TeleComSense

The FCC's "Mulletary" Enforcement of Video Competition

2010-07-14T19:48:53Z

When I say "mulletary", I mean like "military", but in the way of the "mullet", as in the haircut, as in "BIFPIB": business in front, party in back. That's right, the mullet. Like Billy Ray Cyrus, "Joe Dirt", and every '80's metal band. But, why in the world would I compare video competition policy enforcement to the mullet? I'll say it again. Two words: "BIF" "PIB"--business in front, party in back. Why? Because when confronted with the stubborn lack of video competition, to the detriment of consumers, the Commission has steadfastly talked tough in public (on the front end), but refused to break up the party out back with the owners and distributors of cable programming. The result?

Just look at the chart in the last FCC Video Competition Report to Congress, where the Commission reported that subscription video, and programming are the only major services for which prices have steadily increased since the Telecom Act was adopted in 1996. What's more, the last Video Competition Report was produced in the last administration. So, is there a "party in back"? When prices are climbing in a down economy, both in nominal terms, and relative to the CPI, you bet there's a "party in back"!

Nonetheless, the tough-talking, "business in front" continues unabated. Like the mullet militia, the Commission will almost certainly not want to be reminded of their "style" when this administration goes out of style . . . as they all must . . . whether in four, or eight, years. Let's look at some examples of the "mulletary" enforcement of "video competition policies."

"Business in Front"

Exclusionary Programming Practices. On January 20, 2010, the Commission adopted rules to prevent incumbent cable operators, and owners of "must have" programming (like real time sports programming), from using the so-called "terrestrial loophole" to exclude certain competitors from access to this essential programming. This programming is considered essential because customers will not buy subscription television that does not give them access to local sports programming. The "terrestrial loophole" was originally designed to prevent owners of closed circuit TV systems (like the live feed you might see on the "Jumbotron" at FedEx, or the Verizon Center) from being required to broadcast the entire feed (including proprietary "programming", like birthday announcements, marriage proposals, product promotion contests, etc.) to all providers of subscription television service. The FCC has found that just because the sports program (i.e., the game) is transmitted for distribution over a wire, it does not give the owner/licensee of the sports programming the right to exclude rivals from access to this essential content.

In fact, despite the "loophole", which (according to interpretations rejected by the Commission) would allow the owner of the sports event to foreclose access to anyone that didn't own access, cable distributors that owned programming did choose to make transmission of these sports events (both conventional and high-definition feeds) available to non-competing, adjacent incumbent cable operators, but not to competitive video providers, either "in-region" or in adjacent regions. The rules became substantially effective at the beginning of April and fully, technically effective, on June 21, 2010.

The FCC laid down the law . . . it could be said. Yet Verizon, and AT&T, have had formal complaints pending with the Commission for over a year (since July and August of 2009) regarding their inability to get access to the high-definition feeds of local New York sports programming owned by Cablevision--even in areas where neither company competed against Cablevision. See, Order, �17.

Programming/Distribution Concentration. Let's move on to the still-pending Comcast/NBC/GE merger, where the largest owner and distributor of subscription TV programming filed a request with the FCC on January 28, 2010 for approval to acquire one of the largest network programmers. Interesting stuff, really, because Business Week already declared the death of "free TV", even before the FCC got into the "business in front" part of the "mullet-ary" style review. Others also expressed concern that the proposed merger would threaten "free TV."

As a public statement, but not a binding rule, the FCC tries to hold itself to a 180 day "time clock" for reviewing mergers. Technically, this would require the Commission to approve or reject the Comcast/NBC/GE merger in a couple of weeks. Accordingly, the FCC hired an attorney to lead the investigation in late May. Final comments on the merger are due in early August.

Moreover, on July 13, 2010, the FCC held a public hearing at Northwestern University regarding the consequences of the merger, chaired by Commissioner Copps. Commissioner Copps released a public statement, concurrent with the public hearing, discussing the potentially dire consequences of the proposed merger--not only for traditional subscription television consumers, but also for the "new media" markets. In Commissioner Copps' public statement on the hearings, he concludes, "[a]s for me, I have said before that approval of this proposed transaction would be a very steep climb." [emphasis added] Now that's some serious business. . . which brings us to . . . .

"Party in Back"

Exclusionary Programming Practices. Well . . . there is that matter of the FCC never enforcing an act of exclusion by a vertically integrated owner of cable programming and distribution--despite rules and practices to the contrary. As I said a year ago, practices such as these--refusals to deal with some firms on terms that have been voluntarily offered to other, similarly-situated, firms--have been condemned as anticompetitive by the Supreme Court.

They're Competing Like Heck Out There! As part of its "business in front" approach to video competition policy, the Commission announced the previously-mentioned "public forum" to review the merger. Coincidently, though, on the same date (June 3, 2010), Communications Daily reported, "[t]he FCC is partway through trimming a backlog of requests from cable operators to be freed of local rate and equipment regulation, said commission and industry officials. The Media Bureau in recent months has stepped up approvals of petitions seeking findings of effective video competition . . . ." [emphasis added]. The story went on to note that the FCC is making "effective competition" determinations for video markets at a rate greater than once a day--as many as 30 times in May alone?! Wow! Is the subscription TV market "effectively competitive?"

I don't know, but maybe the answer depends on the circumstances. Do over 90% of cable consumers have a choice of at least one "same media" subscription video provider (as is the case in the wireless industry)? Doubtful--but such a finding should be vital to the approval of a certain pending merger. Why? Because the Commission previously found that only wireline-delivered multichannel video had a price-constraining effect on the behavior of the incumbent cable provider. Video Competition Order, �3.

Does the FCC have to exclude wireless-to-wireline competition? It would seem so, because the Commission made a similar finding only a few weeks ago. In the recent Qwest Phoenix Forbearance Order, the FCC reached the same conclusions about wireless voice as they did about wireless video when they declined to include wireless voice--even for customers that only used wireless voice--as a competitive market participant. Qwest Phoenix Order, �55, n.164.

Even if not everyone agreed with the Commission on the ineffectiveness of cross-media wireless competition, the outcome would be unlikely to change in the video market. In an article entitled "Wall Street Loves Cable. . . Still", Multichannel News recently reported one analyst's observation:

'The operating environment in cable is better,' [UBS cable analyst] [John] Hodulik said, adding that the competitive threat may have reached a crest with Verizon Communications announcing last month that it would no longer build out new FiOS markets and DirecTV being less aggressive in new subscriber additions.

Programming/Distribution Concentration. So, how will the FCC tackle a big media merger, unpopular with consumers? Will the "business in front" be followed by a "party in back"? Some would say the party never ended for this industry. Regardless, this year's Video Competition Report should be as interesting an exercise in intellectual contortions as its conclusions are predictable . . . and, no doubt, the same team will write the order approving the Comcast/NBCU/GE merger.

Still, in a transparent and data-driven world, the FCC--should they decide to approve this merger--should adopt a riff on the old English Solicitor custom . . . and wear formal wigs at the Open Meeting . . . like these. Plus, if I had my druthers, every separate statement endorsing any conclusion of vigorous competition in the subscription TV market would have to conclude with this graphic prominently displayed.

Regulate. Rinse. Repeat. Three Steps to the Third Way

2010-06-29T21:34:10Z

"I can't believe that!" said Alice.
"Can't you?" the Queen said in a pitying tone. "Try again: draw a long breath, and shut your eyes."
Alice laughed. "There's no use trying," she said: "one can't believe impossible things."
"I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast." --Lewis Carroll, Through the Looking Glass, Chapter 5

The quote is apropos of almost nothing. I just saw it recently, and I liked it. I suppose if you substituted "contradictory" for "impossible" you might get some meaning out of it by the end of this post.

The title should probably say: regulate, forbear, repeat. But, here's what's got me thinking in circles. Less than two weeks ago, under the color of protecting consumers and broadband deployment in an Internet age, the FCC released an NOI (Notice of Inquiry) proposing to classify some part of broadband Internet service as a "telecommunications service." OK, so far, so good . . . I mean, I understand. If you're the FCC, and you classify some type of broadband Internet service as a Title II service, then you have broad powers to regulate the service (however it is defined) and ensure that consumers are protected through wholesale and retail rate regulation, regulation of terms of sale, etc.

But, here's the hitch: the FCC is talking about applying only a fraction of Title II regulations to broadband Internet related service . . . and then applying a type of "blanket" forbearance under Section 10 of the Act. Forbearance means that enforcement of a particular rule or regulation is not necessary to protect consumers, because the market is competitive enough to protect consumers without regulation with respect to that particular rule or regulation. This is where it starts to get a little weird.

You see, this whole "telecommunications service" classification idea is a response to the Comcast decision, in which the D.C. Circuit said that the FCC lacked authority under Title I to impose "net neutrality" principles/rules on providers of broadband Internet access service. So, a classification of some part of broadband Internet service as a "telecommunications service" would allow the FCC to impose its own consumer protection rules--in the form of "net neutrality" rules--on providers of broadband Internet access service.

To make things more clear, here's what's going on: the FCC thinks consumers and competition for broadband Internet connectivity services need protection. Only, the thing is that the FCC doesn't think the regulations that Congress established for the protection of consumers of "telecommunications services" are quite right--maybe a little too much consumer protection, or not quite the right mix of "heavy-handed" and "light touch" regulation? Or maybe the FCC just likes their proposed regulations for "telecommunications services" better than the regulations written by Congress. Weirder, still.

Only, here's where we go from weird to weirder to weirdest. Last week--only four days after the Commission came out with the NOI on Title II, replete with suggestions for blanket forbearance, the FCC comes out with its Order on Qwest's Petition for Forbearance from certain wholesale requirements imposed under Title II for the Phoenix MSA. The Qwest Phoenix Order was released four days after the NOI was released, but it was adopted two days before the NOI was adopted and released. So why is this so weird?

Well, the Qwest Phoenix Order adopts a very thorough analytical framework that must be satisfied before the Commission grants forbearance from certain requirements imposed on providers of telecommunications services. The Commission's analysis is "market power" based--meaning the FCC must assure itself that the market for the service for which forbearance is being considered must be a competitive market. A significant factor in the Commission's market power analysis is the concentration level of the market being analyzed. Said differently, the Commission will take a careful look at product and geographic markets, how many firms are in the market, and the relative market share, of the firms in the market for which forbearance is sought.

Stay with me now . . . we're almost there. So, in the Qwest Phoenix Order, even though cable providers are large and growing providers of mass market telephone service, even though many customers use over-the-top VoIP service, and even though as many as 25% of all households use only wireless service (Qwest Phoenix Order, � 55, n.164), Qwest was unable to demonstrate the requisite level of competition and lack of concentration to justify forbearance from certain requirements of Title II for the mass market for retail telecommunications services. Given the fact that broadband Internet access services are almost always (approximately 91% of the time, according to the Qwest Phoenix Order, �53, n.159) bundled with, at a minimum, telephone service, it seems hard to reconcile the "blanket forbearance" suggested in the NOI with the analytically rigorous "market power based" analytical framework introduced in the Qwest Phoenix Order.

I'm not being critical of the Commission's methodology in Qwest Phoenix, but it does sort of strain credibility to pretend that the FCC can turn its new framework on and off--classifying broadband Internet connectivity as a type of telecommunications service, but then "looking the other way" on every exercise of forbearance from most of the requirements of Title II . . . especially not for incumbent LECs . . . and certainly not for Qwest . . . in Phoenix. Will a court buy the Jekyll/Hyde forbearance analysis necessary to implement the Third Way? Does the Third Way really bring regulatory certainty?

In a way, the reasoning is so circular that it reminds me of that old anti-drug PSA where a guy is trapped in a small stark room, which he paces around, faster and faster. He says that using cocaine helps him work hard . . . to make more money . . . to buy more cocaine, and he keeps pacing around the room, and repeating that phrase faster and faster, and, well . . . you get the point. In this case, it seems like the Commission is justifying classifying more services as being subject to more extensive regulatory classifications in order to protect consumers, so they can apply "lighter touch" regulations in order to protect more consumers, but, not to worry the Commission will subject more regulations to forbearance so they can promote more investment for the benefit of consumers, but, not to worry, the Commission will adopt more thorough forbearance standards so more regulations will remain available to protect more consumers. . . .

Straight Outta Comstock

2010-06-16T18:43:39Z

Last week, one of my former bosses from COMPTEL--Earl Comstock (on behalf of his client, Data Foundry) --had a discussion with the FCC, including FCC General Counsel Austin Schlick, regarding the FCC's proposed "Third Way" approach to reclassifying broadband Internet transmission service as a "telecommunications service" under Title II of the Communications Act. Here is a link to the ex parte materials Data Foundry filed with the Commission. So, aside from the irony associated with two of the major protagonists in the Brand X decision (Austin Schlick from the FCC, and Earl Comstock for Brand X and Earthlink), almost 5 years from the date of the decision (June 27, 2005), now taking somewhat different positions than they took at the time, what's so interesting?

Well, first, if you know Earl at all, then you know better than to get into a discussion with him about Internet access classification, and you know that he has historically been one of the biggest champions of (his version of) net neutrality in the industry. Seriously, Earl is the "Count of Classification"--he owns that subject. Whether you agree with his policy conclusions (I don't, but will explain in a later post), you have to respect Earl's encyclopedic knowledge of the history and meticulous explanations of the current state of broadband Internet classification. This is no joke. If FCC General Counsel Austin Schlick had been offered a free trip to Cabo, on the condition that he only had to sit through a "presentation" on broadband Internet classification with Earl, Computer II would be the "Only Way"!

But this interesting personality piece aside, the Comstock/Data Foundry ex parte is so relevant because it is analytically correct. What does this mean? Quite simply, it means that one of the leading advocates of net neutrality, and Title II classification for broadband Internet access transmission services, believes the "Third Way," as described by the Commission thus far, is no way at all. Why?

While most ex parte meetings are deadly boring, I would love to have been a fly on the wall for this one. Reading between the lines of what was filed, I'm guessing that Earl made clear, in his inimitable way, exactly what he thinks about what the Commission seems to be up to. In a nutshell, Earl probably told them that they're screwing things up. In Earl's view, the Commission can put broadband under Title II in one of two ways - a "wholesale path," or an "end user path." And the end user path, that the Commission appears to have set its sights on based on Justice Scalia's dissent in Brand X, is the wrong way. Earl correctly identifies the fatal weaknesses in the end user path (whether his analysis of the virtues of the wholesale path is valid is another matter). Those weaknesses are: (1) the Commission would likely have to conclude that all the layers of the OSI stack constitute "telecommunications": (2) that absent such a conclusion ISPs would be able to escape the classification simply by acting at the higher layers of the stack; and (3) that the end user path risks the extension of common carrier regulation to all providers of information services.

This last point probably deserves a little more explication. For the last forty years, the Commission has classified services that combine transmission with information processing as "enhanced" or "information services" subject to Title I. Earl's point is that if the Commission were to find here that such services in fact may constitute the offering of two services - an information service and a telecommunications service, this approach would potentially implicate all information services, which by definition are offered via telecommunications. Indeed if the Commission were to break Internet access up in this way via the end user path, all content providers that purchase Internet access in order to distribute digital goods (eBooks, music, movies, etc.) could be treated as "resellers" of the common carrier service that they purchase.

To further elaborate, let's consider a hypothetical. Assume there is some source of cheap or free video content (maybe those now-goofy public safety/hygiene films from the '40s, '50s, and '60s). You acquire a non-exclusive license to use these films, and create your own cool, funny, retro website. You get a lot of hits, and want to ensure a good quality experience to your customer, but you aren't quite ready or willing to build/buy your own content delivery network. But, why worry? Because, under the interpretation that every information service contains a separable telecommunications service, any member of the public will be free to use the content delivery network (nothing more than transmission by another name) of a Netflix, Google Voice, eBay, or any other provider of Internet content--on just and reasonable terms.

Thus, to summarize, given all the things the FCC says it won't do in its "Third Way" reclassification, the only "telecommunications services" that can be delivered with a "light touch" are those services--which can be combined with computer processing--that the broadband ISPs feel like offering to the public. This seems like simply replacing the prior "Title I" services with a "Title II" label. Will a court really buy this "no regulation, re-regulation?"

So on the one hand, the label "telecommunications service" could be nothing more than just that--a different classification without a distinction from the previous classification. On the other hand, if the Commission really wants to assert that each broadband Internet service has both an "information service" component, and a "telecommunications service" transmission component, then this classification will--if applied evenly--potentially be a Pandora's box, and every Internet service that relies on Internet access will, to some degree, be subject to common carrier regulation.

In some respects, the Third Way might not be all bad. Excessively regulatory? To be sure. Confiscatory? Maybe . . . sometimes . . . but probably only for the politically weak or unpopular. On the plus side, though, the USF contribution factor would drop to next to nothing. Intercarrier termination rates would almost have to be set at zero across the board. And, such an outcome might provide a little more certainty in the "real world" of telecommunications commerce.

In the General Counsel's detailed justification of the "Third Way" as a necessary departure from the Commission's current Title I classification of broadband Internet access services, Mr. Schlick explains that, even if the FCC were successful at defending Title I ancillary jurisdiction, it would involve piecemeal regulation, protracted litigation, and "[t]he extended uncertainty would deprive investors, innovators, and consumers of needed clarity about the rules of the road." (p.3) Huh?

Did the FCC find religion? The logic of the "why" makes sense, but why should the FCC start now? Given the Commission's persistent "non-classification" of VoIP, it's hard to get used to the idea that, all of a sudden, the Commission considers extended uncertainty over the regulatory treatment of an Internet service to be a bad thing. I'm not criticizing the sentiment, or the effort, it's just that it might be a little misplaced. In fact, I'd be willing to bet that the Commission's unblemished, 14 year record of not even attempting to classify VoIP, while constantly saddling VoIP with new piecemeal regulations (E911, USF contribution obligations, CALEA, etc.), has given rise to countless more litigation and uncertainty than could be expected from any Title I classification scheme designed to support net neutrality rules that have ended up in court . . . uh . . . at least once in 5 years.

Wireless Competition Report: The "Ugly"

2010-05-28T08:30:06Z

Before I talk about some else's "ugly"--I'll 'fess up and say that last post was dry as dirt. You know what's worse? "The Ugly" isn't going to be any less ugly!

So, let's just move through it. The "ugly" part of the Wireless Competition Report is the adjacent market analyses--the "downstream" and "upstream" markets information. While some of this data--meticulously compiled as it was--is . . . well . . . interesting, but its relevance to the state of competition in the mobile wireless services market is questionable.

Simply put, the adjacent market analyses were superfluous, almost by definition. Why? Because, strictly speaking, the statutory language that mandates the preparation of the Report requires the FCC to report on the state of the mobile services market and the service providers that comprise that market--period. This means that the market for which Congress seeks information on is the market to be isolated. Congress did not require the Commission to Report on "downstream" markets, or any other ancillary markets.

"Downstream" Markets

Strictly speaking, the "downstream" markets for devices, operating systems, and mobile applications seem almost too integrated with wireless service to be considered "downstream" in the production/distribution chain. This is because it is not possible to receive any wireless mobile service without some sort of device. Semantics aside, though, the Commission's data seems consistent with healthy competition in the wireless market--that is to say that output of handsets is increasing by number of manufacturers (which have doubled from 8 to 16 in the past 3 years), Report, �300, and the prices of handsets and smart phones have decreased dramatically in the past 3 years, Report �310.

But, the chicken-egg problem still exists, with respect to being able to make any inferences regarding the state of mobile wireless service competition based on the "downstream" market data. The largest carriers offer consumers the greatest choice of handset and smart phone models. Report, �308, Chart 43. However, one cannot say what this information means vis-�-vis the competition for mobile wireless services. Do the largest carriers have the most customers because they offer the most handsets? Or, can the carriers with the largest number of customers offer the greatest choice in handsets because they have diverse enough customer bases to support the most diverse number of handset models? Is there another, more anticompetitive, theory to explain the relationship between "downstream" market devices and mobile wireless service competition? We don't know. No correlation between handsets and service competition is ever offered. This is the "ugly." Informative? Sure. Probative? Of what? Not clear.

"Upstream" Markets

The "upstream" market section of the Report suffers from the same problem--the difficulty of drawing a correlation between mobile wireless service competition and the "input" markets of spectrum, access to tower sites, network equipment costs, and backhaul costs. As noted in one of the previous posts, I did "kind of" like the effort to look at inputs. . . at first . . . until I thought about it more. On deeper consideration, it seems unlikely--given the economies of scale and scope that characterize wireless mobile networks--that this exercise is ever likely to produce any information that would not be potentially misleading. Rather, it would seem that the large economies of scale and scope in the wireless network services market would simply indicate that (other things being equal) the carriers that serve the largest number of users (either directly, or through MVNOs) will have the lowest costs per user.

Also, the Report failed to describe to what degree, if any, these costs were competitively significant. In other words, to some degree or another, all carriers must deal with the "role of spectrum", obtaining tower space, network equipment, and backhaul from their cell sites or other points of aggregation. It was unclear from the Report whether any carriers face input costs that cannot be overcome by superior competitive performance.

Role of Spectrum. Here the Commission posits that some firms (the first movers on cellular spectrum in the 1980's, and the winners of the 700 MHz auction) have better spectrum than others, in that it is cheaper to build out--due to its superior propagation properties. However, the Commission also notes that this "lower build-out cost" spectrum costs more to buy than the more expensive to build-out, higher frequencies. Report, �271. This seems like the classic "operating leverage" concern confronting all firms in all industries.

A higher initial fixed cost, can frequently yield very high profits--past a given output level. Conversely, a lower initial cost of entry is often associated with higher variable costs. Neither is necessarily best. For example, many MVNOs probably outperformed many facilities-based networks over the past few years. Will MVNOs, with their low cost of entry and high variable costs, always outperform the same facilities-based carriers? Who knows?

Other Infrastructure Costs. Costs associated with tower site acquisition, and associated network equipment, seem to favor the firms with the largest established customer bases. This is because it costs less to incrementally add sites than it is to build a network starting with a low customer base. Again, while this suggests that the wireless mobile market is characterized by high fixed costs, it does not explain whether "newer" entrants--with less investment in legacy network design, equipment, and reliance on traditional forms of backhaul (copper DS1s and DS3s)--are able to compensate for these higher costs of initial entry with greater capacity, lower operating costs for a given number of subscribers, and greater revenue opportunities (for example, through offering higher-speed broadband services through newer network design).

Backhaul. It is, likewise, unclear to what degree backhaul costs effect competition in the mobile wireless industry, or the degree to which wireless demand affects competition in the backhaul market. The Commission notes that "traditional" copper backhaul is quickly losing ground to fiber-based backhaul. Report, �294. However, the Commission also suggests that "unaffiliated" (with an incumbent LEC) wireless carriers may be at a disadvantage to "affiliated" wireless carriers, due to the costs of special access backhaul (traditionally provided by the incumbent LEC). Report, �� 295-296. On the other hand, given that the largest two wireless networks are also the largest purchasers of "other" incumbent LEC backhaul, it would be helpful to know whether these two carriers have a greater incentive/propensity to differentiate their costs by devoting more "spend" to out-of-region competitive fiber providers--thus promoting backhaul competition.

Another problem with the "backhaul" section is that it never attempts to quantify backhaul costs in absolute terms, or as a percentage of annual costs or revenues. The only reference it makes is to a study in Verizon Wireless' NOI Comments, stating that backhaul was expected to increase from a $3 billion market now (2008 total mobile wireless revenues-$150 billion (Report, �201)) to an $8-10 billion market in the next 5 years). Report, �296, n.785. Assuming an industry cost of backhaul at $3 billion, this would put backhaul costs at slightly less than advertising costs, at around $3.4 billion for the most recent year. Report, �128.

It might be the case that backhaul costs, and the other "upstream" input costs discussed in the Report, are a competitive concern, but the Commission didn't support this rhetoric with data. Again, misleading, and, therefore a little "ugly" . . . .

Wireless Competition Report, Part 2: The Bad

2010-05-26T18:50:45Z

In all fairness to the Commission, the mobile wireless market is undisputedly complex, and the Commission notes the difficulty in analyzing this market. Yet, this is precisely the "Bad" part of the Commission's Wireless Competition Report: the information provided, to the extant it is relevant to competition in the mobile services market, is frequently presented in an incorrect, or otherwise misleading, manner. Here are some areas of potential bias that deserve an "on the other hand."

Concentration. Both the Commission, and the Department of Justice, have stated that the HHI is just a starting point for a competitive analysis. The Commission makes a point that the "weighted average" HHI (relying on data not available for public inspection) is over the FCC's self-imposed "highly concentrated" threshold of 2800 for the first time since 2003. Report, �51. The FCC also notes that, in a merger review, it would have to see an HHI of 2800 with a delta of 100 before becoming concerned about concentration. The current "weighted average" HHI is 2848 . . . phew (a delta of less than 100)! While some of the concentration has occurred "organically", with the networks with the highest CapEx investment getting the most customers, much has undoubtedly come from mergers that the Commission found to be in the public interest.

The HHI the Commission used was based on a "weighted average" of market shares, based on past market share as defined by dollar sales revenues of the market participants. However, the Merger Guidelines allow for HHI calculation by unit sales, relative share of capacity, or even a "bid model", which means that "[w]here all firms have, on a forward-looking basis, an equal likelihood of securing sales, the Agency will assign equal market shares." Guidelines � 1.41, n. 15.

It seems like the mobile wireless service market is a market where all competitors would have, on a forward-looking basis, an equal likelihood of securing sales. For example, while the FCC notes early in its Executive Summary, p.6, that "net adds" for the top two firms vs. "the next two" are asymmetrically high, a closer inspection reveals that only one of "the next two" top national firms experienced net losses over the last 2 years, p.9, and that firm's losses were only severe in 2008. Moreover, absent data-skewing due to a merger, three of the four national firms had positive net adds over the last two years, and a much less dramatic disparity in percentage increases.

Thus, considering that all firms seem to have an equal chance of gaining new sales, it would probably be safe to include the 5 firms listed in Table 4 of the Report (which cover around 75% of the population) in this "1/n" market share assignment, because "nationwide" firms do not appear to geographically price discriminate. Report, Table 10. Whether one uses 5 firms, or 4, the HHI is appreciably less than 2800 (either 2000 with 5 firms, or 2500 with 4 firms). Similarly, if one were to take capacity as being the defining factor for competitive advantage, the HHI would still come out less than 2800 (top 5 firms have 80% of nationwide spectrum).

HHI Does Not Indicate Diminished Market Performance At An Index of 2800.
Appendix C, Table C-3 of the Report lists 14 markets with the highest penetration rates in the country (from 98% to105%). These are the markets characterized by the highest "output" levels (high output is a performance characteristic of competitive markets). Of these, only 6 were below 2800, and only 2 were below 2500. Moreover, the number of wireless-only households continues to climb (now over 20%). Report, Chart 46.

Exclusion of MVNOs. If the Commission is going to use sales of facilities based mobile wireless providers in its HHI calculation, it is only logical to include "nationwide" MVNO sales as well. Why? Because these carriers are getting sales and satisfying consumer demand. The success of the MVNOs indicates competitive market performance, because these sales represent excess capacity that is being put into the market, and not being withheld from the market in order to increase prices.

The Commission concedes that Tracfone would be the 5th largest nationwide provider, and that Tracfone's "Straight Talk" offer is carried on the Verizon Wireless network. Report �101. The Commission further notes that Verizon Wireless is the leader in industry performance. Report, �223, n.634. If Verizon Wireless is enabling an MVNO to come out with a $30 prepaid "all you can eat" voice product, and a $45 data product, and MVNO sales accounted for almost half of Verizon's net adds in the 4th quarter '09, then why would the FCC want to misleadingly use these MVNO sales "against" Verizon? Sprint has a CDMA network, too. And, with their 4G rollout, they should have just as much chance as Verizon of picking up Tracfone's contract if Verizon fails to provide superlative service.

Profitability. In order to justify "profitability" analyses as evidence of (or even relvant to) "market power", the FCC uses a "perfect competition" (i.e., price should equal marginal cost) definition of market power in �12 of the Report ("the ability to profitably charge prices above cost for a sustained period of time"), but later, buried in �55, the FCC uses the correct definition of market power for a firm competing in a "real world" less-than-perfectly-competitive market ("the ability to charge prices above the competitive level for a sustained period of time"), which is also the definition used by the DoJ and FTC.

After explaining that profitability is not the correct method of defining "market power", the Commission concedes that we have no accurate measures of profitability for this industry. Report, �215. But, does the inability to correctly correlate admittedly-inaccurate measures of profitability with market power (higher than "competitive" prices) stop the FCC from devoting 7 pages of the Report (pp.223-229) to exactly this purpose? Regretably not.

The facts, though, are that retail prices have been declining every year for the past 11 years, both in absolute terms and in relation to the overall CPI. Thus, it would seem that "market power" defined as "the ability to keep prices above competitive levels for a sustained period of time" has not existed for a while in the mobile wireless industry. The existence of "higher-than-cost" profits are, by definition, not probative of "market power." Given their irrelevance, the "profits" in this section (no matter how the are defined) are misleading--more likely to be the effect of operating leverage in a growing, high fixed cost industry, than an indicator of "market power."

CapEx: Industry Size/Investment. The Commission clearly thinks that industry, and firm-specific, CapEx investment over the years seems to have some relationship with the level of competition in the industry. While it is not surprising that the two largest firms also have the highest levels of CapEx, it is unclear whether their investment gave them a better product with which to get more customers, or whether their large customer bases have forced greater CapEx in order to maintain service levels. Report, Chart 33. However, it is never clear from the Commission's discussion what, if anything, these figures mean. For example, if you are a carrier that is not investing in CapEx are you at over-capacity, or, are you losing customers due to poor customer experience? If you are such a firm, would increasing CapEx get you a better network/level of service?

Bottom Line: There are significant areas of the Report that could be interpreted as implying that a reader could reasonably conclude that the wireless mobile services market is not competitive, and is becoming less so. If the Commission explicitly stated that this was its assessment in its Report to Congress, then people could argue about the conclusions. However, the Commission's decision to not include certain information, or to include concededly-irrelevant information, and to present this information in a manner that implies only one conclusion, can only be regarded as troubling.

Wireless "Competition" Report, Part 1: "The Good"

2010-05-25T16:59:54Z

Last Thursday, at its May Open Meeting, the FCC adopted its annual Wireless Competition Report. The adoption of the Report caused something of a stir, because the Commission departed from the statutory directive requiring the Report to:

include an identification of the number of competitors in various commercial mobile services, an analysis of whether or not there is effective competition, an analysis of whether any of such competitors have a dominant share of the market for such services, and a statement of whether additional providers or classes of providers in those services would be likely to enhance competition.

47 U.S.C. � 332 (c)(1)(C) (emphasis added). The report, notably, reached no conclusions about anything required by Congress, except identifying the number of competitors in various mobile services markets.

At the meeting, Wireless Telecommunications Bureau Chief, Ruth Milkman, by the account in Friday's Communications Daily, explained,

'What we set out to do when we started drafting this report was to collect the facts and to analyze them and to collect facts about a broader expanse of the mobile wireless ecosystem,' she said. 'We were focusing on the data and the analysis rather than conclusions. We thought we would just lay out for the commissioners all the data and the analysis and stop there and that's what we did.'

So far, so good (I guess)--except for the cringe-inducing "ecosystem" malapropism (which seems to be pervasive over at the Commission, when referring to service supply chains). I mean, I guess what the Bureau did was OK--laying out facts for the Commission to draw the conclusions required by law. But, no one on the 8th floor ever bothered to render these conclusions. Nonetheless, sloppy language breeds sloppy analysis. In this case, if there was a logical analytic framework for the Report, it wasn't stated explicitly, nor was it possible to discern intuitively. In the next few posts, I'll provide my take on the Report overall--the Good, the Bad, and the Ugly.

The Good: lots of information . . . a whole lot--maybe even too much information on too many "markets", but not enough information on the relevant market--the market for mobile wireless services. For example, the Commission seems eager to divide the supply chain into multiple submarkets--either on the input side, or with respect to adjacent, or "complementary" markets (which, except possibly for mobile applications, the Commission conflates with the term "downstream" markets). The report may have been more accurate if the Commission divided the "mobile services market" into "upstream" and "downstream" components (an exercise that would have enabled the Commission to accurately describe the vigorous wholesale market, through which unaffiliated "MVNOs", purchase service to be packaged with unique handsets and offered to the consumer at retail).

Nonetheless, one of the things I really kind of liked was the attempt to provide information on the input markets facing the mobile service providers. Unfortunately, this effort was probably too ambitious and, on deeper thought, it would have been impossible to execute on a meaningful basis. Also, with respect to this portion of the Report, the Commission may have been better off leaving the sections out. It is better to exclude incomplete data, than to include partial data, and then create a misleading narrative based on that data.

Another interesting, and novel, feature of the Report is the Commission's effort to disaggregate service revenue, consumption, and growth trends by the differentiated service--like voice, texting, and data--notwithstanding whether the services were sold in the same way (i.e., text only, etc.). This information was interesting, but not presented in a competitively meaningful way. While the Report helpfully explains changes in mobile wireless service consumption trends, it only suggests, but does not attempt to demonstrate or quantify, probable positive cross-elasticity of demand (substitutability) between voice and text messaging, and possibly data.

The Report theorizes that average voice consumption per user may have declined in the past year as a result of "per text" prices precipitously declining from 2 � cents per text to around a penny per text over the same period. If voice and texting are indeed "close substitutes", then the Commission may want to refine its analysis in the next Report to include voice/texting as a single product market category. This would suggest a more competitive market, as voice plan prices and per text prices continue to fall, pari passu.

On the data side, the Report notes that data revenue--as a percent of total revenue per customer--is expanding at an accelerating rate. It is difficult to draw inferences regarding the competitive nature of the wireless mobile data market, because it appears to still be in its incipiency.

Finally, on the "Good" side of the Report, one cannot deny the work that went into collecting the information. The professional staff of the Commission is truly to be commended. One might disagree with the information the Commission chose to present, how the information was presented, and the conclusions the Commission would have the reader infer based on the information--but this is a Commission policy concern, and does not diminish my respect for the work that went into this Report.

Telecomsense Presents Real Staff of Genius
[italics are to be sung in your cheesiest '80's band voice . . . think "Survivor"]

So, here's to you, Mr. and Ms. Wireless Competition Report Writers . . . for the past year, you've spent about 360, 000 minutes each to tell us that we've all been talking on the wireless phone for about about 8,500 minutes and sent about 4500 text messages--each, on average.
.
Here's to hoping--for your sake--the Commission can reel in its appetite for the
minutiae of minutes, messages, and handsets in next years' Report.

Hungry, hungry, beaureaucrats . . . can we get a list of "exclusive"co-lors? Pink's my favorite!

And take heart . . . At least this year, they didn't require you to compile numbers on the "sexting" segment of the mobile data market . . . naughty, naughty sexters . . .

So, here's to you, oh collectors and crunchers of the numbers . . . it's time to turn off those pretty little smart phones . . . this one has a Disco Inferno Radio Alarm Clock App! . . .,
Close down the Word "Table Wizard" and crack open a cold Bud Light, because without your massive minutes of dedication, we wouldn't know how many minutes "unlimited" truly meant.

Mr. and Ms. Wireless Competition Report Writer . . .

Comcast Stands for . . . Status Quo?

2010-04-20T21:09:37Z

You must be thinking, "[w]hat's this guy thinking (smoking?)?" I mean, a lot has happened in the last month or so--mainly the FCC's release of its long-awaited National Broadband Plan (on March 16th) and the D.C. Circuit's "Comcast" decision, released on April 5th--and I've had exactly nothing to say . . . at least not on this blog. But while I was busy not blogging, the domestication of the dog continued, unabated, and other people had lots of smart things to say--which takes the pressure off me.

Before I can defend the title of this post, I have to lay out "the status quo." For this, I am going to borrow from, and corrupt, a perfectly appropriate analogy used by Tom Tauke of Verizon in a March 24th speech. In this speech, Tauke ("Mr. Tauke", as I like to call him) opens with the wonderfully evocative image of the Winchester Mystery House in San Jose, CA--a house that started as a small farmhouse, but underwent 24/7 construction over 38 years to become a Victorian mansion that appears to have been built upon pure caprice.

To the outside observer, the construction served no practical purpose, with a hallway ending in a second story door that opened to a dead drop down, steps that lead nowhere, and other architectural anomalies. Mr. Tauke uses the Winchester House as an analogy to the evolution of regulatory statutes that are stuck in a technology-specific past, and thus appear to have no practical purpose in a world where multiple technologies, devices, and applications are all used in a similar manner--to provide consumers with access to a primarily (and trending exclusively) Internet-based, communications network.

As I said, I LOVE the Winchester House as a starting point, but, not being nearly as diplomatic and classy as Mr. Tauke, I'll take a little artistic license, add a little context, hurt a few feelings, and generally "keep it real." First, if you didn't click the Winchester House link above, you wouldn't get the full context from the Tauke speech, because, though the Winchester House is exactly as described in the speech, it only appears to have no practical purpose--but it's purpose was never to produce an object of pragmatism, or even of art or architecture. Resale value was the last thing the owner was looking to produce.

You see, the owner was the heiress of the Winchester rifle fortune. After her husband and daughter died young, and in relatively quick succession, Mrs. Winchester was told by a medium that her husband and daughter had their lives claimed by the vengeful souls of those whose lives were cut short by the invention which had made her rich. The medium advised Mrs. Winchester that if she never completed her house, she would somehow appease the spirits, and would not suffer the same premature death as her husband and daughter. Said differently, the construction of the Winchester House, while motivated by fear and superstition, was the purpose of the construction of the Winchester House. The owner wasn't moving, wasn't looking for resale value, and "completion" in any pragmatic sense of the word was, in the mind of the owner, a little scary--in that it would cause her sudden death at the hands of angry supernatural beings.

With this context in mind, it isn't too hard (even if it is a little mean) to say that the FCC and its many Notices of Proposed Rulemakings ("NPRMs")--through which it attempts to implement the directives of Congress, including some of the central recommendations in the National Broadband Plan are not a dissimilar comparison to Mrs. Winchester and the Winchester Mystery House, and are a very apt analogy to the status quo. The Commission, motivated by political fears and superstition--fears inspired by the political power of Congress, made superstitious by the contradictory, twin fears of not appearing responsive--on the one hand--and of looking foolish, or alienating the politically powerful by being responsive, but getting the "wrong" answer.

This is the status quo. It has always been the status quo. For example, Congress could not have been more clear in the Telecommunications Act of 1996 that it wanted the Commission to eliminate all implicit subsidies to high cost carriers, and to have all contributions to the Universal Service Fund made explicit. Fourteen years later, the Commission has yet to complete this relatively simple directive, despite releasing numerous unfinished NPRMs during that time. But guess what? Docket No. 96-45, the original USF Reform NPRM, is still going strong . . . despite the continuous construction of numerous issue-specific orders/remands/FNPRMs and "area code splits" (new dockets created to account for specific issues).

At last week's Senate hearing on the National Broadband Plan, Chairman Genachowski seemed to be quite proud of the fact that, as part of implementing the National Broadband Plan, his Commission had scheduled releasing NPRM's on Universal Service Reform (contribution and distribution) and Intercarrier Compensation Reform for sometime during the 4th quarter of this year. Chairman Rockefeller seemed less happy--in his opening remarks (about 22 mins into the hearing)--he berates the Commission for its "recommendations" to numerous other agencies, and the fact that the Broadband Report says "Congress should" 139 times. Chairman Rockefeller also said that simply asking for comments is not enough. But, hey, dispensing the fear is part of his job, right?

So, how does the April 5th Comcast decision preserve the status quo? I mean, at first glance, and second glance, the Comcast decision was all about "Net Neutrality" policies. All the smart guys say so. Don't believe me? Read Hank Hultquist's posts 1 , 2, and Harold Feld's post on the decision--and be sure to click on all the links (read them all over 5 or 6 hours and then you'll know everything there is to know about Comcast, Net Neutrality, and the history of broadband Internet access service classifications).

But, who cares about Net Neutrality, right? The FCC will figure it out (Genachowski at 48, 69, and 108 mins into hearing) and preserve the "status quo" of the "open" Internet. But wait, there's more. Despite the FCC's confidence in its ability to ensure the safety of the open Internet, regretably, the Comcast decision has caused the FCC to rethink critical parts of their Broadband Plan. Even Chairman Rockefeller relents, and recognizes this tragedy (at just the 27 minute mark). The FCC's General Counsel agrees, and, by the 113 minute mark of the Senate hearing, so did Chairman Genachowski.

The thing I just can't reconcile, though, is that--even though the FCC has NEVER classified VoIP as a Title I or Title II service--the Commission has had no problems imposing public safety, and Universal Service contribution obligations on VoIP service providers. A more cynical person might say Comcast has become just another excuse to continue construction . . . because getting it right is more important than getting it done.

Fear, superstition, and action for the sake of preserving existence . . . so what did Comcast change? It doesn't look like much, except maybe making the Winchester Mystery House a little less mysterious . . .

[End Note: I watched last Wednesday's Senate Oversight Hearing at least 3 times (my penance for not blogging in six weeks). At times, it seemed the Senators were a little harsh on the FCC (albeit, in a theatrical, "Kobuki", "bad cop" kind of way). The House Hearing on the National Broadband Plan on March 25th was, in contrast, a virtual love-fest. On the issue of the National Broadband Plan, I think Congress gave the FCC too broad a mandate to criticize a good faith effort. If they wanted a "real" work plan (See Senator Begich's very good questions around the 88 minute mark), they should have specifically asked for what they wanted. Finally, I really hope the FCC doesn't let Comcast become an excuse, or some other sort of bugaboo, that hinders the expeditious resolution of some badly needed repairs that will set the foundation for further broadband deployment.]

Rust Never Sleeps . . .

2010-03-09T22:21:21Z

"Another flaw in the human character is that everybody wants to build and nobody wants to do maintenance." Kurt Vonnegut, Hocus Pocus, 1990.

With respect to the Hocus Pocus quote above, the late Kurt Vonnegut could just have easily said the same thing about what humans want to read and write about. No one wants to read about maintenance, but everyone wants to read about big events and big plans [like Mike Shanahan coming to town, or the National Broadband Plan]. Maintenance is only interesting when it doesn't get done, and the failure to do maintenance causes something bad to happen.

As a result of this quirk of human nature, when it comes to speculation/predictions/pontification on the National Broadband Plan, the Plan is the thing. The maintenance on the rusting-for-too-long Universal Service Fund and the related intercarrier compensation system are afterthoughts, and haven't received a ton of attention among FCC watchers, and reporters. The shame is that the FCC's publicly-stated intent to do this maintenance is a REALLY BIG DEAL.

To my mind, the Commission deserves more credit for tackling the maintenance (if this is, in fact part of the Plan) than any--forgive the characterization--"pie in the sky" plans. Why, you may ask? Because--to me--these are the boring-but-thankless (not to mention impossibly complex and politically contentious) chores that the Commission must succeed in addressing as a predicate to creating a regulatory climate that will stimulate investment by carriers (regardless of technology), customers, content, and applications service providers.

Moreover, this Commission can really clear away a lot of rust in the next two years, and the rest will take care of itself. Any part of the plan that can be accomplished, in a self-executing way, by mid-2013 is realistic, parts that become effective by 2017 extend into the "optimistic", but still possible. Anything that's supposed to happen past 2017 should probably be taken out of the Broadband Plan, and put into a special "Broadband Prophecy" section, and phrased in Nostradamus-style quatrains.

Back to the point, though, let's look at one really overlooked area of "rust removal"--Universal Service Contribution Reform--and see why it's so important to a plan designed to increase broadband deployment.

The "Broadband Gap" Will Only Widen Without USF Contribution Reform. I've heard some pretty reliable sources speculate that the "Contribution Factor" (the percent of the interstate telecom services revenue that consumers must pay to the Fund) for the second quarter will exceed 15%. This number should be announced this week or next week (I would guess the night of Friday, the 12th). If true, this would represent an almost 40% increase over last year's second quarter figure of 11.3%. Moreover, at the current rate of increase, it would not be surprising to see the factor approach 20% by the end of the year. What does this mean?

Well, let's say you want a "bundled" local/long-distance plan with unlimited long-distance calling. You live in a big-city suburb, and you want to use a facilities-based competitor to the incumbent LEC. Here is a typical price schedule for "phone only" for the VA suburbs of DC. Thus, a 15% contribution factor means that the customer is paying an additional $54 to $72 per year (depending on whether the customer commits to a 1 year contract) over and above the charges it pays to the carrier. Either way, the telephone service customer is paying well over $400/ year simply for phone service.

On the other hand, if the customer had access to broadband, the customer could purchase the lowest speed broadband service for only a little more, and then pay about $20 per year for VoIP service using magicJack�. If the broadband customer has no privacy concerns, they could get service for next to nothing with Google Voice.

Nonetheless, according to the Commission, those customers that are least likely to purchase broadband will continue to be subject to increasing monthly costs for basic telephone service. These customers are those least likely to buy broadband--the poor, the elderly, and the uneducated. (See, p. 82).

It's difficult to conceptualize that the lack of doing USF "maintenance" on the contribution side--to take account of the many, relatively affluent, customers that have already adopted broadband service--can act as a regressive "tax" on those least capable of shouldering this burden. Yet, increasingly, without contribution reform (without "maintenance") this is what those buying POTS ("plain old telephone service") every month are facing.

Contribution reform can be completely accomplished within Chairman Genachowski's tenure, and, if he plans it and follows through, it will be one of the most successful, and (probably) most under-appreciated, things he can do as a Chairman. If contribution reform is announced as part of the plan--and part of the plan that gets implemented most quickly--the Chairman and the Commission staff deserve a lot more gratitude than they will get in the popular press. But, if it helps, I'll grant permission to "crack open a cold Bud Light" to the righteous razors of rust . . . .

Ich Bin Ein "Googleiner"

2010-02-17T22:59:44Z

With sincere apologies to the members of the Google Nation, let me be clear about my last post. I was not "hating on" Google. My only point was to try to mollify some of the "irrational exuberance" that emerged on the Net (and in the press) as a result of Google's understated "announcement" of its plans for a broadband experiment. For those that didn't read my last post, one week ago (Wednesday, February 10th), Google stated on their corporate blog that they would like to build a fiber network to deliver 1 Gigabit speeds to anywhere from 50,000 to 500,000 homes. Most ensuing stories on the Net and in the press reported on/reacted to this announcement as if the project was already under construction.

For those who want to believe in the existence of a "Google-Claus", I strongly recommend the dose of reality that you can get from reading Harold Feld's post from yesterday, where he does an excellent job of providing a detailed account about Google's success through the years of "bluffing" and "slow-playing" regulators and network operators in order to get network operators and their end-users to front the cap-ex to support the transmission speeds that will enable Google to offer more services with which to economically advance their business. There is little reason to believe that this announced "experiment" will bring Google any closer to being a broadband ISP than any of their previous rhetoric.

On the other hand, Google has been quite straightforward about their business plan, which is to create applications that allow them to capture more and more customer information that they then "monetize" through (essentially) resale to advertisers. Therefore, I come not to bury Google, but to praise them . . . for their honesty in dealing with users of all their services, including Google "Buzz" (which coincidentally was really launched on the same day that their broadband network plans were announced). In a reaction that is surpassing strange, the outrage on the Net and in the "blogosphere" over Google Buzz is comparable to the enthusiasm surrounding Google's 1 Gig "broadband network."

But why do I say the outrage about the Google "Buzz" product is as perplexing as the enthusiasm over the non-existant, broadband network? Well, it's simple. Google has never been in the business of being a telecom network operator. In fact, if Google has read the newspapers over the last 10 years--and it's clear they have--we can assume Google knows that entering the retail broadband Internet access market (even at efficient scale) is very often a good way to make a small fortune (out of their current large fortune). To the contrary, though, Google is in the business of obtaining and selling Internet user information.

On this point, Google could not have been more clear with users of its products. Only two months ago, Google's CEO, Eric Schmidt, told Americans--on a national cable network--in a statement that was widely repeated, something to the effect that if consumers don't want people to know what they're doing online, then they shouldn't be doing it [at least not using Google services] in the first place. To underline a point, shortly thereafter, one of the founders of Google's major search partner--Mozilla Firefox--encouraged users to switch to Microsoft Bing for privacy reasons.

In short, if consumers decided to continue to avail themselves of Google's "free" services (like Gmail or Google Search), even after Google's December clarification that consumer privacy concerns take a back seat to Google's policy of using consumer information generated by use of its products for its commercial purposes, then it's a little difficult to understand all the "outrage" surrounding Google's Buzz product. When one considers that many of these same critics are also arguing for rules to keep the Internet "open", the complaints are even more difficult to indulge. Do these outraged privacy watchdogs really want an "open" Internet, or just an extension of the "Nanny-state" that relieves them of any personal responsibility with respect to how they use the Internet?

On this controversy, Google is in the right. They've given consumers enough information to make up their own minds. If consumers choose not to use this information, then what is the point of an "open" Internet? What is Google's incentive to continue to innovate and provide "free" services to those customers that have nothing to hide, and are happy to trade information for applications?

If we regulate Google's online behavior, next thing you know, we're regulating the ability of legitimate Nigerian businessmen to use the Internet to raise capital--just to get at the few fraudsters that abuse the gullibility of some Internet users. But how does this "outrage" do anything to promote commerce, jobs, innovation and openness? It doesn't, and it's about time for the "Internet police" to dial back the schadenfreude, and lay off the last guardian of the open Internet.

Google's "Think Big Gig": What Is And What Should [Will] Never Be

2010-02-13T11:12:33Z

And if you say to me tomorrow
Oh, what fun it all would be
then what's to stop us, pretty baby
but what is and what should never be -Led Zeppelin, "What Is And What Should Never Be"

With profuse apologies to Led Zeppelin for blaspheming their iconic song title to do a telecom policy blog, this is essentially what Google announced to DC policy makers, via its corporate/policy blog, on Wednesday--except that the policymakers and the press didn't hear the last line. But, boy, did they eat up the first few . . . you can tell that Valentine's is in the air.

I say the "announcement" was targeted toward policy makers, because absolutely no relevant business information was provided in the announcement--you know . . . costs, prices, projected revenues, technology to be used, etc. No vendors, competitors, or even Google's Clearwire partners (a venture from which--according to news reports--Google has been backing away) were interviewed or consulted. No, but that's OK, because this wasn't a business "announcement."

What the "announcement" really says is how much political clout Google carries in Washington. On a day when the Gub'ment is closed for a fourth consecutive day, some of the most important Government officials involved in technology policy were intrigued enough to very quickly issue "statements" in reaction to Google's blog post.

For example, the New York Times story actually contains a "statement" from Chairman Genachowski reacting to the Google blog post, and the statement reacts to Google's announcement like it were an "official" announcement--like a firm commitment to enter a market in a specific way, explaining product terms and prices, entry timing, costs, and projected revenues. The Hill even contains a statement from Senator John Kerry, Chairman of the Senate Commerce Committee's Subcommittee on Communications, Technology, and the Internet. Moreover, just about every story you'll read really "drank the Kool-Aid." From the articles I saw on line, only Computerworld got it right.

But what gives me the right to question Google's ambitiously-admirable, but vaguely-defined, "experiment", the belief of the bulk of the press, and some of the most important officials in Washington? Well . . . there's this small problem of the facts and the logic. First, Google's blog never says exactly how they plan to offer this 1 gigabit/sec (1,000 megabit/sec) broadband service at a "competitive price." Second, the whole theory seems to contain a pretty glaring logical flaw: wouldn't Google deciding to become a broadband ISP allow other Broadand ISPs into Google's monopoly business?

]]>
For the "Cadillac" broadband Internet access, Cogent Communications is a good example of such a company. You can read about them here. To save you the trouble of the click-through, Cogent has been in business for over 10 years, has over 1,100 "on net" buildings in North America, and serves most of its customers over that fiber network. A largely "on net" experience allows Cogent to guaranty a "gold standard" of service.

Cogent's most recent publicly-available 10K (admittedly, almost a year old) for the year ending December 31, 2008, explains that Cogent has over 17,800 retail customer connections. Moreover, Cogent offers a "1 Gig" Internet access service, as well as a carrier-class "10 Gig" service. Yet, as they note in their 2008 10K, Cogent's most popular service in North America is its 100 megabit Ethernet Internet access service. (See, 10K, p.7) Cogent further explains that this service is generally priced at $1,000 per month. Id.

On the other hand, for "best efforts" (lots of restrictions, no guarantees), residential, asymmetric Internet access service, the highest speed residential offer I've seen is Cablevision's Optimum Online Ultra� which offers 100 Megs down and 15 Megs up, priced at about $105/month.

So, do you still wonder why I'm a skeptic? If we've established a competitive price range of $100 to $1,000 for the range of quality between the highest and lowest quality high-speed Internet access service offered at 1/10th the capacity Google is promising, then one has to wonder what a "competitively-priced" 1 Gigabit fiber service would look like. This is the problem with the facts. Internet access service at speeds 10 times the fastest Internet speeds for residential and small business users will, at best, likely range from several hundred to several thousand dollars per month--which is why potential RFI Applicants are asked to provide so much information about per household income and Internet spending. Just request an application and find out.

The problem with focusing too much on facts, however, is that facts can sometimes be the trees that obscure the forest; so, too, here. The very thorough Gary Kim of IP Business provides us with some useful information. Of the 120 million, or so, U.S. households, about 87 million are online, and 80% of those (about 70 million households) have access to broadband. Similarly, of all residential search engine searches performed by residential customers, Google's share is about 80%. In its most recent quarter, Google obtained about 97% of its record revenues from advertising. Let's step back now, and look at the big picture.

A year and a half ago, it looked as though facilities-based ISPs, like AT&T, Verizon, and Comcast might enter the behavioral-targeted, online advertising business (the same one Google dominates). The concern of incumbent providers like Google was that the ISPs would participate in the market in the same manner that traditional search engines and social networks gather information from consumers--surreptitiously--and provide this information to advertisers in competition with Google. Google urged hearings to ensure that Congress would protect consumer's privacy.

However, the responses of the ISPs surprised their critics. None of the ISPs had used consumer search information to sell advertising services, but all indicated that they would not use a consumer's information unless the consumer had explicitly "opted in." See responses to Congress

This approach was considerably more consumer-friendly than the approach used by Google and Facebook, which basically require consumers that use their products to surrender all of their personal information and privacy. Needless to say, when Google wasn't the "good guy", Congress quickly lost interest.

So, from a matter a pure logic, the main reason that I am suspicious that Google will ever become a broadband operator is that it will essentially wreck Google's existing business, which relies heavily on requiring consumers to accept a lack of privacy in order to use Google's product. Interestingly, on the same day Google announced its desire to get into the ultra-high-speed consumer broadband business, Google embarrassed itself with a flagrant disregard of consumer privacy in launching its "Buzz" product designed to compete with Facebook and Twitter.

So, the bottom line is that Google's claims seem specious for two reasons: 1) they have not explained how they will enter a competitive business, on a small scale, and provide better services at lower prices than the firms already in the high-capacity Internet access business; and 2) if Google becomes a broadband ISP, then all the "consumer privacy arguments" and restrictions that Google has previously used to keep broadband ISPs OUT of the Internet advertising market will be shouldered by Google. Alternatively, if Google does not offer consumers "opt in" policies so that consumers can decide whether they want their search query activity sold to third parties, then Google has no argument to expect other broadband ISPs to do the same.

If Google's experiment is wildly successful, and they get 500,000 homes, they then allow the broadband ISPs that control the other 70 million households to use the same practices that Google uses to garner customer information to generate advertising revenues. Google's choice as a broadband ISP is to either 1) offer consumers some privacy protection (not the basis of Google's current business success), or 2) allow other broadband ISPs to use the same tactics Google uses to collect advertising data, and thereby invite multiple effective newcomers into Google's monopoly (by market share). To Google's management, I'm afraid these facts, and their consequences, make the forecast for Google's broadband ISP experiment a case of What Is And What Should Never Be.

Before the Net Neutrality Deluge . . . Broadband Still Counts

2010-01-15T06:08:57Z

I couldn't come up with a catchy title, but, before we get totally fixated on Net Neutrality for a big news cycle, I really wanted to draw attention to a very thoughtful, very comprehensive, broadband policy post, entitled "A Sensible Broadband Policy" written by the CEO of a competitive fiber provider--Dave Rusin, CEO of American Fiber Systems ("AFS"). Dave writes the blog TelecomStraightShooter that is linked to on the right hand side of my home page. Obviously, if you read this post--and you should--you'll see that I'm mentioning it because parts of it sound a lot like some of the things I've said.

While the post is titled "a sensible broadband policy", that's a little misleading, because the description "broadband policy" is a lot broader than it sounds. If you want to face the facts--as Dave does--"broadband policy" means the FCC's telecom agenda; and that is not an understatement.

I don't agree with all of Dave's policy prescriptions, and some would probably need the law to change in order to be implemented, even if they are good ideas. On the other hand, other ideas probably seem like good regulations for "other guys." But, hey, show me a market participant in an FCC policy proceeding that hasn't advocated regulating someone else's rates to lower their own costs, or stimulate demand for their own product, and I'll show you my untouched Yeti/Loch Ness Monster/UFO photo collection. Self-interest is not a sin, among FCC commenters, which is why I sincerely believe Dave Rusin's ideas should get as much "air time" as any inside-the-beltway "policy wonk", or "academic expert" (is that an oxymoron?). Why?

Well, for starters, AFS is based in Rochester, NY--that's where the whole competitive telecom experiment started. Another factor in Dave's favor is that he's obviously seen both sides of the various telecom skirmishes over the years, but, as a wholesale transmission guy, he doesn't have a dog in a lot of the fights, but he does understand the issues really well. Finally, he's got to live under his own rules, sleep in his own bed, eat what he cooks . . . the metaphors just don't stop.

But, before I canonize Dave, keep in mind that--as I said before--like an executive with any other carrier, they sometimes equate (conflate?) their self-interest with the public interest. On the other hand, the self-interest of a wholesale carrier on the subject of broadband is interesting, because of their overriding incentive to stimulate output and fill the pipes. That said, the reader must also keep in mind that these insights are not from a telecom regulatory attorney, so they are a little "raw" (e.g., the FCC had four, not five, original net neutrality principles), and some of the USF reform ideas need a little work, but, this is being too picky.

It isn't often that a carrier without attorneys and/or lobbyists on staff (or on retainer) even bothers to offer thoughtful, comprehensive policy ideas, and we don't listen enough to these parties. This post, "raw" as it is, is also--from a policy perspective--broader, and more thoughtful, than most that I've seen from telecom executives on the operating side. To be clear, I don't endorse all parts of it, but I don't think it should be ignored either.

Comcast Isn't the Only One Afraid of a Big Win

2010-01-14T02:56:26Z

Last Friday, the 8th, I did a post on the reports about the Comcast v. FCC oral argument that was held before a skeptical D.C. Circuit that morning. The point of my post was that the Net Neutrality NPRM (comments are due tomorrow!) might be a "rainout", because most reports suggested the court was less than encouraging about the Commission having authority to enforce its Broadband Policy Statement, based on the two main statutory provisions the Commission relied upon in both defending the Comcast decision, and supporting the current NPRM and proposed rules. If the court did vacate the Commission's authority to enforce its Policy Statement, or any similar Title I rules, then--my post noted--the Commission would have to start again with new rules based on different statutory authority.

I also noted that, when asked if it would rather lose on "narrow" (did Comcast have adequate notice?) or "broad" (do the statues the Commission relies upon, really provide the authority to regulate specific Internet practices?) grounds, the FCC said it would prefer a narrowly-written loss. I failed to note that Comcast agreed. While I figured a "broad" loss for the FCC would be bad for cable, it seemed kind of speculative and I really didn't want to get into it.

On Monday (the 11th), though, Harold Feld waded into the topic with an excellent post, entitled Does Comcast Fear To Win Too Much? In this post, Harold confirms Comcast's fears by citing a back-pedaling post that appeared on Comcast's policy blog Monday. The post was an excessive "clarification" of Comcast's "true position" that the FCC does have the authority to regulate Internet practices under Title I. Now a Shakespeare aficionado might observe, "[Comcast] doth protest too much, methinks." But, really, who cares what Comcast thinks? The court's interpretation of the scope of the Commission's authority is going to come out sooner or later, anyway.

]]> is not looking for controversial legislation this year, and is said to be committed to avoiding controversial legislation unless the Senate passes a bill first. The Senate has even less votes to play with than the House, so I think it's safe to scratch off Congress from Comcast's list of "things that go bump in the night."

Harold also notes, though, that Title II, as a basis for jurisdiction, might be what Comcast really fears. Here, I would tend to agree whole-heartedly. If the FCC is in a corner, then they are already "cleared for take-off" by the Supreme Court (in Brand X) to regulate Internet practices, simply by classifying broadband Internet access as a "telecommunications service." Lots of independent LECs, and most CLECs, provide broadband as a "telecommunication service" today, so--from a telecom perspective--a reclassification wouldn't be an alien idea. I'm not saying telecom carriers would welcome a mandatory re-classification, or even see the need for it. I'm only noting that they've seen it before.

But, for cable guys, just the mere idea of classifying broadband Internet access as a "telecommunications service" is scary, spooky stuff; like the kind of talk that makes them not even care that the world is going to end in 2012. I'd like to tell you why the reason for the panic, but I can't. It's not like I know the answer, but can't tell you (not because the cable guys would put out a contract (with no ETF) on me). No, I just don't know. There may be a perfectly obvious reason that eludes my little brain, but whether rational, or superstitious, cable's fear of Title II is quite real.

Regardless, though, I believe that Comcast believes that Title II is scary. Still, I don't think the cable guys need to worry too much about Title II re-classification. Why? Well, the main reason is that it's not all about cable. The FCC knows it could re-classify broadband tomorrow; in fact, they've always known it. But, unfortunately, it's just no fun. If the agency classifies broadband Internet access service as a "telecommunications service", the statute--not the Commission--declares the standard of prices and services that regulated firms owe their customers--just, reasonable, and not unreasonably discriminatory. It's just that simple; no "cool" new rules to write, no new "economics of networks" theories to implement . . . . No, the only thing left is . . . wake me up, already . . . enforcing the statute as written.

The only other thing re-classification would do, would be to establish an underlying service for which the Commission to assert ancillary jurisdiction over other providers of Internet services--like applications, content, and content distribution. But this is no fun for firms that might have consumer protection duties imposed on them by the FCC, and it's certainly no fun for the FCC. The Commission could have imposed "open Internet" principles on all service providers that comprise the Internet ecosystem when it came out with its proposed Net Neutrality rules in the NPRM. Yet, in the NPRM and proposed rules, the FCC chose not to apply its principles evenly; so, why do it now?

Take comfort, Comcast, you're not alone. The FCC wasn't kidding . . . they want a "narrow" loss just as much as you do--and so do Google, Akamai, and Limelight. But, if you don't get that narrow loss, don't sweat it, either. If a "scary", Title II classification was in your future, it would already be in your present.

CASH FOR MINUTES!! No Questions Asked . . .

2010-01-12T23:21:33Z

Yesterday, I did a post--based on a court case initiated in 2007--that suggested traffic pumpers looking for revenue sharing arrangements (for traffic transport and termination) with high-cost LECs was maybe a little scandalous, or at least something you wouldn't want to go around asking about in polite company. Well . . . as with a lot of things, it all depends on who's asking the question, how the question is asked, and whether the person asking really gives 2 cents what anyone thinks. (At this point, transition to your best Rod Serling voice.) But in the Telecom Zone, everything is not always as it appears, which brings us to our next case. Submitted for your consideration, the case of one TRX Telecommunications . . . .

If the "minute broker", mentioned yesterday, brought "buyers" and "sellers" of minutes together in a discrete, low-key, manner, TRX Telecom--the phone company that pays you--(by the way, that's their real tag-line) looks for revenue sharing arrangements with all the zeal of a direct marketing version of a monster truck show promoter. No apologies, no discretion, no shame, no fear, just BUTT-KICKING, PLATFORM POUNDING, MINUTE CRANKING!!

Heck, a better way to say it might be: no business plan? NO PROBLEM! No software-based calling platform? NO PROBLEM! No services to sell? NO PROBLEM! TRX Tel does all the work: they offer basic to more advanced, chat room and teleconferencing services. What they don't do is judge . . . or ask you for anything . . . but MINUTES! Even then, they don't make customers commit to any "minimum" level of minutes. They just ask you to do your best, brother. Any incremental minute (on the TRX platform) is a good minute, and you always get a cut--whether you produce 18 minutes or 18 MILLION minutes . . . .

But, if you DO produce 18 million minutes (per month)? Well, you get a prize, my friend. What type of prize? AN A@$-KICKING, NITRO-FUELED, 5 CENTS/MINUTE! That's right, brother, 5 CENTS/MINUTE! That's 100 TIMES the large LEC interstate termination rate! And this is a BOUNTY--it's not like they're giving you ALL the money that's being generated from your 18 million minutes.

And here's the best part: all it takes to add a million dollars/month to your bottom line is to keep 500 lines busy 24/7 for a month. Convince 500 friends to use their flat-rated, bundled, triple-play phone line to stay on a 24/7 conference call, use their mobile phones for voice, and you can give them a nice discount. Another option would be to use your Skype account while you're sleeping. If that bothers you, then just get non-profits, and other groups looking to save money to actually use the services in a normal fashion! It doesn't matter! Whether Al Quaida or Alpa Chino, "real" or "fake", the fact is that minutes are minutes, and "bounties" are "bounties." I didn't invent this system, but I can't "un-invent" it either . . . . So, here's to you TRX Tel, crack open a cold Bud Light, because you always tell it like it is, and, thanks to you, talk isn't always cheap!

[Note: I don't let my clients pay for this type of shenanigans, so if you're an IXC reading this, give me a call. But, if you don't call, or you're not one of my clients, then your best bet is to just take the advice of "Teddy KGB" (from "Rounders"). Admit you got beat, and pay these men their money.]

Pssst! Wanna Buy Some Minutes?

2010-01-11T22:24:20Z

["None of us are going to deny what other people are doing. If saying bullshit is somebody's thing, then he says bullshit. If somebody is an ass-kicker, then that's what he's going to do on this trip, kick asses. He's going to do it right out front and nobody is going to have anything to get pissed off about. He can just say, 'I'm sorry I kicked you in the ass, but I'm not sorry I'm an ass-kicker. That's what I do, I kick people in the ass.' Everybody is going to be what they are, and whatever they are, there's not going to be anything to apologize about. What we are, we're going to wail with on this whole trip."]
-- Tom Wolfe (The Electric Kool-Aid Acid Test)

I kicked off with that quote, and I want you to read it--and understand this--I respect authentic, original, people in the telecom business. They may not be the most likeable people in popular opinion polls, but they do want they do without regard to the opinions of others, and they almost always drive change (for better or for worse). Dave Erickson of FreeConferenceCalls.com ("FCC.com") is such an individual. And, as much as I might crack on "traffic pumpers", Dave has posted up on this blog--under his own name--without regard to what anyone thinks . . . and I like that. I mean, as traffic-pumpers go, he's "doing it right out front and nobody is going to have anything to get pissed off about." So, brother, if you're reading this, you need to know I've got nothing but mad respect for the way play your game--and that's no joke.

But (and you just knew there was a "but" coming), this is a story--contained in a court case--that I've never seen reported, and it's an enduring testament to Dave Erickson's stone cold, "bad-ass"-ness, but it's a story that readers have got to hear to believe. At this point, Dave will probably disagree with every characterization I make . . . but that's part of why I'm going to be what I am, and there's not going to be anything to apologize about.

OK, so on with the story. Let's say you think there's a good way around the FCC's Farmers and Merchants Order, where the Commission found in favor of Qwest in a complaint against a local exchange carrier ("LEC") that specific revenue-sharing contracts between the LEC and conference calling companies, did not constitute the provision of switched access services, where calls are terminated to an end-user premise, consistent with the LEC's tariff on file with the Commission. So, that order means nothing to you--maybe you've got some cool creative tariff attorney and some inventive new traffic pumping scheme. Fair enough; so far, so good, but here's the big question: if you're a free conference calling company, looking to set up shop in a high cost area with a cool, new tariff, or traffic-pumping plan, have you ever thought about how you'd actually do it?

]]> right accountant and the right banker. You can't just go around to any KPMG office, stroll up to the first person you see and explain that you need a fake dry cleaning business. Next thing you know, people are talking, no one wants your cash, and you might even get a visit from some government guy who wants to rain on your parade; bad times, indeed.

So, you have to be selective when choosing a like-minded partner (most of the time, I'll talk about the exception in the next post); only how? Well, it turns out that, in traffic-pumping, as in every other shady line of business, there's a dude who knows people that might be a little less discriminating--a Sherpa of minutes, if you will. This is the dude who knows the dude. I mean--like with the other example--you can't just go to any LEC, like a Verizon, with a cool plan to generate minutes and ask for them to pay you money for the minutes. So this "dude" finds an accommodating, LEC with more flexible interpretations of the law, or their tariffs; in other words a "flex"-LEC. Now this LEC, is maybe charging a 4-6 cent/minute transport/termination rate, but for . . . say a couple million more minutes a week, a this "flex"-LEC might be willing to give a big "terminator" (like a conference call company), a piece of the action; maybe a couple cents a minute. Bottom line, though, YOU, as the minute generator, don't need to worry about it--that's why you've got a dude. The dude-as-broker finds your partner, works out the revenue split, and then you just move in, set up, and start doing what you do and sharing access revenues. This is normally the end of the story--until some spoiler like Qwest comes along . . . but, hey, it's not like your new partner is the only flex-LEC in America, and the dude can always find you another one.

But what happens when one of these "dudes" doesn't have a formal ethics code, and maybe you've agreed on a revenue sharing split--through your flex- LEC Sherpa--and you pay him a "finder's fee" (maybe a piece of the revenue split)--but, later, you--the conference calling company--find out he's getting a piece of the flex-LEC's split--from the flex-LEC, too--based on your minutes? To be sure, the flex-LEC Sherpa has fulfilled his duties, at the rate you've arranged, but finding out that he's also getting a cut from the flex-LEC's piece of the pie? Well, unless your "broker" has disclosed it, this seems downright unethical--a conflict of interest--the guy's working both sides of the fence. So what do you do?

Well, if you're a bad-ass, ass-kicking, free conference calling company--like FCC.com--you don't stand for that aggression; you sue the bastard. And this is exactly what Dave Erickson, and FCC.com did in this complaint against PowerHouse Communications (their "Sherpa" of flex-LECs). Yep, he sued the guy he had hired to find flex-LECs, because the LECs were a little too "flexible." This case is still winding its way through the Federal court in Utah, so we can't know the ultimate disposition of the matter. One thing we can hope for, though, is that when an individual offers services to locate traffic-pumping LEC for guys that deliver buckets of minutes, that these brokers be held to the highest level of ethical standards.

The telecom industry was built on arbitrage, and unless, or until, the FCC chooses to eliminate arbitrary termination prices, the regulatory arbitrageurs must be held to the highest level of ethics. Because when trust breaks down among those seeking to pump or avoid termination charges, then so does innovation. Free services, whether inbound (like FCC.com), or both (like Google Voice or Magic Jack), depend on cooperation between carriers and applications providers to exploit the system. When this trust breaks down, cooperation breaks down, and, inevitably, innovation suffers. Unless things change, it is not hard to imagine a day not too far off where the only people that pay network costs are cost-causers. At this point, it is safe to say, the Telecom, as we know it, has calcified and will cease to evolve. So far, the Commission has made sure that this day never comes.

Comcast Oral Argument: Is The Net Neutrality NPRM A "Rainout"?

2010-01-09T03:06:15Z

OK, first let me say, that I was NOT at the oral argument in the Comcast v. FCC case in the DC Circuit this morning. So, everything I'm going to say is based on second hand reports from people that were there or from news stories. Thus, having established only the thinnest of credentials to opine on the "near and present" dangers of the court's potential decision, I will pontificate . . . but first some background.

In 2008, the FCC (in a 3:2 decision) issued an order finding that Comcast had violated the principles in the Commission's 2005 Policy Statement regarding broadband Internet access by surreptitiously degrading customer use of peer-to-peer ("P2P") applications. ("Comcast Order"). The Policy Statement held that "consumers are entitled to run applications and use services of their choice." (Policy Stmt at � 4) In its 2008 Comcast Order, the Commission said that Comcast's method of degrading P2P traffic in order to limit upstream congestion in its networks did not constitute "reasonable network management," and, therefore, violated the Commission's policy that consumers be allowed to run the applications of their choice. This policy violation, the Commission added, was compounded by Comcast's failure to candidly disclose these practices to its subscribers and the Commission.

Comcast appealed this decision to the DC Circuit, and the court held oral arguments today. Comcast made essentially 2 arguments: 1) being cited for a "policy" violation was improper, because the Commission had not adopted rules specific enough to warn Comcast that its practices might violate the Commission's application of its principles (i.e., the "narrow" argument), and 2) that the Commission, relying on only general policy statements in the Communications Act (in Sections 230 and 706), lacked any specific statutory authority over Internet practices to enforce the policy principles, which were enacted under Title I of the Communications Act--another general statement by Congress authorizing the Commission to regulate communications by wire or radio (i.e., the "broad argument").

Press reports indicate that the judges were skeptical of the Commission's authority to discipline Comcast on either the "narrow" or "broad" arguments. At least one press report had the FCC's General Counsel stating that he would rather the Commission lose on "narrow" grounds. As a taxpayer, I'm not so sure I would agree, and here's why.
]]> NPRM (see � 84) (released Oct. 22, 2009), pretty much "doubles down" on the arguments it makes in its Comcast brief filed only a month earlier (Sept. 21, 2009). If the jurisdictional underpinnings of the policy statement are going to be declared a broadly insufficient basis on which to adopt Net Neutrality rules, I'd want to know. I mean, why waste all your resources adopting rules that are only going to get rejected on a "broad basis?" If the Commission needs to try another approach, one would hope they would get as much guidance as possible from the court.

Of course, for the court to ask the litigants how they would like to see the Commission lose--on narrow or broad grounds--boarders on the irresponsible. The court knows that the Commission is conducting a rulemaking proceeding based on what it believes to be statutorily sound jurisdiction--the same statutory jurisdiction on which it believes it had the authority to adopt and enforce the Policy Statement. If the court believes the statutes cited cannot be used as a basis for the Commission to regulate the Internet, it is extremely wasteful to allow the Commission to proceed apace, as private parties waste millions of dollars in attorney's fees, and the Commission wastes millions of dollars in staff resources.

Chairman Genachowski clearly made his intentions known in this statement issued after the oral argument, "This case underscores the importance of the FCC's ongoing rulemaking to preserve the free and open Internet. I remain confident the Commission possesses the legal authority it needs and look forward to reviewing the court's decision when it issues." The FCC may well possess the legal authority it needs to adopt some, more reasonable, rules governing behavior by Internet services, applications, and access providers, but it may not be the legal authority the Commission thinks it has.

Given Chairman Genachowski's statement, the court owes it to the agency, the parties, and the public to provide as much guidance as possible. The FCC did not provide public notice of other potential bases of legal authority. If the FCC needs to revise its jurisdictional basis for Internet rules, it will almost certainly have to revise its proposed rules. In all likelihood, we have at least a partial "rainout" of the existing NPRM. The DC Circuit should do its best to give the Commission the broadest guidance it can. It's too late for comments, but the real "rainout" shame would be for the Commission to accept replies, ex parte filings and declarations, and write substantive rules only to find out in a year or two, what it could have found out a few months from now.