Results tagged “broadband Internet access service classification”

September 8, 2014 1:59 PM

Free Press's Misleading Theories on Title II and CapEx (Pt. 2)

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 are lying when 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, but Internet 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.

June 29, 2010 5:34 PM

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

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

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

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

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

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

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

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

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

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

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

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

June 16, 2010 2:43 PM

Straight Outta Comstock

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

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

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

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

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

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

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

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

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

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

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