TeleComSense

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?

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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.

A Good Question, A Direct Answer, and . . . Mayhem Ensues

2010-01-07T04:27:53Z

Confusing, huh? Sounds like a movie idea . . . for a really bad movie; but that's what happened recently with an AT&T filing in response to the 25th Public Notice in the National Broadband Plan proceeding. The Commission asked for public comments on a very important, and very forward-thinking topic: how should the Commission plan for the inexorable obsolescence of the Public Switched Telephone Network ("PSTN").

The simple fact of the matter is that, due to broadband availability and adoption patterns, increasing availability of mobile VoIP apps, and (morbidly) the dying off of PSTN customers--and the fact that younger customers, with broadband access, are opting for VoIP solutions. Fortunately, the Commission acted on its own data, and recognized that the costs of the PSTN are being born by a smaller, and smaller group of consumers all the time, and the consumers that lack VoIP as an alternative (because they have not adopted broadband) are those least able to afford these increasing costs--the less-educated, the poor, the elderly, and minorities. (See, p. 82). The Commission is to be applauded for recognizing a trend, and trying to plan in advance in order to avoid a potentially disastrous crisis in advance.

Among those filing comments in this proceeding, AT&T recognized the problem was as grave as the Commission suspected, and they responded to the Commission's request for comments with all the gravity with which the Commission solicited the comments. Critics may call AT&T's comments melodramatic, but, judging from the attention they received (even if it was misplaced), I'd say AT&T did a good job of calling public attention to the Commission's very timely concern. AT&T's policy blog explains their position a lot more succinctly than I could, and the posts contain good links to AT&T's actual comments. If readers are interested, I would strongly encourage them to read these two posts--the first, and the second.

Bottom line: AT&T isn't seeking to turn off the PSTN, so there's no need for panic. Hysteria isn't good, but (this time) it can have a good outcome if it brings more awareness to an urgent problem--the need for the Commission to reform USF contributions and distributions, and Intercarrier Compensation Reform, before the network becomes a network for broadband "haves, and have-nots."

A House Divided? The Broadband Plan vs. Net Neutrality

2010-01-05T22:42:32Z

[Note: Yesterday, the Department of Justice, Antitrust Division ("DoJ") filed an ex parte presentation in the National Broadband Plan proceeding, which focused on ways to increase the number of broadband service offerings and broadband competitors. Most public attention has been focused on the DoJ's spectrum recommendations, which are largely designed to promote further spectrum availability. One controversial recommendation, which was heavily caveated by the Department, was that there may be situations where the highest bidder for spectrum may not provide the most valuable use for the spectrum. In other words, in an auction model for scarce, but essential, inputs, the hypothetical monopolist is always willing to pay the highest price in order to keep supply off the market. The facts that would support such a theory as a basis for foreclosing carriers from spectrum auctions are not present now, or even imminent. For example, the largest spectrum holder in the country is a new entrant, Clearwire, and the biggest "winner" in the 700 MHz auction--Verizon--spent almost $10 billion on spectrum that it knew would be subject to an "open access" requirement. Therefore, given the attention that this one aspect of the DoJ filing has attracted, this post will not discuss the Department's spectrum recommendations.]

For a long time, opponents of "Net Neutrality" (however they chose to interpret the concept at the time) have argued that, conceptually, Net Neutrality was at odds with the national policy goal of increasing broadband deployment and penetration. The typical argument against Net Neutrality was as general, and loosely-defined, as the concept of Net Neutrality. A good example of the Net-Neutrality-Broadband Policy tradeoff is this 2004 paper by Professor Christopher Yoo for the Progress and Freedom Foundation. This is old news, and not surprising coming from a pro-business group like PFF. So, why bring up an old argument?

Well, because "Net Neutrality" is no longer an amorphous, generalized, mean-what-you-want-it-to-mean, concept. No, the FCC has now given Net Neutrality a very specific meaning in its NPRM and proposed rules. This is what makes yesterday's ex parte filing by the Antitrust Division of the Department of Justice ("the DoJ") in the FCC's Broadband Plan proceeding so interesting. The DoJ's ex parte is interesting for several reasons, but the main one is that it highlights the tension between the goals of the Broadband Plan (as seen through the "consumer welfare" eyes of the DoJ) and the policy and proposed rules set forth in the Net Neutrality NPRM.

]]> for different services.

The DoJ, in its Broadband Plan ex parte, communicates a different, but fairly non-controversial point--that the essence of competition is offering consumers individual price discounts off the advertised price for the same service being offered by a competitor. (See, p. 27 of DoJ ex parte). Instead, and much like the Yoo paper referenced above, the DoJ sees value in protecting all Internet consumers (subscribers and applications/content providers) by promoting competition among the various network providers using competing technologies (i.e., wireline, competitive wireline (limited), cable, and wireless).

Another distinction between the DoJ Broadband Plan ex parte and the FCC's Net Neutrality NPRM, is in how the two agencies view the market. In the Net Neutrality NPRM, the Commission seems to assume that price and network service discrimination are both technically feasible, and potentially profitable, at virtually any geographic delineation. (See, NPRM, ¶¶ 67-74).

The DoJ, on the other hand, never asserts that price discrimination is possible, much less probable, in any specific product or geographic market. As explained in its ex parte, the DoJ defines markets using its Horizontal Merger Guidelines. It is notable that, in the Merger Guidelines, the Division allows for the definition of product and geographic markets "in the Presence of Price Discrimination" differently than its "standard" product and geographic market definitions. Yet, in its Broadband Plan ex parte, the DoJ refers to product and geographic market definition for broadband services using the "standard" definitions (i.e., without price discrimination). Moreover, while the DoJ does acknowledge that competition varies by location, this is not the same as saying that the same provider will (or can) tailor price or network capabilities to the level of local competition in any given area.

Indeed, the DoJ uses the analogy of video market entry by satellite providers to note that, although satellite providers have not been able to successfully discipline cable prices, satellite entry forced cable providers to improve overall network service on a nationwide basis (See DoJ, p. 16). Thus, the general tenor of the DoJ Broadband Plan ex parte is consistent with the DoJ's prior competition advocacy: that more competitors are better than fewer, and that the FCC should encourage new technologies, like wireless broadband, while also promoting output expansion by incumbent broadband providers.

What is most interesting is that the Congress and the President have mandated the development of a National Broadband Plan, as part of the Recovery Act. Congress, and the President, did not require the Commission to develop Net Neutrality rules--especially not rules that exceeded the Commission's broadband principles in existence at the time the Recovery Act was adopted. To the degree that the premiere competition authority of the Executive Branch believes that broadband output (i.e., jobs and productivity) will be maximized by promoting, rather than constraining, the options available to network operators, it seems prudent for the Commission to adopt a more "flexible" approach to "nondiscrimination"--much more akin to the "unjust and unreasonable" ex post standard of Title II. Either way, I'm willing to go out on a limb and predict that yesterday's DoJ ex parte in the Broadband Plan proceeding will have an influence in the Net Neutrality proceeding.

Net Neutrality: What's So Funny . . .

2010-01-05T01:17:33Z

As I walk through
This wicked world
Searchin' for light in the darkness of insanity.

I ask myself
Is all hope lost?
Is there only pain and hatred, and misery?

And each time I feel like this inside,
There's one thing I wanna know:
What's so funny 'bout peace love & understanding? --Elvis Costello

It's a new year, and I wanted to start on a positive note. While this (unfortunately) won't be my last post on Net Neutrality, it is the last in the series of posts about the Net Neutrality NPRM that I outlined in the first paragraph of my first Net Neutrality post back on November 19, 2009.

If you read enough of the advocacy pieces from the opposing sides of the Net Neutrality debate, it's tempting to think that this is some kind of religious war that offers no hope for anything but "pain and hatred, and misery." On the other hand, if you step back for a minute and just look at what the Commission claims it wants to achieve, as a policy matter in the NPRM (at ¶ 10), it doesn't seem that impossible:

we seek to . . . identify the best means to achieve our goal of preserving and promoting the open Internet. We seek to do so in a manner that will protect the legitimate needs of consumers, broadband service providers, entrepreneurs, investors, and businesses of all sizes that make use of the Internet.

If you want to take it a step further, you might just think, "what's so funny 'bout peace, love, and understanding?" Although I've pointed out that the substantive part of the NPRM, and the proposed rules it's designed to justify, doesn't show a lot of understanding, I didn't go quite so far as to call it the "darkness of insanity." But, so what if the NPRM wasn't perfectly on point? Isn't a greater understanding by the Commission exactly what "Notice and Comment" proceedings are supposed to promote? The same Commission that wrote the terribly uniformed NPRM, might be a significantly more educated Commission after Comments, Replies, presentations, hearings, and whatever else the FCC has in store for the development of this proceeding.

Let's stay optimistic, and keep on the "peace, love, and understanding" theme. The FCC's stated goal of preserving and promoting the open Internet--that exists now--and accomplishing the goal with a minimum amount of artificial disruption in the way current and future Internet stakeholders use the Internet is laudable. Fortunately, the Commission's goal can be accomplished with much more minor, and less complicated, rules than those it initially proposed. Please note, though, that, in order to be effective, these rules would have to apply to every service provider that contributes to the customer's Internet experience. Let's look at some alternatives.

]]> No Blocking of Any Lawful Content. This rule is as clear as it seems. Wherever a firm is in the Internet ecosystem--Internet backbone transmission provider, applications service provider, or broadband ISP--no firm should be allowed to block traffic delivery to any requested point on the Net or the PSTN. This rule ensures that unfair practices are not born unfairly by consumers, and the firms in the position to notice unfair practices can bring these to the Commission's attention for quick and discrete resolution. Alternatively, if Commission fails to Act, firms have redress with the courts. A "no blocking" rule limits the potential for exclusionary discrimination.

2) No Tariffs. This is the telecom equivalent of the first rule (which would be directed at "information service" providers). The fact is that a lot of Internet services, including broadband Internet access services, are still provided as "telecommunications services" subject to Title II of the Act. Telecom carriers are generally allowed to permissively file tariffs for certain services, such as termination. A "tariff" is a regulatory vehicle that replaces individual contracts with a legal obligation to pay a regulated rate for a specific service. To date, I'm not aware of any broadband Internet access provider that has attempted to file a tariff to charge backbone providers to terminate traffic to its customers. On the other hand, I'm not aware that the Commission has definitively foreclosed this possibility.

The downside of a tariff is that it, conceivably, could be used to facilitate the fear of "last mile extortion" that the Commission expresses--where a content provider is effectively "taxed" by the broadband ISP if it wants its content displayed correctly. Tariffs can certainly create difficulties that might not otherwise exist.

Consider the Commission's regulation of termination by competitive local exchange carriers ("CLECs") vs. wireless carriers. The Commission allowed CLECs to "permissively" tariff their terminating access services; and most chose to do so--at rates that were frequently well above the regulated incumbent LEC rate. This arrangement continues to feed disputes between carriers. Conversely, the Commission chose to forbid wireless carriers from filing tariffs, and only allowed wireless carriers to charge termination fees to carriers with which the wireless terminating carrier has a contractual relationship. Wireless traffic continues to grow, unencumbered by disputes over termination to wireless devices, and does not seem to have suffered from the lack of tariffs.

Today, Internet traffic follows the "contract" model vs. the "tariff" model, and a single Internet data query might travel over the facilities of multiple providers before ultimate delivery to the broadband subscriber. It seems unlikely that an Internet backbone provider would contract to offer transmission service to a broadband Internet access provider that would require it to collect tariff charges all the way up the chain--from either the content provider, or the content provider's Internet backbone provider. Nonetheless, a rule preventing tariffs for broadband services would make exclusionary tactics illegal, as well as unlikely. In short, this rule eliminates the broadband ISP's ability to translate the "terminating monopoly" problem that exists in the PSTN world into the Internet world.

3) Full Disclosure. Without tariffs, the Internet does (and must) rely on a very complex series of contract relationships, ultimately connecting all market participants. Nonetheless, while contracts are the way of life on the Internet, it would be foolish to assume that they are always reached between purchasers and sellers with equal bargaining power. Thus, to establish the proper conditions for consumers, applications innovators, and infrastructure providers to exploit the Internet's full potential to promote competition, entry, and innovation on every level, then purchasers--of all Internet services (not only broadband Internet access, but also content delivery, hosting, and peering, among others)--must be guaranteed full disclosure of the relevant terms for all services being purchased.

Consumers cannot play the pivotal role they must, in order to ensure that markets function in a manner that promote competition and advance consumer choice, unless consumers have access to clear, understandable, and accurate information about the services they seek to purchase. Similarly, competition cannot exist if consumers cannot comparison shop, and consumers cannot make informed comparisons between service providers without full disclosure.

In short, general rules adapt better to changing supply technologies, services and consumer demands, and they allow the Internet to not only remain "open" but to evolve in order to continue to provide more and more value to consumers. These limited, and relatively unobtrusive, rules present a solution that reconciles the concerns of consumers with the practical constraints within which all Internet firms must operate. So, "what's so funny 'bout peace, love, and understanding?"

Happy New Year

2010-01-01T00:26:51Z

At this point in the year, ideally I would have some cool thoughts about the past year or predictions about the new one. Dave Russin (Telecom Straight Shooter) did a nice job for his readers--here is his post. Harold Feld did the same--here. I wish I could say the same. Unfortunately, I just didn't have the time this month--no excuses, just the way it was. I'm even struggling to get this post done before I take my family out tonight (like in 20 minutes)! But, I felt compelled to get something in for New Year's Eve.

I'm not one for resolutions. I don't think I've ever made one. Nonetheless, this year is where I start. My resolution this year is to be a better blogger. This means not just talking about what I want to talk about, but linking to timely information, good posts by other bloggers, and focusing on shorter blogs; starting now.

I want to thank all my clients for a great year--I love working with all of you! Just as importantly, I want to thank everyone in the government, and any other company that took a meeting or phone call from me. Nobody owes you anything; so I appreciate your time, and I hope to provide as much information and help as I ask for. Finally, I want to wish everyone a happy, healthy, and prosperous 2010 for you and your families!

First Round of BTOP Grant Awards Show Some Solid "WINS"

2009-12-30T04:57:40Z

Earlier this month, on December 17th, the White House announced the distribution of the first round of Recovery Act broadband grant awards. Notably, of the $183 million in broadband grant awards to be awarded by the Department of Commerce (through the NTIA) and the Department of Agriculture (through the RUS), the NTIA awarded over $120 million toward wholesale, "middle mile" infrastructure. A short summary of the NTIA awards, including the "middle mile" projects is available here.

The reason that I highlight the NTIA's decision to devote the bulk of its funds to wholesale infrastructure supply projects is that--as I explained back in April--I truly believe that this approach is the best way to do a job that is extremely difficult to do well. The Recovery Act requires both the NTIA and the RUS to distribute a very large amount of money in a very short period of time. While the Recovery Act does contain policy guidance to the awarding agencies, and some built-in safeguards, such as limiting the federal government to funding, at most, 80 percent of a project's cost (unless the grantee obtains a waiver from the awarding agency), the responsibilities charged to the NTIA and the RUS are still formidable.

The combination of: 1) direct aid (grants, not loans), 2) the sheer amount of that direct aid (a little less than $6.5 billion in "unrestricted" grant funds, and a total of $7.2 billion in total funds), 3) being distributed by government bureaucracies, 4) in a very short time period (by September 30, 2010) makes the job of efficiently distributing the grant money extremely difficult. Adding to the difficulty of efficiently distributing the broadband grants is the fact that the agencies have little objective tools--such as the "broadband map" (my thoughts here) authorized by the Recovery Act, but not required to be completed until after the grant funds are required to be awarded (the map must be completed 2 years after adoption of the Recovery Act--February 17, 2011--though, as noted, the awards must be completed by the end of fiscal year 2010).

In my April post, I argued that Wholesale INfrastructure Supply projects ("WINS") were the best way for the agencies to allocate discretional grants in the allotted time, because allocating grants to wholesale infrastructure providers allows the agencies to transfer the even-more-difficult job of identifying unserved, existing demand to the most efficient prospective suppliers. The attempt at creating my own acronym was, admittedly, weak (like, "wow-that's-weak" weak), and maybe the idea itself was obvious--but even "obvious" good ideas are not always embraced by the government.

This is why I really think the NTIA got it right by allowing itself a lot of discretion to fund "broadband infrastructure projects" (without any more specificity), and then by pushing more funds into wholesale-oriented projects. Multi-party, combination wholesale/retail ("middle mile"/"last mile") projects benefit from the ongoing incentives of the wholesale provider to: 1) stimulate output by seeking out new wholesale customers, as well as 2) monitor its retail partners success in increasing and promoting retail penetration. These projects offer the promise of being easier to "generically" identify and to police on a forward-looking basis than more "unique" projects.

]]> per se, and, qualitatively, it may be that there are just as many--or more--worthy retail projects as wholesale projects. Nonetheless, the "uniqueness" of a project does make the project more fact-intensive, and time-intensive, to initially evaluate and then to monitor. Given the severe time restrictions--it has only been 4 months since the first funding applications were received, and, according to the White House press release two weeks ago, the first round will be completed over the next two and a half months--and the total money involved ($4 billion this round, with about $3.3 billion dedicated to infrastructure), it seems like wholesale projects would hold a lot of attraction for funding agencies.

To the NTIA's credit, they recognized the advantages of the "WINS" theory of triage funding--most likely with no help from me. As a result, the NTIA released the most infrastructure funding in last week's announcement--about 10 percent of the total they have committed to infrastructure projects this round. Last week's announcement was just the "first part" of the "first part" of the "first round" of broadband funding, so I'm not counting the RUS "out" by any means, but they may find it easier over the next two months to take a cue from the NTIA and focus on requests that are presented as combined "middle mile" (wholesale) and "last mile" (usually retail) projects in order to most efficiently meet their own quota for this round (RUS has allocated $1.2 billion to "last mile" broadband infrastructure and $800 million for "middle mile" broadband infrastructure).

Net Neutrality Enforcement: If You Love Something . . .

2009-12-03T01:28:12Z

If you love something, set it free; if it comes back it's yours, if it doesn't, it never was. -Richard Bach

If the quote hasn't tipped you off yet, this is where I stop "hating on" the FCC's NPRM and proposed rules, for all their silliness, and start getting constructive. This is why I wanted to "change gears" with a quote that has been repeated enough to become a full-fledged, diabetes-cavity-inducing cliché of sweetness. Yet if the expression wasn't eloquent, or relevant, it would have never gained the popularity it has; which is why it made its way into the Net Neutrality NPRM (well sort of). So kick back a little, click on to this saccherine-sweet little ditty, and open up your NPRM. In Paragraph 81, the Commission asks one of the most--perhaps THE MOST--prescient questions in the entire NPRM.

In essence, the Paragraph asks for comment on how the adoption of Net Neutrality rules (by the Commission) would be enforced by the Commission. This is a good question, because the Commission is not really built to investigate and enforce complex fact patterns. For example, the Paperwork Reduction Act requires the Commission to seek public comment (allowing at least 30 days for public comment and replies), and obtain Office of Management and Budget approval (allowing the OMB at least 60 days to make a decision on the agency's request) before seeking information from more than 10 parties.

For a "data driven" Commission, this is more than just a hassle; it presents a real enforcement hurdle--especially for the most egregious and difficult cases. Moreover, these investigatory handicaps are further limited by the fact that the Commission can only enforce violations of its rules occurring within the last year; that's right, a one year statute of limitations. Add to that the fact that the Commission has further legal and personnel resource handicaps and it would seem to make the FCC an unlikely sole enforcer of the most anticompetitive, anti-consumer, concerns proscribed by the proposed rules.

So, this is a very real conundrum--and probably deserves a lot more explanation and consideration than given in the NPRM. The question is this: what if the Commission passes rules and the FCC is the ONLY agency (aside from private parties) that can enforce the rules? Furthermore, what if the only vehicle for private party redress were under the Communications Act? This has distinct disadvantages to the public, in that the antitrust laws allow for enforcement by the Department of Justice, the Federal Trade Commission, the state attorneys general, and private parties. Moreover, the antitrust laws allow prevailing plaintiffs--including states on behalf of their citizenry--to collect three times actual damages suffered, plus attorneys fees; additionally, the antitrust laws have a 4 year statute of limitations and broad discovery rights for plaintiffs.

]]> It is right for the FCC to ask what would happen if it were the only agency responsible for enforcement of any proposed Net Neutrality rules that it adopts. If that were the case, then would the agency be doing the public more harm than good if the adoption of rules would limit or prevent competition enforcement under the antitrust laws, or other federal consumer protection statutes? This is an excellent question, given the Supreme Court holdings in Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP ("Trinko") and the Court's more recent holding in Credit Suisse Securities (USA) LLP v. Billing ("Credit Suisse").

Briefly, let's go over the facts and holdings in both cases. In the 2003 Trinko decision, the plaintiff alleged injury under the antitrust theory of "refusal to deal" by a dominant firm, because the defendant allegedly failed to comply with specific duties to deal with rivals imposed under the Telecommunications Act of 1996. Prior to commencement of the antitrust claim by the plaintiff, the FCC and the New York Public Service Commission both took action to address the alleged violations by the defendant (though not for the pecuniary benefit of the defendant). The Court held that the Communications Act, as amended by the Telecommunications Act of 1996, imposed more specific duties on regulated private parties than the more general obligations of the antitrust laws imposed on all firms to deal with rivals. In a case where the primary violation being alleged was a failure to comply with a specific obligation only imposed by regulation, the Court held that the plaintiff's proper venue for redress was under the statute that created the specific obligation (i.e., the Telecom Act), rather than under the antitrust laws. Indeed, in the Trinko instance, the regulator did police the conduct for which antitrust redress was claimed by the plaintiff.

In Credit Suisse, the Court went further than its holding in Trinko--where it precluded antitrust claims based on alleged breaches of explicit duties created by regulation (vs. general duties already present under the antitrust laws). In Credit Suisse, the plaintiff was alleging that it was injured by collusion, consistent with the type of collusion the Securities Exchange Commission had already ruled to be illegal under the securities laws. This is an important factual distinction. Acts of collusion between multiple firms to injure consumers, or rivals, are scrutinized under a much more stringent antitrust standard than single firm conduct. Moreover, there were no explicit securities rules that compelled the defendants to act in a manner consistent with the plaintiff's interest.

Nonetheless, the Court, in a decision written by Justice Breyer, held that the securities laws--which, consistent with the antitrust laws, condemned the same behavior alleged to be condemned under the antitrust laws--implicitly preempted antitrust enforcement. The Solicitor General argued, and the Court even conceded, that there was extremely limited potential for conflict between legal and regulatory obligations if the case was allowed to proceed under the antitrust laws. Nonetheless, because the securities industry is so important to the economy, the Court held that even this remote risk of conflict was unacceptable. So, essentially, the Court held that if the regulator could solve the plaintiff's problem, then relief under the antitrust laws is precluded.

This is an important conclusion. And, while the FCC did solicit comment on the effects of these two cases on the Commission's consideration to impose explicit obligations on broadband Internet access service providers, the Commission did so in a few sentences in the second half of Paragraph 81 of the NPRM. Moreover, the FCC did not explain in detail the potential consequences of a decision to impose specific, explicit obligations on regulated firms. This is a BIG DEAL.

Why? Because the FCC, by adopting rules designed to address legitimate concerns, might be foreclosing from the "enforcement market" a number of more powerful entities, which could address the most egregious concerns outlined by the Commission. The government antitrust enforcers can prosecute outrageously anticompetitive conduct under criminal laws. Moreover, we have already explained the greater enforcement incentives, and tools, available to federal and state government, and private parties, under the antitrust laws. These tools can be a much more effective deterrent to legitimate concerns over true exclusionary behavior practiced by any firms with market power in Internet-related markets--especially, given the FCC's enforcement record for what the Commission has decried as anticompetitive behavior in other industries subject to its regulation.

Here, of course, I'm speaking about subscription television, specifically cable TV. It is indeed ironic that the NPRM frequently mentions the powerful communications tool that the Internet has become--especially the Internet's potential to deliver video content--and how consumers need to be protected in order to preserve this potential vehicle for video competition. Am I the only person who thinks this sounds a little absurd? You kind of have to consider that a lot more people buy cable TV than purchase broadband Internet service, and every (rational) harm to consumer welfare that the Commission has posited in Paragraphs 57-80 has already come to pass (if you substitute "cable TV provider" for "broadband Internet access service provider" and "cable programming" for "content" you'll see what I mean). Yet, unfortunately, with the tools at its disposal the FCC has been unable to protect consumers from documented price increases and content (capacity) restrictions.

Ironically, given the Commission's enforcement record in cable-based video--coupled with legal enforcement constraints and limited resources, especially relative to the sheer number of potential antitrust enforcers and the power of the antitrust laws--it is the applications, content, and Internet services firms that have dominant positions in discreet markets today, that would likely be in greater enforcement peril, and facing greater consequences, than the firms on which the specific obligations are directly imposed. This would indeed be an ironic outcome, because it is these firms (and, curiously, not consumers) that the Commission seems intent on protecting by limiting the imposition of Net Neutrality obligations on broadband Internet access service providers. If the Commission truly loves competition in all parts of the Internet services distribution chain, it might do best to set it free . . . .

The Alchemy of Net Neutrality: Does Double Discrimination Create Value?

2009-12-01T18:14:46Z

`When I use a word,' Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less.'

`The question is,' said Alice, `whether you can make words mean so many different things.'

`The question is,' said Humpty Dumpty, `which is to be master -- that's all.' Through the Looking Glass, Chapter 6.

`Can you do Addition?' the White Queen asked. `What's one and one and one and one and one and one and one and one and one and one?'

`I don't know,' said Alice. `I lost count.' Through the Looking Glass, Chapter 9.

The question to be considered in the context of the Net Neutrality NPRM is not that the Commission is using a word--this time "neutrality"--to mean just what it chooses it to mean, but rather, how does it all add up, when layered on top of another equally "neutral" (but fundamentally discriminatory) regulatory regime such as intercarrier compensation where the same word "termination" has so many different meanings (prices)? How do the sums add up? Like Alice, I've lost count, but let me give you an example to see if you can keep better count.

On November 19th, eBay closed on its sale of Skype, eBay's large, over-the-top, VoIP subsidiary, in a transaction that valued Skype at $2.75 billion (though eBay held on to 30% of the company). This somewhat concludes eBay's rollercoaster ride into the world of telecommunications. Though the company itself valued Skype at $1.7 billion on its own books, eBay was unable to find anyone willing to pay even $1.4 billion--eBay's asking price--this spring, and even some Skype cheerleaders were speculating that, earlier this year when eBay made the decision to sell Skype, that eBay would likely get closer to $1 billion.

In 2005, eBay bought Skype (or some part of it that, curiously, did not include the central intellectual property that made the service work) for a reported $2.6 billion, but the founders stayed on to manage the Skype subsidiary, and if all had worked out, could have earned an additional $1.5 billion over the next couple of years if certain targets were met. Less than a year later, eBay ousted the founders and gave them an additional $500 million to leave early, for a real cost of acquisition of $3.1 billion. At the time of the purchase, eBay was alternately lauded for its foresight, or criticized for paying way too much for a service that is largely "free."

Subsequent to the original purchase date, most reports about the transaction were negative--suggesting that eBay's purchase was looking like a worse and worse decision with each passing year. Business Week continued to follow the operation of Skype within eBay to see how the transaction would turn out. The articles suggested the acquisition, in hindsight, was a bad idea--and getting worse all the time.

But, what happened since April, when no buyers were willing to even purchase all of Skype for $1.4 billion? Who knows? But Skype is now valued at a higher revenue/EBITDA ratio than Google (15X vs. 11X). And, if it's relevant, Skype's 15+ revenue/EBITDA was multiples higher than the 4.4 recorded by Apple over the fiscal year ending in September 2009.

]]> It could be argued that some amount of enterprise devaluation was inevitable over the Spring due to an overhang of potential liability created when Joltid, the company that created Skype, sued eBay to prevent it from using the core operating intellectual property that made the Skype application work, which eBay had been licensing from Joltid. Nonetheless, the basic terms of the sale, valuing the enterprise at only slightly lower than the final sale price, were announced in early September, while the lawsuit was still a potential threat.

It might be crazy, but it's hard to imagine that at least some of the "Skype-Hype" is not based on the premise that Skype's current forward-looking valuation is based, in part, on certain forward-looking regulatory assumptions. That is,unless of course you really believe that Skype's over-the-top services are truly economically superior to all others, nothwithstanding regulations that effect compensation rates for all other voice providers. So if an investor did believe that at least some of Skype's economic success was based on more favorable regulatory (versus economic) cost based rates of call origination and termination, then you would have to believe that certain existing regulations, or lack thereof, would remain in place for the foreseeable future.

Specifically, an investor cognizant of regulatory reality would value Skype with 2 critical beliefs regarding regulatory continuity. First, investors would have to be persuaded that the FCC intends to continue to provide favorable treatment to "Applications providers", --like over-the-top VoIP providers--vis-à-vis the network-based providers of "telecommunications services" and "broadband Internet access services" that the VoIP applications ride over. This is not an irrational assumption as long as the FCC implements "net neutrality" in a manner that protects VoIP providers by foreclosing certain firms from competing to provide differentiated transmission services to prospective entrants in the voice applications market, which may offer superior services to Skype. Again, this belief is consistent with the philosophy of "closing the barn door" to new applications, content, and service providers that the Commission has confirmed in the Net Neutrality NPRM. See, e.g., ¶ 106, and the proposed "nondiscrimination" rule.

Second, a prospective investor would have to believe that Skype's current cost advantage is ensured by the Commission's willingness to continue the current, antiquated, and dilapidated intercarrier compensation regime, which requires other providers--depending on regulatory classification--to pay higher origination and termination fees than Skype. After all, if there were no originating or terminating access charges that can be "created" (by a clever CLEC partner) where none should exist, then providers of "free services" could not create revenue (and profits) out of "free" services and would have no advantage relative to the many other voice providers in the market. Thus, a rational investor would have to believe--that at least for some significant period of time--the Commission will continue to turn a blind eye to intercarrier compensation reform, despite the fact that the Commission has already applied E911 obligations, USF contribution obligations, and CALEA obligations to "interconnected" (with the PSTN) VoIP providers.

Normally, one would think a rational investor would view this assumption as a risky bet, given the Commission's prior imposition of many "telecommunications service" obligations on interconnected VoIP providers, and the fact that the Commission asserted over 5 years ago, in its IP-Enabled Services NPRM, that even if interconnected VoIP services were classified as "information services",

[a]s a policy matter, we believe that any service provider that sends traffic to the PSTN should be subject to similar compensation obligations, irrespective of whether the traffic originates on the PSTN, on an IP network, or on a cable network. We maintain that the cost of the PSTN should be borne equitably among those that use it in similar ways. At ¶ 61. [emphasis added]

But, there may be some reason to believe that, perhaps the investors were provided some more reliable assurances to rely on these regulatory assumptions. After all, the CEOs of both eBay and Skype signed on to an "open" ex parte letter to the Commission, urging the FCC to adopt net neutrality rules.

The interesting thing about the letter is that it was styled as an "open" letter, because it was sent on Monday, October 19th, only days before a scheduled FCC meeting (on October 22nd) to consider adopting a Notice of Proposed Rulemaking on this very topic. The timing is interesting because the Commission's rules forbid advocacy by private parties on any matter less than a week before that matter is scheduled for consideration at a Commission Open Meeting; hence, I guess, the "open letter."

Still, though, one does wonder whether the Net Neutrality rules, discriminatorily applied, combined with assumptions that the Commission will continue to ignore intercarrier compensation reform, really had anything to do with the price and terms of the Skype semi-spinoff. If these assumptions hold up--that discriminatory net neutrality rules will limit new competition, and the existing discriminatory intercarrier compensation scheme will only benefit current VoIP providers--then Skype's subscribership growth signals a lot of future value (for the near future, anyway). On the other hand, I think I might be just as bad at counting as Alice was when she forgot the sums posed by the White Queen.

After all, as long as a rival with VoIP ambitions and potential exclusionary power, remains outside of "neutrality" regulations, in an increasingly wireless world, Skype is not assured continued profitability. You see, while Skype does have a product that runs on Google's Android mobile operating system, it is an inferior version to its native wireline version, because Skype's service has "limited" functionality on Google's mobile operating system. The application "works" but at a disadvantage to any Google-native VoIP service, because "Skype-Lite" requires users to use airtime, and users must subscribe to a mobile voice and data plan.

This would put Skype at a serious disadvantage with respect to Android phones--which seem to only support Google VoIP. Indeed, this may be a reason that the Commission has decided to take a less critical view of wireless net neutrality obligations--because Google (an unequaled provider of lavish employee benefits, and Obama administration support and staff)--is a large benefactor. On the other hand, if Google did grant permission for Skype users to allow "real" Skype to work over Android phones, then both firms are assured--for the near term--of the ability to use the discriminatory application of the net neutrality rules to exploit the discriminatorily-designed, but decaying, intercarrier compensation regime.

As I said at the beginning, like Alice, I've lost count myself. Did Skype benefit from double discrimination, or did they lose count? I just know that as long as the Commission is the master, it can make the same word--"termination"--have so many meanings (prices), but why should it, and why should we have to count, anyway? Wouldn't intercarrier compensation reform--with an emphasis on real neutrality--make more sense?