Telecom Sense

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

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

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

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

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

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

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

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

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

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

The Report theorizes that average voice consumption per user may have declined in the past year as a result of "per text" prices precipitously declining from 2 ½ cents per text to around a penny per text over the same period.  If voice and texting are indeed "close substitutes", then the Commission may want to refine its analysis in the next Report to include voice/texting as a single product market category.  This would suggest a more competitive market, as voice plan prices and per text prices continue to fall, pari passu.

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

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

Comcast Stands for . . . Status Quo?

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

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

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

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

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

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

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

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

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

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

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

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

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

Rust Never Sleeps . . .

"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"

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

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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