Regulating Prices For Business Data Services Will Widen Network Gap Between Urban And Rural America
by Rick Boucher
The Federal Communications Commission (FCC) is preparing to foist new rate regulations on the “business data services” (BDS) market, the dedicated broadband links that provide Internet access to businesses of all sizes. Unfortunately, the proposal has many shortcomings, and it would impose–for the first time–regulations on new fiber infrastructure in an expanding and well-working market that is attracting new service providers as competitors…but its most detrimental effects would be in rural America.
As the representative for 28 years of Virginia’s most rural and mountainous congressional district, I came to an early appreciation of the unique barriers that make developing advanced communications networks in rural areas highly challenging. First, thin population density means that the fiber-optic lines must traverse longer distances to serve fewer people than comparable investments in suburban or rural areas. Secondly, challenging terrain, particularly in mountainous areas, dramatically increases deployment costs. Third, with rural incomes generally lower than metropolitan area incomes, once modern networks arrive, there are often fewer subscribers per capita within the local population than the national average. Consequently, rural networks are deployed more slowly, and advances in network capability come later than in metropolitan areas, producing an existing rural versus urban deployment gap in 4G LTE services.
Telecom policymakers at every level of government and at the FCC must keep these realities firmly in mind. If they fail to do so, the challenges of developing rural networks inevitably become even harder. The FCC’s pending BDS regulation is, regrettably, a glaring example of rural reality nonobservance.
Under the FCC’s proposal, areas the agency deems competitive with multiple business data service providers would remain unregulated. While good for urban and suburban America where high demand for BDS currently exists and multiple service providers meet the demand, that approach will worsen the existing 4G LTE deployment gap between urban and rural areas and severely hinder the rural area deployment of next-generation, super-fast 5G mobile networks. Instead of bringing nearer the time when all Americans will have the benefits of broadband service, the FCC’s proposal flies in the face of the Obama Administration’s longstanding goal of bringing high-speed broadband to 98% of Americans within this decade.
It’s well understood that high-speed networks are deployed most quickly when investors can foresee a profitable rate of return on investment. Because of the unique challenges to network deployment in rural America, the need for a predictable rate of return on investment is essential for rural providers. The Commission’s proposal would impose on rural America a system that, by design, is assured to diminish new network investment. With price regulation, rural deployments would bring lower returns. With the incentive to invest removed, few companies would be willing to dedicate the capital needed to modernize rural networks. The deployment gap will widen, and the arrival of competition in the business data market will be delayed. Even if one high-speed network company proved willing to invest in the currently unserved rural market, it would immediately be saddled with de facto monopoly status and subjected to price regulation.
Under these conditions, it’s certain that few companies would make rural investments. The FCC cannot simply overlook the reality of these markets and remain true to its and the Administration’s commitment that all Americans, and all American businesses, including rural hospitals and educational institutions that are the lifeblood of many local communities, deserve and should receive the same broadband services available in metropolitan areas.
And there is no articulated need to control prices in order to speed the transition to the faster and better 5G systems for either urban or rural areas. There is nothing about the nature of 5G technology that implies a need for price regulation or even a fear that competition in 5G will not mature as robustly in the BDS market as in the unregulated wireless broadband market. With four strong national wireless competitors and cable, a strong new business data services provider, BDS competition is robust and growing. Even Sprint, which seeks FCC regulation of business data services and has a history of abandoning rural markets, has easily found over 20 suppliers for its new advanced Network Vision deployment, belying its contention that the national market is not competitive.
The rewards of meeting the growing demand for BDS in both rural and urban America belong to those who invest and compete. The key is investment, whether that investment comes from incumbent local exchange carriers, from new entrants such as cable, or from competitive local exchange carriers (CLECs). One can reasonably ask why CLECs choose not to redouble their efforts at investment in a market that is both rich in potential and critical to the future of American businesses and large institutions, such as hospitals and universities. Instead, the CLECs are relying on the Commission to regulate the BDS market in their favor, sacrificing future network investment in the name of price regulation for both existing and newly deployed networks. That’s a backward-looking approach that will poorly serve the entire nation and particularly disadvantaged rural Americans.
Originally published by Forbes.
Verizon Exit From Trade Group
Verizon Exit From Trade Group Signals a Departure From Its Entrepreneurial Roots
Verizon is leaving the community of companies who believe in investment and facilities-based competition.
by Bruce Mehlman
Move over, Brexit. There’s a new exit making waves: Verizon’s (VZ) , as evidenced in this ex parte filing at the Federal Communications Commission (FCC).
Verizon is not leaving an economic union but instead the community of companies who believe in investment and facilities-based competition, particularly in the business data services (BDS) market, now the subject of proposed FCC price regulation. And it appears the company is also abandoning certain long-held economic principles, as well.
Since 2003—a virtual eternity in the fast-paced world of telecom—Verizon has staunchly advocated for investment, deployment of fiber, and facilities-based competition. Verizon’s once-visionary leadership coined the phrase ‘new wires, new rules/old wires, old rules’ used by the FCC to create pro-fiber investment policies that helped spur the deployment of its modern high-speed broadband network. The “Fi” in FiOS, a central part of Verizon’s corporate strategy and broadband buildouts—stands for fiber, after all.
Yet Verizon now trumpets a deal with the competitive local exchange carrier (CLEC) trade association INCOMPAS that favors price regulation in the BDS market. Why the sudden change? Some might suggest that Verizon’s proposed mergers currently pending before the FCC and other government agencies might be the reason why the company is now simply driving 55 past the speed trap giving a friendly wave to the regulatory cops.
But there’s another likely reason: In a highly regulated environment, it can be tempting to let regulators determine outcomes in markets rather than doing the hard work of competition.
This was made clear in a recent ex parte filing at the FCC in support of the INCOMPAS/Verizon call for intrusive price regulation. It describes this effort as “a rare achievement that is a culmination of years of hard work and recent compromise from diverse interests-wireless providers, backhaul providers, competitive providers, incumbent providers, and international providers-working together to provide a balanced solution to an issue that has plagued the industry for numerous years.” It should also help the Cubs win the World Series for the first time since 1908.
It’s everything, in short, a regulatory agency could want - except a firm reliance on the very facilities-based competition that will drive fiber investment and actual deployment of BDS to the businesses and institutions that need it most. Instead, as growing purchasers of BDS, INCOMPAS companies now seek to slash their competitors’ returns to accelerate a ‘lease over build’ deployment strategy.
Rather than promote capital investment, INCOMPAS companies find it easier to adopt the DC fashion of the day—seeking regulation for one’s competitors. To paraphrase Senator Russell Long’s famous line about tax lobbying, don’t regulate you, don’t regulate me; regulate that facilities-based competitor behind the tree.
The danger associated with service providers seeking regulation of their competitors is clear. It distorts markets. It undermines investment. And it reduces competition, which hurts the economy.
Moreover, this is the exact opposite of what the FCC should do if it wants the widest, fastest possible spread of high-speed BDS and more competition. The FCC itself recognized that the presence of nearby fiber—even a half-mile away—constrains prices. Good! The point of wise telecom regulation is not the highest possible returns for incumbent holders of BDS contracts but rather ensuring a fair return on investment, the kind of return that will promote rather than discourage investment. It’s one thing for prices to fall because of competition. It’s another when a regulatory agency declares they should fall based solely on the pleas of competitors in the marketplace.
So INCOMPAS thinks that because there is a lack of competition, the BDS market needs “meaningful price reform,” but that price reform should come from the FCC rather than competition from the market.
This is not an academic exercise; the harm of price regulation is real. It will delay deployment of fast BDS necessary to support next generation 5G mobile broadband service in areas that need it most, including rural America. If the FCC were to slash BDS rates by 45%, 25% or 15%, as proposed by INCOMPAS, what incentive will investors have to invest in regions that are more remote and harder to serve, where cable may not be as much of a presence? Rural America should not be forgotten in the rush to wrap up a tidy solution to an FCC proceeding that has been pending since 2005.
The principles of economics are the same as they were a decade ago. Business plans may change, the footprints of incumbents may change, but the principles are the same: If we want innovation and broadband investment, design a system that encourages investment.
Verizon wisely and boldly took that path for many years. Now, it seems to be moving in a different direction, marrying up with INCOMPAS to the detriment not only of those business customers in need of high-speed BDS, but to the economy as a whole. It’s sad, really. But the siren song of using regulation to gain an advantage over one’s competitors has apparently proven too tempting.
It’s been reported that Verizon may buy a video game developer. Time will tell. But while mobile video games are great, regulatory gaming is not.
Originally published at The Street.
From “Best Efforts” to Best Service
The FCC is seeking to extend “special access” regulations formerly applicable only to legacy copper-based services to new fiber-based services in geographic locations the agency deems to be uncompetitive. The author suggests that the data the FCC is using to support its proposed regulations is “deeply flawed and badly outdated” and urges Congress to take a close look at the proposed regulations and to tell the FCC not to act on stale data.
by Rick Boucher
The Federal Communications Commission (FCC) is in the midst of a continuous proceeding to develop new rules for the nation’s $45 billion “business data services” market. These are the broadband links and services provided to business customers of all sizes across the country.
Why is it controversial?
Existing FCC regulations effectively necessitate that telephone companies maintain two networks—one that is modern and fiber-based offering fast Ethernet services and the old one based on copper technology. New fiber networks are currently unregulated, while the FCC mandates that competitive local exchange carriers (CLECs) be given access to incumbent telephone company copper links at deeply discounted rates.
The FCC now seeks not only to keep existing regulations on the old copper-based services, but also extend government-mandated access and price regulation to new fiber-based services in geographic locations the agency deems to be uncompetitive.
The FCC’s plan, however, relies on deeply flawed and badly outdated data used to determine whether markets are competitive.
The market has transformed dramatically as cable companies now offer competitive business data services. Their reliable high speed cable/video systems now pass a huge number of the nation’s businesses, and entry into this market makes obvious sense for them as they face increasing competition for their traditional video services.
But for the FCC, this evidence of real competition is not enough. Specifically, the FCC notes, with a tsk-tsk sound, that cable isn’t a meaningful competitor. The agency claims that cable offers an unreliable “best efforts” service rather than the continuous fast speeds businesses require.
This response makes the agency appear seriously out of step with marketplace realities. The FCC used 2013 data to launch its 2016 rulemaking, and used these same data for an FCC investigation in 2015. Apparently the agency fails to realize that the business data services market is transforming at Internet speed, and that stale 2013 data is simply irrelevant to determining market conditions in 2016.
Fortunately, cable has made clear that it can provide more than “best efforts” service. Today’s cable companies can offer Ethernet capability delivered over hybrid fiber networks to virtually all locations of significant business demand. This revised and compelling data further undermines the FCC’s recent argument for price regulation based on a presumed lack of business data service competition.
For example, Charter notes that per FCC guidance, it originally “excluded locations that were connected only via best-efforts Internet lines” from its list of locations it can serve with business data services, and it has now refiled with a list of all locations connected to a Metro-Ethernet-capable headend. Time-Warner affirmed that “all of TWC’s headends throughout its entire service footprint were Metro-Ethernet-capable by 2013.”
For his part, Comcast’s David Cohen states that Comcast “has invested over $5 billion since 2010 to enter the business services market as a new competitor offering highly innovative products that appeal to business customers of all sizes.”
Cohen also remarks with even greater force that despite FCC Chairman Tom Wheeler’s earlier pledge not to impose rate regulation and to give network operators the opportunity (in Wheeler’s words) to “provide returns necessary to construct competitive networks,” now “a divided FCC is proposing a regulatory regime which penalizes non-dominant, competitive providers with prescriptive rate regulation.” Rigorous regulation of the new Ethernet investments would directly translate into less investment and would diminish cable’s presence in the market.
Reliance by the FCC on today’s data would show the enormous amount of new competition that recent cable entry into the market has created.
And it’s hard to escape the reality that this type of innovation we see from cable happens best—really, happens only—when markets are free to work without the hand of government on the scale.
Competition works, and this market is competitive. It’s time for Congress to take a close look at the proposed business data services regulations and tell the FCC not to act on stale data. When Members go home this summer, they might even discover that competitive cable can now offer their district offices another choice on data services.
Originally published at Bloomberg BNA.
A Lesson From Canada For The FCC
by Bruce Mehlman
Oh, FCC: Take some notes from Canada.
Maxime Bernier, one of the candidates for leader of the Conservative Party of Canada, has just given a speech in which he set out ways to achieve real competition in the telecom sector. And one of the things he proposes is actually to phase out the role of the Canadian Radio-television and Telecommunications Commission (CRTC) as telecom regulator.
Bernier is a telecom and regulatory expert. He was Minister for Industry in Stephen Harper’s Conservative government and led the deregulation of local telephone markets after cable companies and wireless had transformed the telecom landscape. In short, Bernier recognized that there was “obviously more and more competition,” and he acted on it. In the face of opposition both from those who favored continued regulation and the Canadian regulator itself, the market was deregulated and competition flourished.
So why is Bernier so anxious to act now? It all goes back to his time in government. Ten years ago, he had set out a Policy Direction to the CRTC, which instructed, in his words, “the CRTC to rely on market forces to the maximum extent feasible within the scope of the Telecommunications Act” as a “solution” to its “control freak mindset.”
Back to old ways
What happened? “I, and many others at the time thought that it would force the CRTC to change its ways, to become more flexible and adapt to the new competitive reality. We were wrong. The CRTC seemed to take the Policy Direction seriously for a few years. And then it reverted back to its old ways.”
And from this, Bernier draws a conclusion about regulation and regulators: “Those whose task it is to regulate this industry tend to be behind the curve. They don’t want to let go of their regulatory control. Meanwhile, the industry has actually moved on, with new innovations.” That’s exactly right. And it applies just as much here as there.
Now if the CRTC can behave this way in a parliamentary system, in which it is supposed to follow the directions of Parliament, imagine the vast discretion our own Federal Communications Commission (FCC) has in a system where it is an independent regulatory body.
Implementing policies that ignore the marketplace
Why should Americans care? Because the issues that Bernier cites as examples of a regulatory mindset are the same ones we face here, notably with broadband, wireless and the nature of competition itself. In each case, the regulator opted for policies that ignored the marketplace, put its hand on the scale and favored policies that restrict investment. In auctions, restrictions on bidding intended to dictate market outcomes led to misallocation and under-utilization (as some of the spectrum sold in 2007 for public safety is still not being used and other parts took seven years to finally see service after sale in secondary markets).
So whether it’s broadband, wireless auctions or the nature of competition itself, the issues are similar on both sides of the 49th parallel. Regulators too often seek to ignore marketplace realities. In the U.S., we are witnessing it today with the FCC’s heavy-handed proposed regulations in areas such as special access, privacy and the video marketplace, among others.
Regulators only want to protect their own power
What Bernier writes of the CRTC could equally be said of the FCC: “As the industry evolves, the CRTC finds new reasons to continue to regulate it, in order to justify its existence. In doing so, it is not protecting consumers, it is only protecting its own power. The telecom industry is a mature and competitive industry, and it should be treated as such. It’s not a playground for bureaucrats.”
Both Americans and Canadians are better off with greater access to modern, fast telecommunications services, when the regulator lets the market work, encourages real competition, and investment, and keeps its hand off the scale. In fact, again quoting Bernier: “Interventionist policies that are meant to bring more competition actually do the opposite. Competitive markets don’t need government intervention to work. They only need to be free.”
Originally published at Forbes.
Consumer internet privacy: Leaving the back door unlocked
by Rick Boucher
The Federal Communications Commission’s (FCC) asymmetric approach to internet privacy is likely to create a false sense of security among web users. Despite stringent FCC privacy regulation of internet service providers (ISPs), consumers’ information will enjoy little protection when they are interacting on social media sites, shopping online or surfing the web.
The recent Senate hearing on Internet privacy that featured FCC Chairman Tom Wheeler and Commissioner Ajit Pai, along with Federal Trade Commission (FTC) Chairwoman Edith Ramirez and Commissioner Maureen Ohlhausen, underscored that the FCC’s approach to internet privacy — singling out ISPs while leaving the privacy practices of edge providers essentially unregulated — is unbalanced.
By analogy, compare internet privacy to protecting a house. Wheeler’s proposal only locks the front door to guard against ISP privacy violations, while keeping the back door wide open for edge providers, such as social media and e-commerce companies. And that’s happening as the internet ecosystem shifts radically toward the ability of edge providers to make the greater use of consumer information. A recently released study demonstrates that the expanded use of end-to-end encryption renders ISPs incapable of accessing most data that moves across their networks. Meanwhile, edge providers have complete access to information about their users, and they have sophisticated processes for monetizing it.
Sen. Al Franken (D-Minn.) suggested a viable alternative that would be better for consumers: keeping both doors locked and assuring uniform privacy protections by both ISPs and edge providers. According to Franken, “Should they [consumers] choose to leave information with companies, they need to know this information is safeguarded to the greatest degree possible. Telecommunications providers and edge providers like Google need to ensure their customers have more information [on] the data being collected from them and if it is sold to third parties.”
The FCC claims it lacks authority over edge providers. The FTC regulates privacy through its “unfair trade practice” authority, under which enforcement only occurs when companies fail to deliver the privacy protections they promise. Neither agency can require edge providers to extend the privacy protections that Franken envisions. His goal could only be achieved if Congress conveys broader regulatory authority on one agency or the other.
Also better for consumers would be to keep both doors unlocked. It’s not ideal, but at least consumers would be aware that all of their personal data on the Internet, irrespective of the device, platform or service used, is susceptible to being tracked and utilized.
Each approach has strengths and weaknesses. The first approach would offer a consistent and enforceable set of consumer rights and expectations. However, Pai thinks the doors-unlocked approach would be better for investment and continued digital innovation.
If and until Congress acts to require edge providers to respect consumer privacy, the only way to assure parity of treatment across the ecosystem and give consumers clear privacy expectations is to rely entirely on the FTC to lightly oversee privacy for both ISPs and edge providers. As Ohlhausen said, the FTC’s approach, “which has been incremental and technology neutral, has allowed us to be flexible as technology changes.” It’s probably the best we can do under current law. Singling out one segment of the internet ecosystem for special and more onerous treatment is flawed policy.
Boucher was a member of the House for 28 years and chaired the House Energy and Commerce Committee’s Subcommittee on Communications and the Internet. He is honorary chairman of the Internet Innovation Alliance and head of the government strategies practice at the law firm Sidley Austin.
Source URL: http://thehill.com/blogs/congress-blog/technology/280603-consumer-internet-privacy-leaving-the-backdoor-unlocked
FCC, Stop Worrying — the ‘Special Access’ Data Market Is Already Competitive
by Bruce Mehlman
The market for “special access” data services is getting more competitive all the time. And now there is additional fresh economic evidence of this.
For those who aren’t familiar with this important telecommunications issue, “special access” refers to bulk data connections used by businesses. For some time now, large traditional telecom providers have come under fire from critics who contend they make this sector uncompetitive, and the Federal Communications Commission has been investigating the issue.
But three professors (Mark Israel, Daniel Rubinfeld and Glenn Woroch) have analyzed the FCC’s own data and found that many businesses have competitive options that are geographically close to them. AT&T’s counsel summed up the professors work like this: “... these new, more precise data show even more dramatically that the vast majority of locations with special access demand are extremely close to multiple facilities-based competitors—indeed, in most cases, within a few hundred feet.”
To understand why the market is competitive, it’s important to understand how the market actually works. The professors write: “... competitive providers deploy fiber networks in areas where there is demand for special access services, use those networks to compete for customers located in buildings in the vicinity of those fiber networks, and then deploy connections to buildings where they win customers.”
Why does this matter? Because the realistic opportunity (a bid) to capture a market from an incumbent itself is a sign of competition, since it constrains the prices the incumbent can offer. With only one provider, prices would be higher. With competitive providers sniffing around and building fiber very close to potential customers, prices are constrained.
So let’s look at the facts. Based on an analysis of the FCC’s own data, it turns out that 25% of buildings that have a connection only to an incumbent local exchange carrier’s (ILEC) special access services are only 17 feet away from the nearest competitive provider’s fiber network; 50% are 88 feet away, and 75% percent are within 456 feet. The mean distance for all relevant buildings is 364 feet.
For comparison, 364 feet is about the length of a football field with the end zones. Seventeen feet? There are canoes and snakes that long. Eighty-eight feet? That’s shorter than an NBA court and less than Yadier Molina throws every night to get a runner out at second base. What about 456 feet? Well, with the Kentucky Derby coming up, that’s more than 200 feet shorter than one furlong. And it’s the same height as a roller coaster in New Jersey.
So the economic conclusion is clear. As the authors write:
“In any event, it is not true that most buildings are served by only an ILEC or only by an ILEC and a single other provider. This assertion is based on two incorrect assumptions: (1) competition occurs only among providers that have already deployed connections to a building, and (2) cable companies do not compete for special access customers.”
Rather than the distorted picture of a market dominated by ILEC incumbents that the FCC likes to present, in fact, the real picture is one of competition, with an ILEC and two competitors (one of whom may be a cable company offering fast speeds) offering facilities-based competition for most buildings in which there is special access demand. Isn’t this the way markets are supposed to work? Why won’t the FCC recognize this?
It’s said the longest journey begins with a single step. Here, to reach half of the supposed “monopoly” buildings, competitive local exchange carrier (CLEC) competitors only have to go 88 feet. Why can’t they invest? Why do they need government subsidizing their business model? Is stringing fiber 88 feet, to reach half the market, too much of a burden?
On any reasonable analysis of the FCC’s data, the special access market is competitive. It’s time to recognize that fact.
Athletes sometimes wonder what to do after their sporting careers are over. For Yadier Molina, the choice is easy: work for a CLEC. He can show them how easy it is to sling fiber 88 feet.
Originally published by The Street.
Netflix’s ‘House of Cards’ Collapses
OTT service’s network management revelations are an ‘exercise in hypocrisy’
by Rick Boucher
Netflix’s stunning admission that, for five years, it reduced the video speeds of customers of Verizon Wireless and AT&T Wireless — while not doing so for customers of Sprint and T-Mobile — is little short of breathtaking. It was an exercise in hypocrisy to claim that broadband providers were degrading the quality of its video when, in fact, Netflix — without notifying its customers — was doing precisely that.
Recall the history here to understand why Netflix’s actions were so brazen and deserving of governmental review. Traditionally, peering agreements among content networks and last-mile Internet-service providers (ISPs) were never regulated, but were always negotiated between private parties.
For Netflix, arm’s-length negotiations posed a problem, because as the share of total bandwidth taken by its content grew (up to 37% at peak hours, according to one survey in March of 2015), its position became ever more untenable. It wanted ISPs to build more bandwidth to consumers for Netflx’s use, but it didn’t want to help pay for that. It didn’t want its own business model constrained.
SHIFTING THE COST BURDEN
Instead, Netflix tried to shift the real costs of its service onto others — the local network operators. In fact, it wanted “free interconnection” with the ISPs shouldering all of the costs of the upgrades required to carry the ever-growing volume of Netflix traffic. Then, as the flood of Netflix content caused consumers to experience problems with video quality, Netflix was quick to put the blame on the ISPs.
Also remember that Netflix was a driving force in advocating for network neutrality. The company’s CEO, Reed Hastings, pushed first against Comcast and then against ISPs more generally, accusing them of “purposeful congestion” and pushed free interconnection for Netflix’s services. In a sharp departure from an unbroken history of peering agreements being negotiated by private parties through which the network responsible for delivering a greater proportion of traffic to the other network would bear the resulting cost, he demanded that “they (ISPs) must provide sufficient access to their network without charge.”
Hastings blamed video quality problems on a lack of interconnectivity, even as — without disclosure — Netflix itself was slowing down video. Then, while continuing to complain about video quality degradation, the company persistently and successfully urged the Federal Communications Commission to include regulatory oversight over interconnection for the first time as an aspect of the net-neutrality rulemaking. That unprecedented assertion of authority is now a central feature of the litigation presently pending on the net-neutrality order.
ISPs, whether cable, wired telco or mobile, weren’t throttling or slowing Netflix video. Netflix was. This fact matters for yet another reason. One of the central responsibilities imposed by the net-neutrality order on broadband providers is transparency in network management practices. It must be noted that while being one of the strongest advocates of the FCC using last-century common-carrier rules to impose net neutrality obligations on the ISPs, the company was simultaneously secretly violating one of the core net-neutrality principles, the necessity of being transparent in its network management practices. The practice of degrading video for customers without notice was anything but transparent.
A MATTER OF MATH
Network-management practices that deliver fast, reliable Internet content rely not on blog posts and banging drums for government action, but on sound engineering and sound mathematics. The French writer Stendahl wrote, “Mathematics allows for no hypocrisy and no vagueness.” Nor should legal proceedings. Now that Netflix’s actions are publicly known, there is a clear path forward.
The Federal Trade Commission has jurisdiction over unfair trade practices in the Internet ecosystem. Advertising one service, such as level of video quality, while delivering a lesser service falls within the ambit of an unfair trade practice. Did Netflix advertise a service it failed to deliver? Were its conduct and its disclosures to customers consistent with fair trade practice?
Congressional committees may also legitimately ask about the circumstances that led the FCC to take the unprecedented step of departing from voluntary peering arrangements and asserting regulatory authority over interconnection between networks. In both venues it’s timely to ask some serious questions regarding Netflix’s behavior. These proceedings could even become a new Netflix hit, a true-life House of Cards.
Originally published at Multichannel News.
Level the Privacy Playing Field to Protect Consumers
Download a PDF of IIA Honorary Chairman Rick Boucher’s op-ed for Bloomberg BNA on Internet privacy and regulation.
The competition-distorting game in the business data market
by Bruce Mehlman
In their never-ending quest for continued and even expanded “special access” price regulation, competitive local exchange carriers (CLECs) for years have suggested that no real competition exists in the business data market.
Not true. I’ve been writing for some time how the cable industry provides effective competition in the business data market by offering Ethernet connections that are significantly faster than today’s CLEC services that continue to rely on antiquated copper-based networks as a result of special access regulation. Now, it turns out there is a group that agrees with me: the cable industry itself.
In their most recent comments filed at the Federal Communications Commission (FCC), the National Cable & Telecommunications Association (NCTA) highlights how the cable industry has played “a significant and growing” role in the special access marketplace. NCTA noted how their presence has increased from “…virtually non-existent when the Commission first started this proceeding back in 2005, ” to now offering “…business customers a wide variety of high-capacity services including state-of-the-art Ethernet services over Hybrid Fiber Coax or I00 percent fiber optic networks.”
Not surprisingly, innovation and competition have vastly changed the market since 2005, two years prior to the iPhone’s introduction. Rather than simply reselling services and facilities provided by others, the cable industry has entered this market the harder way: through investment. So as NCTA notes, “the most important task for the Commission in this proceeding is to ensure that it preserves incentives for continuing and expanding facilities-based competitive entry and investment.”
One would think that preserving competition and expanding investment would always be the principal task and goal of a regulatory agency, but this hasn’t been the case with special access. Instead, we’ve seen the CLECs, for two decades, hold on to their special privileges, including price regulation, forcing ILECs to maintain two networks, one of which the CLECs use to offer a slower, technologically inferior product to that which cable now offers.
So, for the Commission, the issue ought to be simple: Is there competition? And if there is competition, why regulate prices? The first question is answered easily by cable’s extensive entry into the market; the second naturally follows from it – in a competitive market, no need or justification exists for price regulation.
The question the FCC must now resolve is whether rates are “reasonable,” and market competition is the proof of that. As NCTA notes, “Firms lacking market power simply cannot rationally price for services in ways which…would contravene Sections 201(b) and 202(a) of the Act.” Based on this longstanding precedent, where a competitor has entered the market with its own facilities, the Commission has no basis for concluding that the competitor’s price is unreasonable. Consequently, in areas with two or more facilities-based providers, the Commission has no basis in logic or law to compel an incumbent LEC to offer service at a regulated rate that is lower than the competitive price.”
Viewed this way, the Commission’s task is pretty simple. The FCC has enough data to act. It should end this proceeding quickly and allow the market and competition to work, encouraging rather than discouraging the facilities-based investment that is already bringing faster and better products to the market for business services. Unsurprisingly, the most competition in this market is already at higher speeds than 1.54 Mbps, for the same reason that Willie Sutton robbed banks – it’s where the money is.
Rate regulation would distort incentives for competition and new entry, particularly among competitors that have built out facilities to compete. Rate regulation is unnecessary. The best sign of a well-working, competitive market is when new entrants come in with a better product to compete for customers. That’s exactly what’s happening in the business services market today.
Too often in Washington, we see industries (like the CLECs) seek special protection to shield themselves from competition, rather than advertise that they want to participate in the competitive fray. Good for the cable industry for taking the path of competition, and good for them for calling out the CLECs’ regulatory, competition-distorting game.
Originally published at The Hill.
Sprint Tells Regulators, Investors Different Stories
by Bruce Mehlman
Challenged telecommunications giant Sprint (S) is talking out of both sides of its mouth—and it seems to be a smart strategy that’s paying off.
Every year American employers spend far more money than they should on a blizzard of government filings. Some are mandatory like tax returns and Securities and Exchange Commission (SEC) filings. Some are critical for public safety or record-keeping like prescription drug studies or the Census. Some are purely voluntary—like engaging in federal regulatory agency proceedings.
However, problems arise when these filings fail to add up. For instance, what if a company tells the SEC one thing to try to win favor on Wall Street but then tells another government agency something different to get special regulatory treatment? Which one should the government believe? For that matter, what should investors believe?
Sprint provides an excellent example of this type of behavior, offering investors a bullish spin for growth based on innovation while pleading with policy makers to pity its relative weakness through ongoing regulatory intervention. In the age of heightened transparency, however, policy makers should see through the smoke and recognize the competitive market that truly is. And, unfortunately for Sprint and its investors, the story it’s telling regulators is much closer to the truth.
Last September, Sprint told the FCC that it still needs government-regulated access to business data lines, so-called “special access”: “Every one of these sites will require additional backhaul and Sprint and other competitors will depend on both TDM and Ethernet special access more than ever to be able to compete.”
Sprint said much the same in 2013.
But to the SEC (and therefore to Wall Street), however, Sprint tells a different story, one of network modernization and using modern lines. For instance, in its Form 10-Q just last August (a few weeks before the filing with the FCC), Sprint stated: “As part of our recently completed modernization program, we modified our existing backhaul architecture to enable increased capacity to our network at a lower cost by utilizing Ethernet as opposed to time division multiplexing (TDM) technology.” The company also said that network modernization program was saving it money through “reduced network maintenance and operating costs, capital efficiencies, reduced energy costs, lower roaming expenses and backhaul savings.”
Translated, this means that Sprint is modernizing its facilities and saving money by doing so, including from connections to other networks. Most of the network modernization efforts consist of building out Ethernet lines, the faster lines used for business data that are replacing the older, copper wires used for regulated “special access” lines. In fact, Sprint said just that in a press release in 2011, noting correctly that “Aggregated Ethernet access can provide a cost-effective alternative to traditional TDM access” (i.e., “special access” lines) for business.
Why then the need for special access and prices set by regulation rather than the competitive market?
So far, both sales pitches seem to be working, at least somewhat: the FCC has maintained anachronistic special access regulation, and Wall Street has accepted Sprint’s statements that its network modernization program is good for the company. Last July, a Fierce Wireless article noted that Sprint was going to use wireless backhaul to reduce its capital costs, even allocating a portion of its spectrum for backhaul; in a similar piece, BITG analyst Walter Piecyk estimated that Sprint could save from $600 million to $1.2 billion per year by switching to wireless backhaul.
In this, the analysts just echoed the views of Sprint CEO Dan Hesse, who stated in 2013 (a few months after Sprint once again filed at the FCC on behalf of “special access”) that he expected 90% of Sprint’s backhaul “to be driven by Ethernet over fiber and the remaining over microwave.” So Sprint is switching to newer, faster technology, and in the process saving money, but still wants its competitors to subsidize older lines. It tells the SEC that it’s embarking on newer lines to compete but tells the FCC that it needs regulation of older lines, too.
Wall Street knows that in the competitive world of telecommunications, the companies that invest in newer and faster technologies are the ones most likely to do better over time—even better if these investments lower the companies’ operating costs, as Sprint claims on its backhaul costs. Sprint obviously knows all this, too, which is why it is so eager to convince Wall Street analysts that it is a thoroughly modern company deserving of their money.
But Sprint can’t perform the straddle forever. Let’s take Sprint at its word that it is investing and competing in a highly competitive market, even at the same time reducing capital expenditures. It’s time to end the special pleading for special access, invest, and compete. That’s what great companies do.
Originally published by The Street.
As Activists Continue to Use Technology to Fight for Justice, Access Matters
The federal Lifeline program needs to be reformed to include high-speed Internet service for Americans with the lowest incomes.
by Larry Irving and Jamal Simmons
People aim cellphones at a speaker in front of the TCL Chinese Theatre on Hollywood Boulevard in Los Angeles on Dec. 6, 2014, as they march to protest the decision in New York not to indict a police officer involved in the choke hold death of Eric Garner in New York City.
Those advocating for a freer and more just America have always used the latest communications technology to further their aims. In 1841, abolitionist Frederick Douglass launched the North Star newspaper using the advanced communications technology of the 19th century, the printing press, to fight for the freedom of black people. Douglass and the suffragists of the late 19th and early 20th centuries followed in the tradition of the great pamphleteers, such as Thomas Paine, who built support among fellow colonists to separate themselves from the king of England.
President Franklin Delano Roosevelt used commercial radio to broadcast fireside chats to the American public about how he was trying to alleviate the impact of the Great Depression in the 1930s and ’40s.
In the 1950s and ’60s, Martin Luther King Jr. and other civil rights leaders knew that television cameras capturing the brutality of oppressive sheriffs would outrage Americans in their living rooms far from the front of segregation. The repulsion Americans felt when they saw women and children attacked by men wielding firehouses and dogs set in motion one of the great reform movements in American history.
Today, protest leaders across America capture moments of outrage with cellphone cameras and distribute videos over the Internet to worldwide audiences using social media.
Those who created the printing press, radio, television and mobile phone had no idea that their inventions would be used as tools in the fight for justice. Yet in each era, Americans used technology built to educate, entertain and enable business transactions in order to accomplish political goals.
These days, new social media platforms emerge regularly. Individuals have become broadcast channels with audiences rivaling some small radio stations. The barrier to new technologies reaching even wider audiences is lack of high-speed Internet access, and for many people who need it most, the barrier to access is cost. This Black History Month, reforming the federal Lifeline program to include broadband should be elevated as a key step to increasing access for Americans with the lowest incomes.
As the telephone became a tool necessary to conduct business, get access to emergency services and stay in touch with family and friends, Rep. Mickey Leland (D-Texas), then-chairman of the Congressional Black Caucus, prompted President Ronald Reagan’s Federal Communications Commission to create the Lifeline program in 1985 to lower costs and increase access to that critical service for low-income Americans. The Bush administration widened the program to include access to mobile phones. As the Internet becomes the standard required to access commercial services, apply for employment and complete homework, it’s time to include broadband service in the Lifeline program.
Along with adding broadband, policymakers should reform how the Lifeline program operates. Streamlining the application process by coordinating eligibility qualification with other federal programs and giving individual citizens the power to choose among providers on their own with a Lifeline Benefits Card should lower costs and gather more bipartisan support.
From reading pamphlets and newspapers to listening to the radio and watching television, American democracy has relied upon the communications technology of each era to engage citizens. Political candidates post digital video to communicate ideas, and activists are only becoming more creative in engaging followers online. Access to high-speed Internet service is critical for participating in the great American debates of today. Reforming Lifeline to include broadband service will help ensure that more Americans are able to bring more change.
Originally published by The Root.
Broadband growth means staying the course
by Rick Boucher & Larry Irving
Monday is the 20th anniversary of the Telecommunications Act of 1996, the last rewrite of the nation’s communications laws that set the stage for the competition, innovation and investment that we now enjoy but must not take for granted.
The act’s framers promoted light-touch regulation and a structure that led to an expanding Internet driven by new technologies, devices and applications. These forward-looking Clinton-era policies placed competition and investment as the central catalysts to drive innovation and advance consumer benefits.
Two stark paths now lie before the Federal Communications Commission (FCC): It can advance pro-investment, facilities-based broadband competition or it can discourage investment and broadband build-out.
Recent actions and announcements from the FCC indicate that the agency may be backtracking on the successful broadband policies of the past two decades. Rate regulation of broadband, for example, would negatively affect a growing sector of the economy by allowing government to place its hand on the scale rather than permitting market competition.
The FCC is required by law to determine annually the state of competition in the U.S. wireless market, but it fails to find the market competitive, even as nearly 80 percent of Americans have a choice of five or more wireless service providers. Consumers also have ample choices among plans and phone manufacturers.
Moreover, the agency has been reluctant to recognize competition among different technologies, such as between wired and wireless services. The 1996 act’s goal to promote cross-platform competition appears largely to have been realized, as triple- and quadruple-play plans for video, Internet and voice service are marketed by wired and wireless phone companies and by cable companies. More and more Americans are cutting the cord to landline phones.
The FCC also seeks to continue regulating last-generation business data lines that fail to meet today’s definition of broadband. In essence, it forces incumbent providers to invest in two networks, the old one that helps the business models still using copper wires and the new one that provides fiber for the high-speed broadband consumers and businesses want and need. Rather than give incentives for new fiber investment by competitors to serve business customers, the FCC continues to promote leasing of the antiquated copper network.
The agency has further dampened investment incentives by extending pro-leasing policies to wireless networks. It recently abandoned precedent that required wireless providers with spectrum to invest and build out their spectrum resources before leasing (roaming) on a competitor’s network. Why bother building out one’s own network, enhancing competition, if it’s easier to roam on the networks of others? This slows the effort to bring faster broadband to everyone.
Europe has tried to advance leasing at the expense of promoting investment and competition, and it resulted in less investment. Under those policies, Europe fell behind the U.S. in both broadband investment and deployment. In the U.S., broadband investment was $562 per household in 2012, compared with a meager $244 per household in Europe.
At bottom, it’s pretty simple. Competition and a light regulatory touch promote investment; regulations that deter competition deter investment.
A fitting anniversary celebration of the 1996 Telecom Act would be to stay the course so wisely set forth by Congress and the Clinton administration to encourage investment and innovation. We know it works. Just look at your smartphone.
Originally published in the San Jose Mercury News.
Will the U.S. Soon Fall behind in the Global Broadband Race?
by Larry Irving
“Regulatory humility.” To many, if not most, Americans, the phrase sounds like an oxymoron. Yet, for the last two decades, this has been the almost uniquely American approach to telecommunications and technology policy.
For more than 20 years, starting with the development of the first papers on Internet policy from the Clinton-Gore Administration, America’s watchwords were “first do no harm.” Adopting a posture of regulatory humility did not mean that government had no role: it still pressed for universal service, an open and secure Internet, protection of intellectual property, and improved use and management of spectrum needed for existing and emerging wireless technologies. The Administration recognized, however, that its job was to “steer, not row,” as the late Commerce Secretary Ron Brown put it.
Consistently, the United States has acted on the belief that policies that promote innovation and long-term investment are key to maintaining and expanding technological capacity and leadership, creating jobs, and improving consumer welfare. The approach has worked. The U.S. private sector has invested more than $1.4 trillion in telecommunications infrastructure since 1996, and private investment in America’s information infrastructure outpaces investment in any other country or region of the world.
Stark contrasts, however, lie beyond our borders. Australia, for example, has taken a more hands-on approach to infrastructure investment. Australia first announced its plans for a “National Broadband Network” (NBN) in 2007. The intention was to create a government-owned business enterprise that would provide broadband Internet across the country, but the NBN became increasingly politicized, faced construction difficulties and brought cost overruns. When a new administration took over after elections in 2013, they radically altered the vision and the financing for the NBN. Now, almost a decade after Australia’s government first led efforts to bring broadband to Australia, the NBN project is still underperforming and Australians still don’t have the world-class broadband network they want and were promised.
Choice of regulatory model has also affected investment in Europe. The Boston Consulting Group, in a report commissioned by the European Telecommunications Operators’ Association, stated that investment in Europe’s telecommunications infrastructure had declined by two percent per year for five years because of outdated and intrusive regulation that distorted competition and discouraged investment.
The European Commission now understands that new emerging technologies, such as the Internet of Things, cloud computing, virtual reality and data analytics, that will determine Europe’s economic and technological competitiveness will require increased investment in broadband networks. Thus, the EU is recasting its regulatory models to encourage that investment. In fact, the Commission recently launched a Digital Single Markets strategy to lay the groundwork for Europe’s digital future. One of the pillars of that initiative is creating the right conditions for digital networks and innovation to flourish. Key to creating that environment is an overhaul of existing telecom rules and the creation of incentives for investment in high-speed broadband.
These examples make what’s happening in the U.S. so perplexing. Earlier this year, the Federal Communications Commission (FCC) put at risk two decades of unparalleled investment in networks and technological growth. The FCC voted to apply Title II regulation – designed for regulation of a monopoly-era telephone regime – to the most vibrant and innovative sector of the U.S. economy. Even more troubling is that the FCC also intends to increase its control over Internet Protocol (IP)-based networks, the networks designed to carry new and innovative applications and services for consumers and businesses.
Title II regulation could stifle investment and deter innovation and, of note, there are options to preserve an open Internet and to spur growth and competition that are less archaic and destructive. Creating regulatory uncertainty as we seek investment in more capacious broadband networks makes little sense.
We have witnessed what happened in Australia over the past decade when government and politics became too involved in the development of a nation’s infrastructure, and we are watching Europe move to reform outdated, Title II-like regulation to accelerate sluggish investment in its broadband networks. The United States, on the other hand, has led the world in Internet innovation over the last 20 years, helping to spur investment with its deliberately chosen regulatory model. Now is not the time to reverse course. With more and more users and endless possibilities for innovation thanks to high-speed IP networks, investment is needed now, more than ever.
“Regulatory humility” and “first do no harm” – sounds like the right recipe for the next 20 years of broadband growth.
Originally published in The Hill.
Regulators Should Take ‘Yes’ for an Answer to Broadband Competition
By Bruce Mehlman
Federal Communications Commission (FCC) regulators, purportedly eager to promote competition, keep stifling the investment needed to advance it meaningfully. Case in point, the Commission recently opened a tariff investigation on “special access” rates in the business data services market. For many observers, this political inquiry is unwarranted by the facts on the ground, driven instead by companies whose business models are dependent on government protection for “rent-seeking,” or ongoing access to the networks that others built.
The market is working; with every passing month, evidence of real competition in ethernet and business services grows. Telcos, fiber over-builders, wireless players and cable companies are all investing to better compete for business customers.
Cable companies have https://www.ncta.com/industry-data/item/3199#.U3JOSGox5xg upgrading networks that extend deeply into neighborhoods and commercial areas, so their expansion into this space makes sense. In a telecommunications industry characterized by cross-platform competition, successful players must upgrade their networks and use them to their full extent. Cable is working to prepare for DOCSIS 3.1, gigabit to the home, and developing higher speed offerings for all types of customers. They see synergy with their existing interests and want to take advantage of economies of scope and scale to serve business customers.
Indeed, Comcast now boasts that its business services revenue “grew 21.4% to over $1.1 billion” targeting “businesses of any size;” Time Warner claims “just north of 30% growth in its wholesale transport business” while increasing capital expenditures focused on commercial buildings; Cox (which plans to offer gigabit service in all its markets by the end of next year) reports “double-digit growth again in the wireline last mile;” and Charter recently announced its plan to continue to expand “the footprint of [its] serviceable enterprise area” to serve more businesses. A FCC filing even noted that “[t]he enterprise-focused units of the nation’s largest cable operators-Time Warner Cable, Comcast, and Cox-are now the fifth, sixth, and eighth largest providers of ethernet services in the United States, respectively.”
Another reason cable is moving into business data services now, and another sign of healthy competition, is presented by Google. Bernstein Research believes that Google Fiber could take up to 40%-to-50% of the market in cities where it will be deployed and could pass 15-to-20 million homes within six-to-eight years—not bad for something Google described as an “experiment.” This expansion will force both the incumbents and cable to respond.
The commission’s new investigation into special access rates gives short shrift to these aggressive competitors and relies on an old vision of the marketplace to protect the business models of a few companies, even as it is supposed to be promoting deployment of ever-faster broadband. Those hardworking crews you see from the road, and that rumbling sound you can feel, represent investment taking place. Competition works and is working in the real world—but it apparently remains unseen and unfelt at the FCC.
According to FCC filings from INCOMPAS—the voice of Competitive Local Exchange Carriers (CLECs) who are dependent on government regulation giving them access to networks that others built—the country needs permanently heavy regulation to preserve competition. Just recently, INCOMPAS CEO Chip Pickering appeared on C-SPAN’s “The Communicators” to note that his trade association arose from the question, “Should we have a big monopoly or open it up to competition?” In reality, there is no such monopoly. INCOMPAS is simply trying to force real competitors making actual investment in infrastructure to subsidize those who are not; it’s choosing to ignore the investments and deployments by new entrants and the competition they offer for business services.
There is no reason for the FCC to put its hand on the scale and select winners and losers by re-regulating the business data services market. The Commission’s investigation is unnecessary and should be shut down now. The “village” is safe and thriving.
Originally published by The Street.
Net Neutrality: Washington’s Chance at a Bi-Partisan Win-Win Solution
by Rick Boucher
Net neutrality. It’s the longest standing communications policy debate of the 21st Century, and a decade after it started, it’s still raging and far from resolved.
I share these observations as a Democrat and long-standing supporter of strong network neutrality protections and as a deeply involved participant in the writing of the Communications Act of 1996.
I’m motivated by a desire to put this controversy to rest on terms that would allow both Democrats and Republicans to declare victory and realize their main policy objectives and, coincidentally, strongly benefit the public interest.
Title II Vulnerability
First, why do I say that the controversy is far from resolved? After all, in the name of network neutrality protection, the FCC just reclassified broadband as a Title II common carrier service. Doesn’t reclassification of broadband resolve the controversy and assure network neutrality protection?
Actually, no. It has only escalated the controversy and jeopardized the future for net neutrality guarantees. In fact, reclassification of broadband is perhaps the most tenuous federal agency decision in recent memory given that it suffers from severe potential legal infirmities and enormous political risk.
I’ll be specific.
First, the FCC’s reclassification order is legally vulnerable. For starters, it flies in the face of the Communications Act of ‘96. In that law, we specifically created the category of “information services” to ensure that Internet service providers who use telecommunications to make information available to the public will not be subject to monopoly-style regulation designed for the era of wired telephones. Until this year’s reclassification decision, the FCC had consistently treated Internet access as an information service. Suddenly, the FCC has now reversed ground, ignored years of precedent and reclassified broadband as a telecommunications service so that it can protect network neutrality through telephone regulations descended from the 1930s.
The courts do not look kindly on abrupt agency reversals where long-held interpretations are suddenly thrown out the window without a clear indication of changed circumstances warranting the regulatory about-face. In this case, the underlying facts have not changed, and consistent with judicial precedent, the courts will hold the FCC’s feet to the fire on its decision to ignore and reverse a long-standing interpretation that defines broadband as an “information service.”
The courts will also examine the FCC’s deficient notice prior to the rule change, in which the agency failed to put a possible reclassification at the center of its rule making proceeding. That shortcoming may well have deprived interested parties of the opportunity to provide informed comments and presents a very real legal risk that the FCC’s decision will be overturned.
Avoidance of Political Risk
Yet, the ultimate risk to the FCC’s net neutrality decision may be political. Current polling indicates roughly a 50 percent chance that a Republican will win the presidency next year. If that happens, the FCC would revert to a three-to-two Republican majority, and it’s virtually certain that a new Republican FCC would return to the classification of broadband as an information service. Network neutrality protections would be lost, and philosophically the Republicans would have little interest in finding an alternate means to continue them.
The FCC’s reclassification order rests on a bed of sand, but one thing it has done is open the door to a legislative opportunity for Democrats to achieve their long-held goal of statutory permanence for network neutrality protections.
During the telecom debates of the past decade, Republicans have consistently opposed net neutrality legislation. Now, in the interest of obtaining lighter regulatory treatment for broadband as an information service, Republicans have signaled their willingness to enshrine meaningful network neutrality protections in a statute in return for not applying common carrier regulation to the Internet.
By accepting the Republican offer, Congressional Democrats would achieve their long-held goal of statutory permanence for network neutrality in exchange for a return of broadband to the information services status it has enjoyed since its inception for all but a few months of this year. Net neutrality guarantees would be virtually immune from legal challenge and far removed from political risk.
Why wouldn’t Democrats want to take advantage of this unique opportunity? It’s a true compromise: net neutrality regulations in statute, enforceable by the FCC, in exchange for a return to information services regulatory treatment of broadband, also in statute, as Republicans want. There’s no reason not to take the deal for either party and also thereby remind the FCC that no matter which party controls it, Congress is the ultimate arbiter of telecom policy.
The issues are crystallized. For the moment, both Democrats and Republicans enjoy roughly equal leverage, and each can give to the other the thing it wants the most. In that circumstance, even in a Congress not prone to legislating, the passage of a law is clearly possible.
As a Democrat and network neutrality proponent, this is a deal I hope the Democrats will accept.
Republished with permission from Bloomberg BNA.