialize. Notably, Prof. Wu never mentions the FCC's previous (and PK's current) concerns about peering as a cause for concern.
Broadband ISP "Incentives" to Discriminate, Circa 2010
In the Open Internet Order, the FCC largely parrots Prof. Wu's concerns that broadband ISPs have the incentive and the ability to discriminate against "over the top" providers offering services that compete with the voice and/or subscription video services sold by the ISPs. The FCC first establishes, using the ISPs' own statements, that consumers view certain online applications as substitutes for voice and subscription TV service. Order, para 22.
Then, the FCC simply assumes from comments of groups advocating rules (and not ISPs or voice/video competitors) that, of course the ISP has incentives to discriminate against online alternatives. Yet, the record contained no data supporting the FCC's conclusion (showing, e.g., higher profits in TV/voice than broadband Internet). Order, paras 23-24.
Public Knowledge expressed no concerns about data caps and peering in the 2010 docket.
The Problem with Apple TV . . .
Supposedly, Apple wants Comcast to help it deliver some kind of super-cool IPTV that will actually make you want to buy video service from Comcast (vs. get it on the Internet). As part of this service, Apple wants Comcast to offer Apple TV a guaranteed quality of Internet access, so that its video content would not be affected by general congestion issues that can otherwise cause videos to buffer. And that higher quality access, even if not exclusive to Apple, is a problem . . .
Is The Problem With "Net Neutrality"
My fear is that "net neutrality" is no longer about just a reasonable set of minimal consumer expectations designed to keep the Internet creepy enough to hold the Interest of consumers and the NSA, while at the same time keeping it wholesome enough to prevent SkyNet from becoming self-aware by 1997 (or whatever similarly-fevered nightmares the rules protect us from).
Without a presumptive tolerance for commercially-reasonable service deviations, net neutrality becomes a fetish devoid of any utility. If we can't limit proscribed conduct to only practices or agreements that unreasonably restrict Internet "output," then how do we know whether rules are serving consumers or requiring everyoneto serve a concept that may have limited benefits?
Yesterday, Neflix CEO Reed Hastings published this blog post, arguing that "strong" net neutrality rules would not require Netflix to pay for the costs to augment its inbound ports to Comcast's ISP gateway (it did last month). I have no problem with Netflix buying something from Comcast, and then complaining about having to pay for it. It kind of makes Mr. Hastings seem like every other Comcast customer, no?
But (to paraphrase "the Nature Boy" Ric Flair): you may not like it, but you better learn to love it, because it's the best thing going, brother. What I mean is this. We're all appreciative of Netflix's success, but we would like more companies like Netflix. This means that it's possible to imagine a day when people don't buy subscription TV service from their ISP at all.
Yesterday, I talked about the difficulties that the present system that prevents broadband-only customers from getting access on any terms to in-market streamed games (if those games are available only through an RSN). When these problems are resolved, consumers will presumably be able to buy content from a number of sources online, in addition to the HD channels you can get over the air (which covers most local NFL, a good amount of college basketball/football, and some baseball).
In a future where the Internet is the primary video delivery media, but programming is purchased by consumers from multiple vendors, it is unrealistic for video providers--who will be getting paid by consumers to deliver the service being sold--it is unfair and unrealistic to expect that all of the ISP's users should pay for each upgrade of inbound capacity required by a limited number of subscribers.
For example, at the end of last year, Netflix probably had about 33.5 million users (based on this article). The total number of broadband customers at the end of last year was around 84.3 million, based on this recent report from Leichtman Research. So, at present, Netflix would have 100% of ISP customers pay for a service that only 40% are signed up for, and an even smaller percentage use Netflix service intensively enough to require the inbound capacity upgrades.
On its face, Netflix's request doesn't seem huge when it and YouTube may be the only really large video content providers. However, even if only Netflix switches IP transit vendors or CDNs, every so often, the ISP will have to make the investment again because not all backbones handle Netflix traffic.
Moreover, in a world where the traditional "cable" company is selling a much smaller amount of programming than today--and the average consumer may be buying Netflix-style, over the top video from 4-5 independent providers--it seems more unfair for the ISP to be required to charge all of its customers for service only some will use.
The only reason Hastings' argument has a scintilla of appeal to consumer groups is because consumers pay so much for cable today. If/when everyone will get video from their own over-the-Net service, then Netflix will better understand that if you're the one taking the people's money, then you pay for any incremental additional costs to deliver your product--and it's your responsibility to make sure traffic hits the ISP's network at a high enough speed to be useful to your customer.
The bottom line is that consumers want more "Netflix's" and less subscription TV, and the fairest way to apportion inbound capacity costs is to bill the incremental cost causer--which is the party collecting the revenues from the customers that are using the service which requires in-bound capacity upgrades. To do otherwise, is to simply re-adopt the unfair cable price structure of the existing pay TV market (everyone pays for the people that use the most high cost--a/k/a "sports" programming).
When you're the only widely used alternative to Comcast, you get a lot of sympathy--as Netflix does, and often deserves. But, business arguments disguised as "public policy" arguments don't work unless they work for all users. In the past, Netflix has also shown an indifference to costs that its heavy users impose on general, lighter use Internet customers. But these arguments are near term winners for Netflix that don't get all members of the public into a better place; understandable, but not persuasive, arguments that the government should reject.
The first day of March Madness is one of the greatest TV watching days in America, made even better by our special devotion to drinking and gambling. Monday's article on Recode reminds us, though, that broadband-only consumers will be forced to spend this great national holiday watching TV in a bar.
The value consumers place on sports content is as obvious as the rising prices of subscription TV. But, sports content, and its regulation (or lack thereof) can also provide some insights into the FCC's priorities, and the relative value that the FCC places on the sports consumer (vs. the sports programming distributors). It is also interesting to compare how the FCC views sports content distribution practices with how a court might view the same practices under the antitrust laws.
The FCC On Sports Blackouts
A good way to see just how the FCC views sports content consumers, relative to broadcasters and pay TV providers is to look at the FCC's NPRM to eliminate its sports blackout rules. The proceeding began in November of 2011, when a group called the Sports Fan Coalition (Public Knowledge, Media Access Project, and some sports fan sounding groups) filed a petition to eliminate the rules.
The petitioners were absolutely right and reasonable. The FCC should have simply said, "we agree--and we're actually a little embarrassed that the rule was adopted at all, much less still on the books."
In reality, it took the FCC two more years to unanimously approve . . . a Notice of Proposed Rulemaking to ask questions about the effects of "repealing" the sports blackout rules (that it had no clear authority to adopt in the first place). To reassure industry that the FCC hadn't found religion, Acting Chairwoman Clyburn was careful to explain that, "[e]limination of our sports blackout rules will not prevent the sports leagues, broadcasters, and cable and satellite providers from privately negotiating agreements to black out certain sports events."
Because, you know, what could go wrong with private blackout agreements between leagues, RSNs, and their MPVDs? It's not like the agreements could be more anticompetitive than the rules themselves, right?
A Year Earlier, In a Court of Law . . .
In December 2012, a federal district court in New York issued an opinion refusing to dismiss antitrust complaints filed by TV and Internet consumers against Major League Baseball, the National Hockey League, Comcast, DirecTV, and other affiliated RSNs. (Yes, the defendants are the same parties the FCC "will not prevent" from entering into private blackout agreements.) The Southern District of New York ruled that the complaints presented a "plausible" claim that blackout agreements between the baseball and hockey leagues, and Comcast, DirecTV, and their RSNs were being used to eliminate Internet competition, require customers to purchase from MVPDs, and generally increase prices to consumers.
Here are some excerpts from the court's opinion describing how real consumers view the types of agreements the FCC "will not prevent" (internal quotes refer to the plaintiffs' complaints):
Plaintiffs challenge "defendants' . . . agreements to eliminate competition in the distribution of [baseball and hockey] games over the Internet and television [by] divid[ing] the live-game video presentation market into exclusive territories, which are protected by anticompetitive blackouts" and by "collud[ing] to sell the 'out-of-market' packages only through the League [which] exploit[s] [its] illegal monopoly by charging supra-competitive prices." Opinion, at 2. Emphasis added.
The Complaints allege that the "regional blackout agreements," made "for the purpose of protecting the local television telecasters," are "[a]t the core of Defendants' restraint of competition." "But for these agreements," plaintiffs allege, "MVPDs would facilitate 'foreign' RSN entry and other forms of competition." Plaintiffs argue that the "MVPDs also directly benefit from the blackout of Internet streams of local games, which requires that fans obtain this programming exclusively from the MVPDs." Id. at 8.
Back at the Commission . . .
Public comments on the FCC's sports blackout NPRM were a filed a few weeks ago. Major League Baseball does not typically blackout telecasts in response to gate sales. But, realizing that its own private blackout agreements may soon be illegal, the MLB, predictably, argues the FCC rules are still needed--as an anticompetitive backstop to the anticompetitive agreements the FCC "will not prevent." Of course, the MLB doesn't tell the FCC why it might not have as much access to private blackout agreements in the future.
In its comments, the Sports Fan Coalition devoted a several pages of its comments to explaining (as then Acting Chairwman Clyburn noted) that, even without the FCC's rules, anticompetitive private blackout agreements will still be available to the leagues, the RSNs, and the big cable and satellite companies. But, the SFC is simply responding to the FCC's primary concern in the NPRM.
FCC Priorities: TV, TV, and TV
The contrast between the federal district court's skepticism and the FCC's comfort with private blackout agreements could not be clearer. It is notable, but not terribly surprising, that there is no reference to the two year old consumer antitrust cases anywhere in the sports blackout docket; not in the original petition, the FCC's NPRM, or in any party's comments. It's almost as if the FCC and sports consumers are in different worlds.
If you just read the FCC's press releases, and the speeches from the Chairman and other Commissioners (and their tweets), you might think broadband Internet was a huge priority. Yet, it's difficult to reconcile the FCC's statements with the fact that the Commission tolerates agreements by regulated TV distributors (broadcast, cable and satellite) that require sports leagues/teams to refuse to deal with broadband-only consumers on any terms for "in market" games.
The Chairman says that he will target legal restrictions on the ability of cities and towns to offer broadband service. I'd be more impressed if he targeted restrictions in sports content distribution agreements that intentionally reduce the value of the broadband Internet to all consumers.
Last week began with news that Netflix had decided to improve its long-languishing service for customers of Comcast's ISP by directly interconnecting with Comcast, cutting out Internet transit provider Cogent Communications. The Cogent-Comcast "peering" dispute had been a long-standing topic of media speculation.
Prior to the announcement of the direct interconnection agreement, many media sources had wished to present this dispute as just another iteration of ISPs attempting to "extort" money from sources of competing content. Netflix's decision to solve the problem itself had pretty much eliminated the "poor Cogent" articles by the end of the week--after Dan Rayburn's detailed explanation of the deal.
Knowing what we have learned in the past week, it would seem that Netflix's "ISP Speed Index" is more likely a fairer representation of the performance of Netflix's CDN versus that of its third party transit providers. The Netflix ISP Speed Index is obviously not attempting to measure "true" ISP speeds, because even gigabit provider Google Fiber hovered around 3.5 Mbps for most of last year.
The ISPs to which Netflix connects with its own CDN generally see speeds in the 2.3 Mbps-2.9 Mbps range. For the customers of ISPs served by a third party transit provider, speeds are often much lower. But how bad is too bad?
The "Mendoza Line" for Poor Streaming Transit Performance
Within the past day, Verizon's CEO has said that their FiOS ISP is close to a direct interconnection agreement with Netflix. Recall, that Cogent also had issues with refusing to augment inbound capacity to Verizon.
In fairness to Cogent, it does not claim to offer CDN service. Still, you have to wonder, where is Netflix likely to switch away from "plain old transit" service next?
Luckily, Netflix kind of tells us (and its transit/CDN vendors) the levels of service deterioration at which they can expect the "Never mind, I'll do it my damn self" call from Reid Hastings. Here is the performance of several ISPs who offer broadband access at speeds well above 5 Mbps for the last 4 months, as reported by Netflix's ISP Speed Index.
I looked at the Netflix ISP Speed Index for the last 12 months, and, traffic delivery at anywhere between 2-3 Mbps seems to be acceptable. If you're reading about customer service complaints, it's safe to assume that speeds have dropped below 2 Mbps for the ISP in question.
For both Comcast and Verizon customers, Netflix's transit/CDN vendor(s) performed well for most of the year--only deteriorating significantly over the last several months. Like in baseball, though, there is a Mendoza Line for competent transit service, and it seems to be around 2 Mbps. So . . . if you're a Mediacom customer, you probably don't have much longer to wait.
Netflix's traffic is certainly growing very quickly. But, asymmetric, end-user-destined video traffic is growing very quickly for all ISPs, everywhere. Sandvine's second half 2013 traffic report shows that for the largest Internet consumers (North America and Asia) peak hour video consumption may be as high as 70% for the average North American user, and 75% for the average Asian consumer (I got that by adding the "real time entertainment" and "P2P" categories for both continents). You'd think this would be a good thing for a content delivery network, no?
Is "Peering" Net Neutrality Redux?
Level 3 explains in this recent ex parte, that all is not rosy in the world of the CDN--despite Level 3's own recognized success in the market--because of the nettlesome costs that some ISPs believe should be paid by the party getting paid to carry the traffic to the ISP (namely, Level 3). BTW, this is completely the same issue as the Netflix carrier-v.-every-ISP-in-the-graph issue.
But, Level 3 characterizes what some would call the costs of providing CDN service, as "tolls" that unfairly target large CDNs distributing disproportionately-downstream, bandwidth-intensive traffic. Level 3 tells the FCC, "ISP tolls that facially apply equally to all traffic are effectively tolls on the most bandwidth-intensive services - video services that compete with the ISP's own video services." (ex parte at 8/8).
What types of Level 3 traffic are ISPs targeting? Well, sometimes it looks like this:
You see, HBO Go is an online service that HBO (not the subscription TV provider) offers its customers that already buy HBO's premium subscription TV channel. Since HBO, like almost every any other provider of streaming video service, lacks the demand to justify the hassle/cost of direct interconnection with the ISP, it uses the highly-competitive CDN market to deliver its service.
Level 3 is one of HBO Go's CDN partners, for certain Apple devices. As Level 3 notes, the end-user is often buying a TV service from their ISP. But, poor quality delivery from the TV channel's online content devalues the TV product the ISP is selling. Thus, it isn't clear why the ISP has an incentive to degrade Level 3's traffic, when the ISP knows that some significant portion of Level 3's traffic is a complement to the ISP's subscription TV service.
The CDN business is focused on how to efficiently deliver asymmetric, bandwidth-intensive traffic to the customers of the ISP. If the ISP had to pay for/build incoming capacity from every CDN to the ISP, then it's good for the CDN, but the ISP can only limit its costs if they CDN traffic stays put.
So, why would Level 3 want the FCC to impose regulations that give an ISP any kind of interest in which CDN provider a content owner would choose? Maybe, because sometimes those CDN customers decide to build their own CDN, as soon-to-be-former Level 3 customer Apple is reportedly doing. New CDNs equal new competition for small content owners, and that's not always a great thing . . . for CDN incumbents. Now I get it.