In case you didn't notice, the FCC's press release describing its decision to reclassify broadband Internet access is a little different on the subject of interconnection than Chairman Wheeler's "Fact Sheet" 3 weeks earlier. The FCC's press release from last week is substantially similar to the Chairman's fact sheet, except that it contains no reference to the classification of the "service that broadband providers make available to 'edge providers.'"
The Chairman's "Edge Service" Classification Proposal Was Really Unpopular
On the last day that parties could lobby the Commission, (February 19th) Google had meetings with senior advisors for the Chairman and the two Democratic Commissioners. In these meetings, Google persuasively argued that "the Commission should not attempt to classify a "service that broadband providers make available to 'edge providers,'" because "this supposed additional service does not exist." Ex Parte (Internal quote to Chairman's "fact sheet.") On the eve of the Commission's vote, the Wall Street Journalreported that "the FCC tweaked its language to address Google's concern."
Without this report, it would be hard to know who to credit for killing a truly reckless idea. That's because the following 5 parties all made arguments against the Chairman's proposed "new service" on the same day as Google: Akamai, Free Press and New America's Open Technology Institute, National Hispanic Media Coalition, and Cox Communications.
When you somehow manage to get Free Press, New America, and the National Hispanic Media Coalition to oppose an additional Title II regulatory classification--because it makes your original Title II reclassification look even more legally suspect--that's when you know you've gone too far.
The Importance of Direct Interconnection Agreements
The scariest aspect of the Commission's proposal must have been the FCC's casual willingness to disturb these companies' existing arrangements with ISPs by mandating the future terms on which they and others would be able to obtain interconnection. For companies with little to no regard for the terms of their existing interconnection agreements, like Netflix and its transit vendors, the Commission could not make their situation worse. But, for the leading Internet companies, the Commission must have appeared alarmingly ignorant of/indifferent to the importance of these agreements to Internet traffic delivery.
Reason 1: The Disintermediation of Internet Traffic
In 2009, the University of Michigan, Arbor Networks, and Merit Network presented the results of the largest traffic study since the advent of the commercial Internet. The study showed that, between 2007 and 2009, Internet traffic delivery changed radically. Over only 2 years, Internet transit (the traditional "intermediary" between ISPs) became dramatically less important as a traffic delivery vehicle.
Instead, major content providers began delivering more and more content directly to the consumer's ISP (either through their own networks or CDNs). Accordingly, since 2009, the "tech giants" have been accelerating their investment in network assets and data centers to route their high bandwidth traffic directly to efficient delivery points in the ISP's networks.
As the Internet has evolved to more efficiently deliver high-bandwidth content to consumers, the largest content providers--including Netflix for the first 4 years of its streaming service--have placed a premium on placing content closer to the customer. Therefore, the largest traffic sources have entered into agreements to directly exchange traffic with their customers' ISPs. When these agreements provide for the settlement-free exchange of traffic, it is because this reflects the mutual benefits received by both parties.
Since parties to settlement-free "peering" arrangements each provide the
other with valuable network facilities, or other benefits, this value
can be observed by looking at the investment the parties put into their
networks (i.e., capital expenditures). To get an idea of the
importance of those agreements to Internet companies, consider the
increase in capex by the largest Internet companies since 2009.
Regulation of Interconnection Terms Could Devalue Previous and Future Investment
As we can see from the chart above the major Internet companies have undertaken a massive amount of capital spending over the past 6 years in order to efficiently deliver content and services to consumers. To be sure, not all of the Internet companies' capex is driven by traffic delivery interconnection concerns, but the increase in these companies' capex since 2009 correlates with the findings of the University of Michigan, et al., traffic study referenced above. Moreover, news reports have confirmed spending on improved data networking infrastructure as a capex driver. See, e.g., here and here.
This capital investment has been made by edge companies and CDNs with the expectation that it will allow these firms to provide a better experience to their customers than their competitors provide. Indeed, Google notes that it has entered into peering agreements with some of the largest ISPs because it is "unable to use transit to reach users on those networks with reasonable quality." Ex parte at 2 (emphasis added.)
The risk of requiring ISPs to provide interconnection as a separate common carrier service was articulated succinctly by Akamai, which handles 15-30% of the world's Internet traffic. Akamai argued that the FCC must not mandate the terms and conditions of ISP interconnection, because if the ISPs are required to provide access on equal terms to all:
This is not technically feasible and the result could be access for none, which would decrease the performance, scalability, reliability and security of the Internet.
Akamai, February 20th ex parte at 1 (emphasis added). In other words, Akamai understands and accepts that it "must often compete with others for access to ISP facilities." Akamai, February 9th ex parte, at 3 (emphasis added). But, does the FCC accept interconnection as a legitimate element of competition?
The Commission Should Not Displace Competition with Regulation
Netflix, Cogent, and Level 3 assert that they cannot get interconnection with the ISPs--on the terms they would prefer--because of a lack of competition. But, as Akamai explained, companies seeking the most efficient terms of distribution to the ISP's customers are competing with each other for the best access to these customers. Could it be that competition is the reason the transit companies aren't getting the terms they want?
Compare the sum of the capex of Netflix's distribution chain over the relevant time period, with their competitors. Is it surprising that Internet transit wants the FCC to "level the playing field?"
Transit is at a disadvantage relative to direct interconnection because the Internet has evolved. For the content distributors sending the most traffic, transit has not been the preferred solution for a long time. But competition, and not a lack thereof, produced this outcome.
Unlike the major focus of the larger net neutrality debate--which is concerned with adopting rules to foreclose future ISP service offerings--the regulation of interconnection terms and conditions is fraught with risks to existing service configurations. The FCC must be careful not to use prescriptive regulation of ISP
interconnection terms--in the name of competitive "neutrality"--to
foreclose innovative firms (and their customers) from reaping the
benefits of their own ideas, risks, and investments.
In its Net Neutrality Comments, Free Press combines a limited number of less-than-ideal data points with a faulty methodology and a misleading narrative to claim that has "proven" its' reckless accusation that ISPs arelyingwhen they express concerns that Title II reclassification/regulation may distort their incentives to invest in network improvements.
In the previous post, we discussed some of the problems with the methodology, reasoning, and data Free Press uses to reach its conclusion. Today, we'll correct Free Press's misleading narrative "interpreting" the data with some relevant facts that you wouldn't know if you only read their comments.
Ironically, Free Press concludes its misleading presentation of capex "facts" (Comments III.B and III.C) by stating, "[w]e hope that the Commission and other policymakers learn and understand this history, for this debate cannot be a legitimate one if basic historical facts are replaced by incorrect beliefs." Comments at 111 (emphasis added). This statement would be OK (but still too preachy), if it didn't just present the FCC with a version of history so tailored for advocacy that it exists only in Free Press's comments. But, it's easy to forget . . .
Excessive Investment=Excess Capacity=Loss of Investment + Jobs
Free Press speaks of the period before the Cable Modem Order (in 2002) with a level of nostalgia that would seem more appropriate to a former WorldCom executive than a group claiming "historical facts." Free Press confidently asserts,
[common carriage], in conjunction with policies that opened up communications markets to greater competition, also was responsible for the largest period of telecommunications industry investment in U.S. history.
Comments at 90. The only hint from Free Press that this period may not have been an unqualified success is when Free Press allows that, "[m]uch of this investment . . . was a bubble ...." Comments at 111.
Perceived Bandwidth Demand Drove CapEx. Internet traffic grew at incredibly high rates in the second half of the 1990s, but the Internet was new to most people, and the subject of a lot of hype. Thus, perceived Internet traffic growth not only outpaced actual Internet traffic growth, but it was also disproportionately affecting perceptions of total bandwidth demand. But, where would people get these ideas?
Well, in a March 2000 report to Congress, then-FCC Chairman William Kennard stated,
Internet traffic is doubling every 100 days. The FCC's 'hands-off' policy towards the Internet has helped fuel this tremendous growth.
(emphasis added). Kennard's predecessor, Reed Hundt, would have none of this foolishness, and wanted people to know that "[i]n 1999 data traffic was doubling every 90 days." (emphasis added) ( Quote is from Hundt's self-congratulatory book, "You Say You Want a Revolution"at 224.)
The Reality. Not everyone at the FCC was buying (or selling?) the hype. A senior economist at the Commission, Douglas Galbi, published a paper the same year (2000), warning that total bandwidth demand was not as high as everyone seemed to think.
Growth of bandwidth in use for Internet traffic has been dramatic since 1995, butInternet bandwidth is only a small part of total bandwidth in use. . . .
(emphasis added). Meanwhile, massive fiber deployments and innovations in optical transmission equipment meant that capacity was about to explode.
The Reckoning. Only a year after Kennard's report to Congress, CNET reported that the U.S. was in the midst of a bandwidth glut, and that prices would likely decline much further. By summer 2001, the equipment companies issued clear warnings that the unraveling was well underway. A few months later, the Enron scandal would break.
Over the next year, what followed was the largest dislocation, in terms of job loss (500,000) and wealth destruction ($2 trillion) the telecom industry has ever seen. See, e.g., this BusinessWeek article. Law professor Dale Oesterle writes that the telecommunications industry in 2002 may have been the largest, most scandal-ridden, industrial meltdown in U.S. history.Here at 1.
The Aftermath. After the telecom bubble burst, depressed Internet transport prices would continue well into the middle of the decade. If you're wondering how low
In 2006, Level 3 needed additional transatlantic capacity, so it purchased 600Gbps of lit capacity on another carrier's transatlantic fiber. At the time of this purchase, though, Level 3 was carrying 480Gbps of traffic on its own transatlantic subsea cable system; a system that was scalable to 1.28Tbps. In other words, Level 3 already owned unlit transatlantic capacity, but using its own fiber didn't make sense because wholesale prices had dropped below operational and replacement costs!
The Biggest Lie About Capital Investment
The central deception of Free Press's entire misleading capex narrative is, of course, the notion that the 2002 Cable Modem Order was the defining event for broadband Internet capital investment. As explained above, the telecom bubble had little to do with Title II, and neither did the bust. Moreover, broadband Internet services, in particular, benefited more from the bust (post Title I classification), than they did from the boom.
The cheap [below-cost] Internet bandwidth of the early/mid-2000s led to a lot of web application experimentation and new Internet companies. Consumers responded quickly, and favorably, to the new, high bandwidth Internet applications, like Myspace. Xbox, and Youtube.
This led to strong consumer broadband Internet adoption, which could not have been possible if the broadband ISPs had under-invested in their networks. The FCC data show broadband Internet services increased by a factor of about 4.5 between 2002 and 2008; from 17 million customers in 2002 (see Table 3) vs. around 75 million telco and cable broadband customers in 2008 (see Table 1).
Indeed, this 400-500% increase in demand for broadband Internet service compares favorably with total bandwidth demand growth of around 300% during last half of the 1990s. See Galbi at Table 2. In fact, the success of the broadband Internet economy (Internet companies, backbones, metro fiber providers, and broadband ISPs) from 2002-2008 would finally end the bandwidth glut, and bring back demand for new "Title II" Internet transport capacity, including transatlantic capacity.
Free Press tries to prove that broadband ISPs are lying about their concerns with potential new, and undefined, rules under a Title II reclassification. But, if the FCC is tempted to change its regime based on erroneous cause-effect propositions that ignore historical facts, then it would seem the broadband ISPs have every reason to fear the unintended effects that will accompany a new regulatory classification.
It's no secret that Net Neutrality pressure group Free Press would like the FCC to revisit the 2002 Cable Modem Order, in which the FCC classified broadband Internet service over cable as an "information service." Nor is it a secret that the largest broadband ISPs oppose such a reclassification.
The ISPs often contend that a reclassification of broadband Internet service as a Title II, or "common carrier" service, would open the door to a range of regulations that could dampen or distort their incentives to invest in network improvements. But, in its comments on the FCC's Net Neutrality NPRM, Free Press intends to conclusively vanquish the "investment fear" arguments of the ISPs once and for all.
Free Press believes it can "debunk" the "myth" that Title II discourages regulated firms from investing in their networks if it can show that the broadband ISPs invested heavily in their networks at a time when the ISPs' broadband services were (pretty much) subject to Title II classification. Free Press relies on revenue and capital expenditures from the annual reports of a cross-section of large, publicly-traded, telecom and cable companies to tell the Commission a fairy tale.
Perhaps everything that could be wrong with Free Press's facts and theory about ISP network investment over the last 20 years is wrong--starting with the theory itself. This blog will focus on the problems with Free Press's theory, and its limited set of "facts" in support of its theory. Tomorrow, we'll explain what really happened (using Free Press's data, along with other relevant historical facts), and why Free Press's narrative is so misleading.
Investment Itself Is Never an Appropriate Regulatory Goal
Free Press seems to equate periods of rising capital investment as a "good" outcome, and periods of falling investments as a "bad" outcome. However, regardless of whether the investment was efficient or not (it isn't), the FCC should never try to assume the role of central economic planner. The FCC's only interest in investment should be to make sure that consumer interests are served in the manner that least distorts company investment incentives.
CapEx from Financial Statements Doesn't Show What Free Press Thinks It Does
Even if stimulating investment was the right focus for the Commission, the capex information Free Press presents does not prove that Title II is the answer. If Free Press is trying to show that the regulatory classification of consumer broadband service affects how much a firm invests in that service, then aggregate, firm-wide network investment wildly overstates mass-market broadband investment in any period.
In Fig. 1 (Comments p.100), Free Press tracks capex for a number of telecom carriers over time. But, by using aggregate enterprise capex, Free Press is primarily tracking capex for Title II services in all relevant periods. Notwithstanding the regulatory classification of one residential service, the majority of the revenue produced by these firms' networks still comes from Title II services (e.g., both AT&T and CenturyLink reported record numbers of residential broadband customers in 2Q 2014, but this service only comprised ~16.5% of total firm revenues for both firms).
A more accurate estimate of the capex devoted to the Title I service would focus on correlations between significant broadband subscriber growth and increased (decreased) capital investment over the same period of time. For example, CenturyLink has tripled its broadband subscribers (from ~2m to ~6m) over the last 5 years; during this same period, capex has grown at a CAGR of over 60%. See here (figures are from 2013 Annual Report, and the 2Q 2014 Earnings Supp. spreadsheet). A more careful review of the companies' data, however, may not support the story that Free Press wants to tell.
Investment and Revenue Figures from the Late '90s Are Not Entirely Accurate
Even if we accept that "investment" is a worthy regulatory goal, Free Press paints a misleadingly "rosy" picture of the era. Free Press concludes its recasting of the "golden age of investment under Title II" by simply stating that, "the 2001 recession and the economic impact of the September 11th attacks took their toll on the U.S. economy, and the telecom sector wasn't spared." (Comments at 101)
Free Press neglects to mention the devastating accounting scandals that would surface right after 9/11, or the massive layoffs, bankruptcies, and distress sales that would follow, and cascade through the industry over the next two years.
On October 16, 2001, Enron announced it would have to restate its earnings for the prior 2 years. This statement, and the subsequent SEC investigation, would uncover widespread accounting fraud throughout America's largest companies.
When you look at this list of the accounting scandals that were exposed in the 11 months after 9/11, don't focus solely on the telecom and cable companies. Keep in mind that every energy company on this list also owned significant telecom network assets. (See this 2002 study at p. 21/38).
Bandwidth trading. If you're wondering why most of the accounting scandals involved telecom or energy firms, that's because they had a common thread. Most of the telecom-related accounting fraud was related to "bandwidth trading." If you don't know what bandwidth trading is, just listen to Enron explain it.
The idea of bandwidth trading was just a few years ahead of its time. In practice, it would take BitTorrent and The Pirate Bay to make using someone else's capacity while they were sleeping a reality.
Early bandwidth traders, like the modern P2P thieves users, did not actually exchange money. Rather, if you had bandwidth on one route, and another company had capacity on a route you wanted, you could just swap capacity--but that's boring. Instead, each party would "pretend pay" the other for the prevailing value of the capacity (which still seems kind of dull).
The real fun came with the accounting. Both parties could record each other's pretend payment as real revenue, and record the capacity they were giving up as a capital expenditure; winning! For more, see this 2002 Wall Street Journal article. Oh, and when I say "could record," I mean literally; not legally.
As you can see, Free Press makes a number of mistakes in its attempt to prove that their Net Neutrality opponents could never justifiably fear Title II regulation--from trying to prove that a fear of undefined future regulations is unwarranted, to a misunderstanding of what their data actually show. Tomorrow, we'll explain what actually happened in the golden age of Title II and why Free Press's narrative is so deceptively misleading.
[The craziest thing happened to me a couple months ago. You've heard about this NSA spying thing, right? It has outraged consumers, governments, businesses across the globe, and yearns for us all to consider installing a pretty serious VPN/encryption lockdown. Anyway, based on what they've seen of my wildly eclectic interests/borderline insanity, the NSA claims that--from what they can tell about my disordered personality--I share online behavioral patterns that they have only seen with some of the world's most unstable/dangerous criminal minds and if they knew more about me they could get a better handle on where the bad guys are (online, anyway). So they made me a deal: I come clean about the full extent of my online interests/browsing behavior, and they give me the stuff they pull on all of you. "Stuff [They] Don't Want You to Know*" is an occasional blog series where I share some of this information with you.]
So, anyway--to answer your questions--I now know a lot of messed up things about a lot more people these days. Given the date, and the overall spookiness in the atmosphere today, I'm sure the more inquisitive of you want to know whether I know all about the AT&T-UFO connection. Well, as a matter of fact, I do. But trust me when I say this: you can't handle the truth. For now, that vault's just going to have to remain closed.
So let's pull back the curtain on something you can handle. I recently came into possession of a number of texts/emails between our regulation-happy friends at Free Press and all their regulation-happy friends in the policy world, like Susan Crawford and Tim Wu. Some of these were texts that seem to have been traded during hearings to take their minds off the inevitable IP transition, and others appear to be just how they were passing the time on long plane or car trips. And, yeah, you heard right. Apparently, they do use their phones on planes; and, no, they haven't taken the "it can wait" pledge not to text and drive.
Despite their private contempt for public safety on the highways, and the regulations of the Federal Aviation Administration, one thing's for sure: these guys do love themselves some regulation (as long as it doesn't, you know, cramp their style). How much do they dig regulation, you might ask? Well, they have a little game that they like to play, and I'm going to tell you about it, because it's actually been kind of funny to watch the results.
Here's the game: you take any movie and substitute the words "regulation," "regulator," or "regulate" for any one word in the title of the movie. So here's how it works, from some actual Free Press private communications:
Regulate Me to Hell (Drag Me to Hell) The Good, the Bad, and the Regulators The Silence of the Regulators 12 Angry Regulators Inherit the Regulation Regulations of Steel Fifty Shades of Regulation (DQ'd b/c not a movie yet) It Takes a Regulation Texas Chainsaw Regulation Planet of the Regulators Gone With the Regulation Regulators on a Plane T3: Rise of the Regulations The Regulations of Narnia Birth of a Regulation Triumph of the Regulation
I know; the last two surprised me, too--but, you have to admit, the titles work as films glorifying regulation. Pretty funny, huh? You could have knocked me over with a feather when I saw this stuff--I didn't even know those guys had a sense of humor.
Who knows? Maybe this game will catch on and we'll see Randy May and Scott Cleland trading their own regulation-game quips at the next Free State Foundation Conference . . .
*"Stuff [They] Don't Want You to Know" is a series of occasional blog posts that are entirely fictional and intended to poke gentle fun at figures within the telecom policy world. Nothing in this series should be mistaken for the truth.
One week ago, S. Derek Turner of Free Press was doing like he do--criticizing other parties for speech with which he disagrees, and presumably advocating the moral purity of single letters as first names--except that this time, he couldn't wait the 5 minutes or so that Free Press normally waits before doing something completely inconsistent. No, this time Free Press tied it up in one neat little package for us.
Not wanting to waste such extreme courtesy (or poetic irony), the task of reporting this feat has fallen to moi. Specifically, Mr. Turner released a statement calling AT&T out for a "missive" against the FCC that, Turner believes, was emblematic of AT&T's "penchant for bullying" which, he continues, is as "boundless as its hubris."
From what "bullying" by AT&T was Mr. Turner defending the FCC? It turns out to be this blog post by Bob Quinn, speculating that if the FCC has a difficult time saying goodbye to "old-timey" regulations designed to protect the then-nascent telephone market from the depredations of the telegraph industry, then hopes were dim for the FCC to progressively regulate the unique issues that will arise as part of the transition from TDM-based networks to IP networks.
I'm not surprised by AT&T's comment any more than I am by Free Press's disagreement with this comment. But "bullying?" Correct me if I'm getting the whole "bullying" thing backwards, but isn't the goal of bullying to intimidate someone to act differently than they would otherwise act? I'm pretty sure that AT&T's blog post more accurately qualifies as "criticism."
"ToMAYtoe"/"toMAHtoe", right? I mean how's a phone company to act if they don't like what the FCC is doing/failing to do you? Interestingly for AT&T, Free Press's guidance is linked at the bottom of the post.
In its comments opposing AT&T's Petition for the FCC to start a proceeding to deal with issues involving the IP transition, Free Press points to the "right way" for AT&T to pursue a deregulatory goal,
"it is perfectly appropriate for any incumbent carrier to assert its rights under Section 10 of the Act to seek forbearance from specific regulations, as has been done for the specific regulations AT&T names in its petition." At p.2.
See, if AT&T had just supported forbearance, that's the way Congress told them the FCC would deregulate, then it would be OK. Oh, wait, AT&T's blog post sounded like it was expressing support for the US Telecom Forbearance Petition that it believed the FCC could have granted in less than a year. Message to AT&T from Free Press: you suck! With a capital S.!
"Public Interest" merger "efficiencies" are in the eye of the beholder. The term "efficiency" is hardly a precisely-defined, universally-understood concept. For many, if a merger created more capacity to better serve the basic mobility communications (voice, text, and limited data) needs of those that would otherwise go without these benefits, the merger could be said to be "socially efficient."
On the other hand, "efficiency" could be considered from an engineering perspective to use the latest technology to squeeze every last drop of bandwidth out of a given amount of spectrum in order to better satisfy the data demands of the most technologically advanced consumers. The consumers that use these devices most intensively have a powerful voice in Washington, and might be called the "tech-nobility."
Throughout the analysis of the proposed AT&T/T-Mobile merger, the only "efficiency" benefits that have mattered are those that are important to the "tech-nobility." And who represents the "tech-nobility"?
Well, it's clear from last week's "Staff Report and Analysis" ("Staff Report"), by who it chose prominently to cite, that the FCC sides with the "tech-nobility"--a group whose views are most stridently expressed by the self-appointed "defenders" of advanced telecommunications consumers--Public Knowledge and Free Press. See paras 165-245 of the Staff Report. The only potential efficiencies of concern to the Commission are those that can be demonstrated to further wireless broadband deployment.
The Parties' Argument and the Commission's Reaction
Unfortunately for the parties, a lot of their efficiency claims seem to depend on combining their 2G and 3G networks. The Commission, while recognizing this possibility, seems openly contemptuous that AT&T and T-Mobile would be even operating these networks. See, e.g., ("While it may be true that the spectrum gained from control channel elimination could result in increased deployment of advanced technologies it could also prolong AT&T's reliance on outdated and inefficient GSM technology.) Report, para 203. (emphasis added)
Similarly, in paras 216-225, the Commission criticizes AT&T's claims of merger-specific efficiencies, because it believes that AT&T could and should be more aggressively moving GSM devices off its network--though the Commission acknowledges that AT&T has virtually eliminated the retail sale of 2G GSM devices. For example, while the FCC doesn't dispute that the transaction could provide the parties more "head room" in gradually phasing out their GSM networks, while moving spectrum to "higher" uses, the Commission concludes, "prolonging the use of less efficient technology should not be deemed a benefit for purposes of assessing this transaction." Report, para 221.
Does Anyone Benefit from "Less Efficient" Technology?
Well, the answer is "yes", but the population benefited is only the poor and elderly, and they hardly count as constituents of Public Knowledge, Free Press, and the Commission's "Broadband Nation." Who says the underserved, including the poor and elderly, benefit from lower priced, simpler offerings?
The FCC, for one, took this point of view only six months ago in its Wireless Competition Report noting that, "MVNOs [Mobile Virtual Network Operators--companies which buy capacity from facilities-based carriers to create their own product/service offerings] often increase the range of services offered by the host facilities-based provider by targeting certain market segments, including segments not previously served by the hosting facilities-based providers." Wireless Report at para 33.
Unfortunately, in conducting its "efficiency" analysis in the Staff Report, the FCC seemed to neglect the increasingly important role of MVNOs, by ignoring the parties' claimed engineering benefits--which flowed from the bottom up. The problem is one of bias--toward the "tech-nobility" as represented by Public Knowledge and Free Press.
You see, neither the Commission nor the interest groups could put themselves in the place of a large carrier with a responsibility to serve all segments of the market--including those segments served indirectly through MVNOs. AT&T has contractual responsibilities to its wholesale MVNO customers. Let's consider their "social efficiencies" for a moment, since the Commission ignored this productive use of technologically-inferior networks.
Tracfone is the country's fifth largest mobile wireless provider with approximately 20 million subscribers. TracFone serves the value-oriented portion of the market, including customers poor enough to qualify for Lifeline subsidies. TracFone offers a variety of affordable plans and phones from readily accessible general merchandisers and convenience stores.
AT&T and T-Mobile are two of TracFone's largest underlying carriers. Dislocating TracFone's GSM customers would impose costs on those least able to afford these costs and maintain cellular service. Is it the best policy for the Commission to choose technological efficiency over social efficiency in order for the merger to be in the public interest?
America's seniors gain two major benefits from mobility--health and safety, and mitigation of loneliness, which often accompanies old age. These consumers do not, for the most part, use advanced mobile broadband services. One of my clients, Consumer Cellular, Inc. is the exclusive affinity provider of AARP and focuses on serving America's seniors.
Recently, Consumer Reports announced that Consumer Cellular was rated highest in customer satisfactionamong all mobile wireless service providers. While Consumer Cellular was ranked highest in customer satisfaction, it should be noted that Consumer Cellular is an AT&T MVNO. Paradoxically, Consumer Reports also ranked AT&T the lowest of the major carriers in terms of customer satisfaction. Why?
The simple answer is that Consumer Cellular's customers use phones supported by the 2G and 3G networks for which the merging parties claim the greatest efficiency benefits from being able to combine. It is also notable, in all the rhetoric surrounding adjacent markets in this merger, that Consumer Cellular offers its customers phones for which it has exclusive distribution arrangements. These phones are made by Doro and have earned high reviews from consumers and tech experts alike for their performance tailored to the elderly and hard-of-hearing customer segments.
Who would you trust, an engineering model modified to generate the Commission's pre-determined views on "efficiency" or a wholesale customer, providing what a majority of its consumers believe to be the best mobile service in the country . . . using a network that it believes will become more efficient as the result of the merger?
The foundation of any relevant merger opposition rests on the correct definition of a relevant product and geographic market, and then attempting to rationally predict the expected consequences of any undue concentration in these markets. To this end, Free Press's proposed definition of a "nationwide smartphone cellular service market" deserves some scrutiny.
The Free Press Product Market Definition
In order to prove a merger violates the relevant antitrust laws, an opposing party must demonstrate that the effect of the merger would be "substantially" to lessen competition "in any line of commerce" (product market) in "any section of the country" (geographic market). Clayton Act, Section 7. For a merger opponent to be successful, they must show that the merger will lessen competition in some discrete product and geographic market.
As an opposing party, Free Press begins its criticism of the merger in an analytically correct manner--by attempting to narrowly define a "market" in which it contends competition will be lessened. Nonetheless, in defining a product or geographic market, an opponent must look at the consumer's options--not just what might work for their case.
Frequently, antitrust plaintiffs make the mistake of defining product markets too narrowly (e.g., "stuff that only I like", or "Bob Marley Songs") in order to produce high concentration numbers. Product markets are often defined too narrowly because plaintiffs mistake product differentiationwithin a market for different product markets.
Free Press makes this same mistake, concluding that "nationwide", post-paid, smartphone cellular service constitutes a separate product simply because some carriers offering these services can command higher prices than functionally-equivalent service plans offered by smaller competitors. Rather than proving a separate product market, Free Press has simply identified an example of differentiated competition within a product market (mobile wireless service). Courts have consistently, and correctly, rejected product differentiation as a basis for defining a "product market"--from "premium" ice cream, to "premium" beer, to "expensive" suits. SeeThe Significance of Variety in Antitrust Analysis, Section II. B., generally.
Among its many other omissions, Free Press fails to define the unique characteristics of providing "nationwide" smartphone cellular service, as opposed to cellular service supporting all mobile devices, such as a "feature phone", a "tablet", or the dreaded "somewhat-smart-phone" that Free Press criticized Metro PCS for offering just 4 months ago. Given the unique diversity of products each carrier supports, it is difficult to imagine how a "hypothetical" smartphone cellular service monopolist would behave differently from a carrier supporting all mobile wireless services for purposes of satisfying the market definition tests under the DoJ's Merger Guidelines.
Even if the proposed product market could be defined with precision, it would still not necessarily indicate that consumer welfare would be harmed, due to the principle of "supply substitution." You see, a "hypothetical monopolist" in the product/service market must be able to profitably be able to raise prices without attracting entry by other firms in the market. SeeGuidelines, Section 9.0, et seq.
This is why the FCC (from its earliest Wireless Competition Reports) wisely declined to analyze competition on a service-specific basis, finding instead, that the "evidence "support[ed] a product market that was much broader, including all CMRS services. See2nd Annual CMRS Report at 8. The Commission presciently made this finding when 36% of all CMRS customers were using paging, and that market was growing at 22% year over year. Id. at 5.
Geographic Market Definition
Free Press provides even less evidentiary support for why the relevant geographic market, from a consumer's perspective, is nationwide. While all wireless consumers want to be able to contact anyone in the country, and they want to be able to use their phones anywhere in the country, this is an element of product market definition, and one that the FCC has recently addressed through its "Data Roaming Order."
The geographic market for wireless services (including "smartphone cellular services") is the area in which a consumer could reasonably be expected to purchase such service--even if a "hypothetical monopolist" raised prices by a small but significant amount within that area. In other words, for most people, this market is local (as the Commission has always concluded). While it is natural for every economic agent to want to provide service to the largest possible market, the only reason Free Press argues for a "nationwide" market is to enhance concentration numbers in an "artificial" geographic market.
For Free Press, this argument is understandable (to increase merger-related concentration), but it is also intellectually dishonest. After all, how can Free Press scream up and down about a Metro PCS smartphone cellular service offering, and then argue that Metro PCS is not "in the market" for a significant number of customers? Regional carriers, like Metro PCS, are either relevant or they're not. Free Press can't get a free pass.
Just Don't Think About It . . .
Without its uniquely distorted market definition (and maybe even with it), Free Press cannot show any consumer harm from the merger. Allegations of harm through "coordinated conduct" usually work best in homogeneous product markets that are geographically concentrated (think milk or cement). If the only thing to compete on is price, then competition is best "managed" through coordination.
On the other hand, a "unilateral effects" theory (also argued by Free Press) works better in highly concentrated markets, with differentiated products, and where each firm is each other's closest substitute. The big question here is, does AT&T price its services differently in markets where T-Mobile is a competitor than in markets where T-Mobile is not present? This seems highly unlikely--given Free Press's "nationwide" geographic market argument.
Successfully opposing a merger is no easy matter, but, at a minimum, the merger opponent has to arguably promote something more than social engineering. In the present case--based on all known facts--consumer welfare (represented by output stimulation) has been most persuasively argued by the merging parties. Fortunately for consumers, any localized competitive concerns can be easily cured by discrete divestitures, which will only strengthen "renegade", "irrelevant" carriers like Metro PCS.
What we've got here is...failure to communicate. Some men you just can't reach. So you get what we had here last week, which is the way he wants it... well, he gets it. I don't like it any more than you men. -Rep. Henry Waxman (D-CA) (referring to Communications Subcommittee Chairman Greg Walden's (R-OR) inability to get a major ISP to testify in favor of an anti-net neutrality resolution at Wednesday's hearing).
The quote above is, of course, not the words of Rep. Waxman. That quote (you may recognize) was spoken by "Captain, Road Prison 36" in the classic movie "Cool Hand Luke." Although, it sounds like something Rep. Waxman could have said after Wednesday's hearing (if he was a redneck chain gang prison guard from the '60s), what he actually said was this, "[r]epublicans couldn't get a single major broadband provider to testify in support of their resolution." For the record, the Republicans won the battle, by successfully voting their "net neutrality repeal" resolution out of the Subcommittee on a 15-8 vote, along party lines.
The significance of Wednesday's hearing might be a little deeper than what meets the eye. Why did Rep. Waxman say that there wasn't a single major broadband provider supporting the Republican repeal resolution? Well, Jim Cicconi of AT&T said it best in his prepared testimony wherein he explained, including a quote from a previous statement by AT&T's CEO, Randall Stephenson, that the FCC's compromise rules weren't everything that AT&T had hoped for, but the rules provided certainty, and AT&T could live with them. Reasonable enough, right?
But, changing ownership of a cliché, or catchphrase--while considered clever by the folks at Free Press--essentially means nothing. After all, it didn't help the opponents of net neutrality rules, so why should this "used and losed" phrase fare any better in the hands of the proponents of net neutrality? But the real reason why the Republicans should have heeded the "no more hearings" warning in my post after the last set of hearings?
The only payoff is for your opponents. They simply get more undeserved press to rehash stale arguments. Unfortunately, for Republicans, the juice just isn't worth the squeeze. Even if Republicans succeed in getting the resolution out of the House, the resolution then has to get past the Senate and garner 60 votes to get past a Presidential veto. This is a bad bet, no matter how well-intentioned, because it has long odds and a win won't pay big. What do you win when your natural supporters don't even want you to place the bet? But, given the greater odds against, the more relevant question for Republicans might be what can you lose?
As the Republicans are learning, it takes precious time to demagogue this big bowl of nothing. Perhaps, the Democrats last term might have been better served by focusing attention on more important issues. Now there are less Democrats. Do the Republican legislators really want to repeat this mistake?
. . . especially "Walled Gardens" that are tiny, and easy to leave. Apropos of nothing, I would also add that real men don't "Facebook". Seriously, does anyone think Chuck Norrishas a Facebook page? I looked it up, and the answer is "no". To Chuck, Facebook is probably nothing more than a catalog of 500 million needy, attention-seekers whose asses just aren't worth kicking . . . .
But I digress . . . back to my original point. A few days ago, Free Press attempted to create a tempest in a teapot over the new mobile broadband Internet offerings by Metro PCS. Basically, as explained by Ars Technica, Metro PCS offers some, limited functionality, service plans over its new 4G network at discounted prices. Less access to applications costs less, more functionality costs more. Simple, right? You'd think. But Free Press is angry over the FCC's decision to allow mobile wireless broadband providers to block some content. As a result, it--not surprisingly--is calling for an investigation of Metro PCS.
Free Press seems most disappointed that, despite all their efforts, they got basically an empty Net (pun intended) out of the FCC's Net Neutrality rules. Once you get past the FCC's aggressive, but confusing (and confused) rhetoric in the Net Neutrality Order, it becomes apparent that the actual "rules" (see Appendix A) are pretty much a restatement of the Commission's 2005 Policy Statement (the principles in the 2005 Statement, minus the "competition" principle, and more "subject to reasonable network management" caveats). The Order also notes that wireless service providers will be granted more latitude than wireline providers, due to the bandwidth constraints resulting from more limited wireless data capacity and spectrum scarcity.
After the Commission adopted a predictably generic set of rules, Free Press was predictably disappointed. The frustration of Free Press is understandable, but their ire over an additional market offering--over an upgraded network--by Metro PCS is sadly, and mistakenly, misplaced.
I have no connection to Metro PCS, and no opinion of the company. I do, however, have a genuine admiration (gained firsthand) for the guts, intelligence, and skill of the company's early investors--particularly, Columbia Capital Partners and M/C Venture Partners. Look at these investors' portfolio companies, and you will see that they have been successful by making it their business to bring competitive capacity to all parts of the communications and Internet industries.
Nonetheless, the only "facts" I know about Metro PCS are those in the public domain, and here are the ones that seem most relevant to this matter. Around 6 months ago, the FCC couldn't give a spit about Metro PCS' presence in the wireless market. In the Commission's Wireless Competition Report, the FCC didn't even credit Metro PCS with having a wireless broadband network (see p. 30, Table 2), much less a 4G network. Metro PCS now has both, and is actively offering consumers a variety of service offerings over this upgraded network. On the other hand, some would have us now believe that Metro PCS is the "Big Bad Wolf"? But who's really "crying wolf?"
Adding consumer choices is the sine qua non of a competitive market. Moreover, the creation of additional broadband capacity--regardless of technology--has been identified by the President, the Congress, and the Commission as a strategic national priority. If Metro PCS is successful with its offers, it will gain a toehold in the mobile broadband market--if not, then it will have to change its service offers.
Thus, if a "Walled Garden" is so scary to consumers, it's hard to believe that a new entrant would attempt to serve demand that doesn't exist. Nonetheless, consumers that are scared will just go somewhere else, or opt for another Metro PCS service offering. It is disappointing that a group called "Free Press" is asking the Commission to deny consumers "free choice." It kind of makes you wonder who Free Press is trying to set free . . .