Tag Archives: FCC

Still Working on Net Neutrality

Net Neutrality has been a topic I have written about at length, multiple times this semester. With the recent Netflix Deal in place the debate about the legality or consequences for the health of the internet as we know it. As I wrote about in my previous pieces on this issue, there seemed to be a general though that maybe the loss for the FCC against Verizon in the case on how Verizon needed to treat is broadband traffic regarding whether or not telecommunication antitrust rules applied to them, was not really a loss at all. In fact, the “loss” may have opened up the opportunity for the FCC to write all new legislation for ISP’s that would be much more strict and well defined than anything they could enforce via the old teleco rules.

Unfortunately today, the WSJ and NYTimes reported that the FCC was going to propose new Net Neutrality rules that to my eye, seem like a real cop out on the parts of legislators. With the new rules that the FCC will propose, ISP’s and certain companies would be allowed to create deals giving those companies preferential treatment in terms of bandwidth if the terms were “commercially reasonable”. The WSJ article claims that this is an attempt by the FCC to find a middle ground amongst the many different voices in their ear on how to legislate on this major issue. With companies like Apple and Amazon creating massive streaming operations the ISP’s will need to be more technologically sound than ever, but the question in the end is who should bear that cost and with what sorts of consequences.

I believe that the passing on of these costs to consumers will be a huge limiting factor for companies who need the larger bandwidth constraints but cannot pay for it as well as a barrier to entry for those potential companies that cannot afford to strike deals with the major ISP’s. Cable prices have skyrocketed over the past 20 years as I am sure the majority of us can attest to as we pay the Comcast bill every month, and in my opinion if these companies are allowed to charge for preferential treatment the costs will be passed onto the consumer and then some, all the while stifling any competition left in the market. The road will not be easy for the FCC with multiple lobbying efforts going on and with a new technological reality than they have ever faced sitting in front of them, but hopefully they stay strong on net neutrality rules for the sake of the internet.

Better competition through mechanism design

Today, The Wall Street Journal highlighted the increase in consumers’ wireless bills despite a sort of “price war” in the wireless market.  T-Mobile had lowered its prices and started offering incentives in order to get people to switch from the major carriers Verizon and AT&T.  Those carriers followed suit.  In addition, there has even been a move away from having subsidized devices, thus allowing people out of their contracts with out a fee (now handsets are financed by the customer, and I wonder if the carriers aren’t better off for it). Even with all this price action, the industry has an HHI (the Herfindahl-Hirschman index, a measure of market concentration where 1 is perfect competition, 10000 is monopoly) of roughly 2600, and is increasing (see graphic below).  This is roughly equivalent to a market with only four carriers!  In addition, the CFO of T-Mobile believes that the carriers will consolidate further. Given the number of carriers to begin with this seems to indicate that the industry is heading toward further concentration of monopoly power.  In order to make sense of increased market concentration despite intense price competition we need to consider what makes a wireless company wireless.

fcc-wireless-report-2011-illo03

Wireless carriers broadcast over frequencies that make up the wireless spectrum.  In order to broadcast over a certain spectrum in a certain area, you need to have the licenses to do so.  Once a company has the license it can build a network of towers and provide service to the area. In short, no licenses, no wireless.  To get a better idea of how spectrum rights effect market share, consider the following two graphics.  As can be seen, owning spectrum effects your ability to grow and compete (Sprint is having network problems currently…the reader can decide for themselves whether the spectrum has anything to do with a carriers network).

fcc measuring competitionspectrumAllocation

The next auction is will be the most complex of any auctions the FCC has attempted before.  The FCC means to have two auctions going at once, one auction where broadcast companies get to auction off their old spectrum from broadcasting analog TV, while wireless carriers participate in an auction for newly bundled spectrum.  If the fierce competition that consumers currently enjoy is to continue, this auction needs to consider mechanisms that will ensure the big firms like AT&T and Verizon don’t put themselves in an unassailable position as incumbents.

To do accomplish this end, the FCC should implement a spectrum cap such that it ensures a new incumbent will enter.  Research shows that spectrum caps can ensure such outcomes.  In 2010, Germany used spectrum caps in its “Mega” spectrum auction.  The auction raised almost 4.4 billion euros for the German government, and included restrictions on how much of the new offerings the incumbents could purchase.  This ensures that smaller companies can expand and continue to compete with the larger firms.  It also weakens a main barrier to entry into the wireless market, further increasing competition.  Another provision that must be enforced is that no matter who buys the license, they must use it.  The above mechanisms are useless if incumbents can accumulate spectrum to deny it to others, or if “new entrants” just turn around and sell it to the incumbents.

Critics of policies like this one say that such restrictions will decrease the revenue of the auction.  This is accurate; but the goal of the auction is to encourage competition, not maximize the revenue.  While Verizon would pay handsomely for a wireless monopoly, and no doubt that auction would raise record profits, it would all but ensure there was no real competition.  Opponents may attack the less then optimal revenue, but to do so is missing the point of what the auction is designed to do.  On a lighter note, I doubt said critics would want to live under a government that did maximize its revenue, making their qualm more reassuring of the auctions effectiveness then concerning.

We can observe today that if given the opportunity, competition can be intense in the wireless industry.  Even the little companies like Metro PCS and Boost Mobile can give Verizon and AT&T a run for their money in small markets.  In order to see this continue, the FCC should utilize mechanisms in their spectrum auctions that ensure this competition continues.  While market consolidation is a consequence of the market for wireless services maturing, the United States should take care now to make sure the wireless industry doesn’t grow up to be anti-competitive.

 

 

Net Neutrality Struck Down? (Revised)

Earlier in the month, I wrote about the conclusion of a lawsuit between Verizon and the FCC. Verizon won the lawsuit; “three judges on a US Appeals court panel struck down net neutrality rules saying that because the FCC decided to characterize ISP’s not as telecom companies but in a category of their own, the FCC could not regulate them as such.” (Econ 411 Blog).

This essentially left the door open for the FCC to start pushing through new laws in an attempt to regulate this “new market” that they had characterized these ISP’s as. Since I wrote this article, there have been a few very interesting developments that I think stoke a fire under the net neutrality debate as well as the FCC as they are now under even more pressure to take action in markets that are seemingly becoming more and more concentrated. The most prominent of these events are the Comcast/TWC merger as well as the deal between Netflix and Comcast that effectively makes Netflix pay for efficient streaming of their content.

With this in mind, I would like to take a look back over my explanation of the Comcast/Time Warner merger:

“Let’s start with just the bare bones of each company — according to the NYPost, TWC had some 11 million video subscribers combined now with Comcast’s 22 million gives you a rough estimate of 33 million subscribers out of a total of 100 million people who have some sort of cable video connection through a provider in the USA. The question then, is what constitutes a monopoly? In terms of Antitrust regulation (and in Econ 432 class), one of the main indicators of monopoly or at least one of the main influencers of regulation from the government is the Herfindahl-Hirschman Index or more simply known as the (HHI). This measurement is used to determine the “concentration” of an industry or given market in an attempt to determine how close to monopoly conditions a given merger would create. According to the article, the formula is computed on a scale of 0-10000 with 0 being perfect competition and 10000 being one single company owning the market. According to the government, a score from 0-1499 is low concentration, 1500-2500 is moderately concentrated and above that is considered to be highly concentrated. Moreover, in a “somewhat concentrated industry” a merger resulting in a 200 point increase gets the government worried and an increase of 100 points in a highly concentrated market does the same. The NY Post did rough calculations and found that the HHI increase due to the Comcast/TWC merger was in the range of 639 points (500 if you want to be conservative they say). This most definitely would make the government look twice.” (Econ 411 Blog)

As of this moment in time, the FCC has not made any major comments about this case, but the word is that they are looking into things. It would seem just from the piece above, that there should at least be some due diligence completed by the FCC on a deal like this. The WSJ and myself made the comment about the Verizon/FCC case that maybe Verizon’s victory in that case had set the stage for the FCC to take a strong stance in the future to regulate the ISP industry.

This however, was before the Comcast/TWC took place and the deal between Comcast and Netflix succeeding even that — things have gotten even scarier for those wanting to make sure the internet stands to stay the internet we know and love.

So while those of us waiting waiting eagerly to see the FCC action from the Comcast merger had our eyes locked on just that, Comcast had different plans. Sunday morning it was announced by the WSJ that Netflix would be paying Comcast an undisclosed amount for direct access to their servers. Yes, I know you are wondering what the heck that means, so here is a little background on this issue. Recently (around Holiday ’13 and since then) there have been numerous anecdotal reports of Netflix streams deteriorating on different ISP’s networks. The WSJ article I just mentioned dives into this with a little more detail, “the average speeds of the company’s prime-time streams to Comcast subscribers dropped 27% from October to January. Netflix’s streams to Verizon subscribers also have slowed in recent months.” The battle has since ensued as to who should pay to prop up the ISP’s networks in order to keep things running smoothly. Netflix acknowledged these issues in their 4th quarter conference call recently saying that if they were forced to incur additional expenses due to paying to keep networks running in such a state that they can efficiently transfer their content, that their own bottom line would be adversely affected. It is hard to speak to this point at the current time due to the fact that we do not know exactly how much Netflix agreed to pay Comcast– what effectively happened was that Netflix paid to cut out the middle man between them and Comcast.

The issue here is not that Netflix paid Comcast to cut out the middle man; the money was going to someone regardless and that, in my eyes, is just an expense that is built into their business model to begin with. The real issue is the fact that Comcast has a makings of a monopoly in the US market and is in a position to make a company pay based on the type of use of Comcast’s network. In other words, Comcast is the ISP to enough Netflix customers, that Netflix had no choice but to cave and pay in order to maintain the integrity of their own business. It is extremely disturbing to me that a company like Netflix, that has fundamentally changed the way that average American citizens consume media, is now at the mercy of an ISP like Comcast.

The time to act is now, and if there was not a clear enough image of the types of perils caused by allowing these ISP’s to run amok without proper legislation, I believe there is now. The problem with not treating all traffic the same is not the fact that Netflix’s bottom line gets squeezed at Comcast’s glee, but rather that smaller companies (the next Netflix etc) that require full use of the internet as a part of their business model, can now be choked out like a weed in concrete. I hope that the FCC sees this and does prove both myself and the WSJ right by issuing legislation with a heavy hand, as the future at this moment seems quite fragile.

 

U.S. Appeal’s Court’s Controversial Strike on Net Neutrality: Is all lost?

In a Wall Street Journal report, net neutrality proponents were set back on Tuesday when a U.S. federal appeals court in Washington rejected federal rules that require broadband providers to provide equal service to all internet users. In presiding over Verizon’s lawsuit against the Federal Communications Commission (FCC), the court decided to repeal the 2010 FCC rules that require Internet service providers (ISPs), such as Verizon and Comcast, to treat similar content crossing their networks equally. The repeal would give ISPs greater freedom and discretion in how they allocate and charge for bandwidth.

It appears that the decision stems from legal confusion about how exactly to classify broadband carriers. In a Bloomberg news article, according to U.S. Circuit Judge David Tatel, “[…] the commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the commission from nonetheless regulating them as such.” A common carrier is an old, legal definition of a service that provides a method of transportation to the public. CNET provides a good example of a common carrier: a ferry company could provide a service by transporting people across a river, but since the river is a public waterway the company would be required to charge customers fair and reasonable prices, and could not “indiscriminately choose to service some customers and not others.” Due to a past FCC ruling that excluded broadband from being considered as a common carrier, it is now ruled that they cannot now regulate broadband as one.

The main problem that proponents of net neutrality see is that broadband network companies such as Comcast and Verizon could now charge Internet companies, including Google and Netflix, for broadband access. The main fear is that this will stifle innovation by increasing the costs and barriers to entry for Internet startups. Opponents stress that the previous net neutrality rules had been too harsh on network providers. Opponents also suggest that there could be potential benefits if the balance shifted more towards the network providers, mainly through the added safety of allowing for better policing of the internet if providers could shut down access to websites suspected of criminal activity. In addition, if the rewards to competition were increased in the broadband industry, ISPs may be better incentivized to provide faster and cheaper service to end-users in the long-run. Although I would consider myself a proponent of net neutrality, I agree that by providing the right incentives to encourage competition, broadband companies might seek to expand their service by laying more high speed network infrastructure that would ultimately benefit both Internet companies and end-users at home. To me, this situation is akin to the development of the highway infrastructure across the U.S.: Drivers benefit greatly from having greater access to transportation, and they definitely hate to pay at toll roads, but in the end someone has to pay for the concrete, asphalt, the highway construction crews, and maintenance workers that gave them the freedom of mobility. Just like in the development of highways, there is no free lunch in the construction of new broadband networks, so an uncompromising war on the ISPs likely won’t lead to the most efficient outcome.

In the end, this isn’t a question about whether we would prefer a Mad Max like anarchical broadband system to 1984-esque totalitarian style bandwidth providers. Internet startups need a cheap, effective way to reach users, consumers need an affordable way to find the content they want, and broadband providers need a way to be compensated for their enormous costs of creating the expensive infrastructure. This is a matter of how to best incentivize all players in the Internet to create the most efficient system of transferring information from one place to another. Without the ability to balance the interests of both bandwidth consumers and producers, achieving that goal will be hopelessly impossible. Lets hope further appeals could further refine the FCC regulations such that everyone benefits.