When Privacy Regulation Could Do More Harm Than Good
by Rick Boucher
Once again, the Federal Communications Commission is about to take major action affecting the internet, right before an election and without sufficient consideration of its impact. This time, the issue is consumers’ privacy on the internet.
Back in April, with the goal of protecting user privacy, the FCC launched a rulemaking proposing severe new restrictions on the internet service providers that connect consumers to the internet. While well intentioned, the agency’s proposal swept too broadly – and, as on previous occasions, the agency has had to backtrack significantly from its original idea in the face of strong public reaction.
Chairman Tom Wheeler now claims that his revised proposal tracks the Federal Trade Commission’s existing privacy framework, which governs the conduct of internet edge providers, such as e-commerce companies. Given broad consumer acceptance and the massive commercial growth of the internet under the FTC’s framework, many interested stakeholders asked the FCC during its public comment period to adopt the FTC’s framework as the privacy requirements for ISPs. Doing so would promote clarity for consumers and ensure a consistent set of rules across the internet ecosystem.
Unfortunately, contrary to the chairman’s claim, the FCC is on the verge of embracing a much broader set of ISP privacy requirements than the FTC’s framework imposes on edge providers. The FCC proposal would require that ISP customers grant affirmative “opt in” consent before the ISP could use virtually any web browsing data. By contrast, under the FTC’s “opt out” framework, no such requirement exists when consumers search and browse on edge providers’ websites.
ISPs rightly object to this disproportionate burden. Justifiably, they point to the fact that edge providers access far more consumer browsing and app usage data than ISPs and monetize it through internet advertising in far greater volume than ISPs. If fact, the growing use of end-to-end encryption, virtual private networks and other proxy services renders a large amount of the data flowing across their networks invisible to ISPs. It’s already technically impossible for ISPs to access about 70 percent of global Internet traffic. By contrast, few limits apply to the insights edge providers have into their users’ web activities. The plain fact is that edge providers use consumer data far more intensively than ISPs.
Even prominent edge provider Google – which surely knows a thing or two about web browsing and search – thinks the FCC’s approach doesn’t make sense, writing that the FTC’s opt-in “framework recognizes that while U.S. consumers consider healthcare or financial transactions, for example, to be sensitive information that should receive special protection, they do not have the same expectations when they shop or get a weather forecast online.
“Thus, although Google and other companies take strong measures to avoid using sensitive data for purposes like targeting ads, consumers benefit from responsible online advertising, individualized content, and product improvements based on browsing information, regardless of the company collecting the data.”
Advertisers, too, have said that implementation of the FTC framework across the entire internet ecosystem is far superior to the FCC proposal. Major trade associations of those who place the vast majority of web ads believe that Chairman Wheeler’s proposal is far broader than the FTC’s rules and would disrupt the smooth functioning of the internet economy. Whether we like it or not, that economy depends in good measure on the online advertising that helps constrain the prices of internet-provided services and enables large amounts of content to be provided for free.
A key distinction involves the definition of what is truly “sensitive” information. The FTC framework lists specific categories, including Social Security numbers, financial, health, location and children-related information as sensitive, available to edge providers only following affirmative opt-in consent. The FCC declares all web browsing and app usage history to be sensitive, available only following opt-in consent. It’s hard to imagine how any legitimate policy goal is achieved by placing so much harmless data beyond the reach of ISPs, whose technical ability to use consumers’ information is rapidly declining in any event. The FCC has simply chosen the wrong target and, in doing so, is on the verge of creating widespread consumer confusion.
Consumers have learned, sometimes painfully, that maintaining their privacy on the internet is not as easy as pulling down window shades or building a higher hedge around their lawns. And that’s the real risk with Chairman Wheeler’s latest proposal – why change a unified system to a bifurcated system that could actually prove harmful to consumers by creating confusion and leaving the false impression that information is protected when in fact it’s not?
The solution is simple: The FCC should truly harmonize its proposal with the FTC’s existing rules and defer to that agency’s broader and longer experience with protecting consumers’ privacy. Any attempt at conflicting and disparate privacy regulation will just create confusion and make the internet a less favorable place to do business, with significant negative effects on the e-commerce economy.
Originally published by Morning Consult.
When A Compromise Isn’t — The Future Of Business Data Services
by Bruce Mehlman
Trade association INCOMPAS, which represents competitive local exchange carriers (CLECs), and Verizon have been working together to “negotiate” a deal with the Federal Communications Commission. Although the terms may make perfect sense for them, they’re bad for the actual deployment and adoption of broadband infrastructure and, namely, the future of business data services (BDS).
Some are currently trying to sell this as a “compromise” plan — it’s not; a compromise typically requires there to be opposite sides at the table. Verizon is in the midst of transformation where it has sold off much of its wired telephone footprint across the nation in recent years and, as a result, now finds itself more and more a buyer of BDS in much of the country.
Good for Verizon if it thinks that this transformation benefits its company and shareholders, and quite logical for the company to lobby regulators on its new position. The FCC, however, retains the duty to investigate what’s really at stake in the purported “compromise” and to spot and call a shell game when they see one. Unsurprisingly, it all comes down to price and profit.
The “compromise” proposal favors Verizon and INCOMPAS members while undermining everyone else in two clear ways. First and foremost, Verizon is increasingly looking to lease investments made by others, rather than invest in wired infrastructure itself. As a buyer rather than a seller, they now favor government price controls.
But, in addition, the “compromise” proposes that, for incumbents (which Verizon remains in some markets), the rate for the 1.54 megabit DS1 service that it offers would be used as the price benchmark for the slowest Ethernet it provides, whatever speed that may be, and the benchmark prices would rise from there.
This is all terribly convenient for the incumbent parts of Verizon that, unlike other incumbents, have maintained high DS1 prices in recent years. Thus, under the compromise plan, Verizon’s existing high DS1 rates (starting at $460) would translate into a higher pricing ceiling for Ethernet services compared to other incumbents in the market.
Companies that still invest in wired infrastructure but charge significantly lower DS-1 prices than Verizon appear to be the compromise plan’s clear target. Along with lower average DS1 rates, AT&T, for example, offers businesses an Ethernet pricing schedule that charges more for faster speeds but that encourages its customers to move up the speed chart quickly, providing greater benefits for the BDS institutional customers, which can benefit from faster speeds.
In this politically-charged year, some might be tempted to view the BDS debate as a mere battle between two indistinguishable big corporations… the Hatfields vs. the McCoys of the NYSE. Don’t.
INCOMPAS is now threatening competition from all providers, as well as the very idea of competition itself in these markets. If the Verizon/INCOMPAS proposal is adopted, it would punish the companies that have maintained lower rates in response to significant competition and new entry, not least from cable, as well as those offering pricing schedules designed to encourage Ethernet adoption.
Can it really be that the FCC wants to reward robust competition by penalizing those who have invested and competed, including on price, rather than those getting out of the business of investing in more robust wireline exchanges?
I thought the FCC was concerned about market power in DS1, DS3, and Ethernet markets. I thought the Commission wanted competition. I thought the Commission wanted the quickest possible deployment of faster Ethernet BDS.
If those assumptions are correct, the commission has only one rational choice: to reject this self-serving “compromise” and to adopt a policy that promotes investment and strengthens true competition.
But if the Commission adopts the proposed “compromise,” Verizon gets an unfair, government-dictated rate advantage while AT&T and others are forced into rate structures that discourage investment in fiber facilities and the rapid migration to Ethernet services. That’s called picking winners. It’s not government’s role, and it would work inimically to the very policy goals the FCC is required to promote.
Originally published at Investor’s Business Daily.
Election and Regulatory Appointments Will Determine Future of FCC, Tech and Telecom
by Bruce Mehlman
Official Washington now enters the final stretch of an unusually-stressful election season. Ending the uncertainty may be good news for business in a sense, but it also shows just how powerfully elections influence the direction of policy, markets, and many securities that move in part based on the level and nature of government regulation.
A new President, after all, appoints not only important Cabinet posts, but also, just as important, the new chairs of regulatory bodies such as the FCC, FERC, and of course the SEC and CFTC. As we’ve seen in the last eight years, these regulatory agencies can exercise a powerful influence on shaping key economic decisions not only for the regulated companies but also for consumers and investors. Those personnel decisions impact the economy and jobs very directly.
Take tech, media and telecom, for instance. According to one estimate, communications technologies account for about one-sixth of the economy, with a regulator (the Federal Communications Commission) that is constantly seeking to expand its scope and mission, sometimes even without adequate Congressional authority or legal justification.
Not long ago, there was a bipartisan consensus that the country needed more communications technology and that private investment was the best way to make this happen quickly. The subsequent torrent of infrastructure investment that followed deregulation enabled the Internet economy to take off, empowered consumers and extended benefits to virtually all companies that use advanced broadband technologies, in terms of productivity effects and other benefits.
In recent years, though, we’ve seen a change. Given a choice between encouraging the private sector to invest to build new facilities or to lobby to gain access to the facilities already built by others, it seems that the FCC has chosen “lobby” every time. Such short-sighted policies sell out necessary investments for our future in exchange for instant gratification for some rent-seekers today.
To take a current example, in the continuing debate over “special access” lines (now called business data services) used by big businesses, schools, hospitals, and other large institutions, the FCC is pushing hard for new price controls that will not permit companies to recover their full investments in these broadband deployments. Rather than regulating only in areas where an incumbent has clear market power, the agency wants to regulate in areas in which three or four companies compete, in essence picking winners and losers and favoring the business models of a few companies that free-ride on the prior investments of others. Needless to say, this type of direct interference in functioning, competitive markets – in which faster technologies are being deployed all the time – has a sharply negative effect on investment.
On a happier note, the FCC has also been engaged in a long and complex auction process to make more wireless spectrum available for business and consumer use. If this auction is successful, with more spectrum, we should expect another boom in wireless and more businesses will be able to increase their productivity through faster wireless broadband.
So, in this world of technological convergence, in which companies offering Internet, video, and traditional communications services are merging (some quite literally and others through expanding their business lines), investors should know that there are some critical decisions on the horizon regarding interference in these markets or light-touch regulation. Those decisions will impact whether companies invest robustly, whether distributors of content will have the right incentives to continue innovation in that space, and many other issues. Watch the returns on Election Night – but also watch those critical appointments in regulatory agencies over the coming year to get a fuller flavor of the impact of government regulation on markets.
Originally published at The Street.
The Regression Investment Depression
While most of us were on vacation this summer, the Federal Communications Commission concluded its latest comment period in the long, ongoing saga of business data services regulation. The agency economists have published more than 100 analytical regressions in the past several months that try to show that competition has failed. Yet, the studies vary significantly among themselves rather than showing consistency.
Some economists the FCC hired pointed out a truth we learned in Statistics 101: that correlation does not equal causation and the regressions standing alone don’t make the case for market failure.
In short, just publishing a regression does not establish a fact, still less provide a justification for extensive regulation. And even “facts” are subject to a further test: whether the data are statistically significant. Flaws in developing the model (not least, bad pricing data) will have serious consequences in determining its accuracy and whether the data are, in fact, statistically significant.
But what do the data really show? And why is there such an interest in regulating prices, to begin with?
Simple economics suggests that the way to promote the most rapid deployment of the fastest business data services to the enterprises that need them is to rely on competition and the market forces that drive innovation and investment. The FCC, however, seems to start from the position that only regulation can ensure that adequate services are provided to businesses. And so the agency is seeking to set prices at a level that, while convenient for some competitors, doesn’t allow for a sufficient return on investment to stimulate broadband deployment. How this approach will spur investment and deployment is anyone’s guess; the FCC doesn’t have an answer.
by Rick Boucher
Now a group of seven prominent economists has just made clear their opposition to the conclusions the agency is drawing from its plethora of regressions. In short, the economists argue that, because the FCC starts from the wrong place – the mistake that correlation implies causation – the agency, therefore, ends up at the wrong place – the idea that there is not only market power in the Ethernet market but market power that justifies price regulation. As they write, “[a]s commenters across the spectrum rightly acknowledge, the rationale for ex ante rate regulation hinges entirely on protecting customers from a dominant provider’s abuse of market power; in turn, there is no plausible argument for regulating BDS providers that lack market power.”
The FCC’s argument means that incumbent providers ought to lower their prices in a market that, due to the presence of competition, lacks the price flexibility that would enable the providers to raise other prices in order to offset the declines. That doesn’t make sense. There’s no reason for a fire sale on broadband services in a competitive market, particularly when companies will not make new investments without an assurance that they can recover their investment costs. And the agency’s reasoning makes even less sense when Ethernet prices are falling, as they are now.
The agency cannot simply pick and choose the regressions that support its arguments, like picking favorites from a box of chocolates, while dismissing the others. Overall, though, the data are clear: they do not justify a finding of market power in the Ethernet market – and certainly not one that would force a regulator to take the next step of actually imposing price regulation based on the data.
Among the economists who don’t buy the FCC’s arguments and who favor maintaining the ability of carriers to earn a reasonable return on their investments are professors Michael Katz and Joe Farrell. Professor Katz served as chief economist of the FCC from 1994 to 1996, during the time the Clinton administration and participated in passage of the Communications Act of 1996. Professor Farrell served in the Obama administration as director of the Bureau of Economics at the Federal Trade Commission, in addition to previous service at the FCC. Both also served in the Antitrust Division of the Department of Justice. So they know their stuff and have seen economic policymaking from the inside as leading officials in Democratic administrations. If both of them, as well as the other five economists, are crying foul at the FCC, then it’s time for the agency to go back to the drawing board, rather than picking and choosing a few favorite graphs as justification for moving forward with unwarranted regulation.
At this critical juncture the agency should take heed of the well-informed commentary pointing out the harms that unjustified price regulation will cause. To do otherwise will retard the facilities-based investment essential to the deployment of broadband networks and services. In short, we’d have an investment depression based on regression. The FCC can and must do better.
Originally published by Morning Consult.
A virtual reality future means changing broadband reality today
Today’s tools will not be adequate for a fully immersive, high-definition VR future
by Larry Irving and Jamal Simmons
Last month, a ripple traversed the internet when the White House posted an Instagram picture of our commander in chief just outside the Oval Office wearing a pair of virtual reality glasses. In the photo, President Barack Obama is trying out a virtual reality experience captured during his trip to Yosemite National Park and created by National Geographic, Felix & Paul Studios, and Oculus, while an aide continues to work at her desk oblivious to the strange scene.
This striking image of the Leader of the Free World transporting himself to another corner of the country brought nearly 600,000 views of the 360-degree video tour, and captivated many more people with this amazing technology — but that virtual experience is just the tip of the iceberg for VR.
Putting on a virtual reality helmet or visor unlocks new impactful ways to tell stories, play games, and educate children and adults. While the equipment is costly and clunky today, in a few years, a pair of glasses and headphones will more than suffice for a VR experience. Virtual reality has the power to transform every form of video media consumption, as long as policymakers enable high-speed broadband networks to keep pace; a sensible regulatory environment that helps investment and innovation flourish is crucial.
The appeal of virtual reality is obvious to anyone who experiments with the technology. The world of gaming, for example, is hungry for VR. Video gamers crave the ability to set foot in a new realm.
In a different arena, VR sports company StriVR Labs is changing how people prepare for competition. Stanford Football, the NBA’s Washington Wizards and many other college and pro teams are using StriVR’s immersive technology to train their players. Today, whether you’re an Olympian or an NFL quarterback, you can learn to think through tough situations by training in a virtual setting — but without physical contact or wear and tear on your body. And soon, StriVR Labs and their competitors will turn VR technology from a training tool to an entertainment powerhouse. Sports fans won’t just watch a game, they will be thrust into the middle of it. What fan wouldn’t love that?
Filmmakers are also betting on new VR tools to enhance both fictional stories and documentaries. Imagine the possibilities: Directors will be able to place the viewer inside of an atom or the Grand Canyon; a viewer would not just see the flight of a bird, but personally experience the bird’s flight. Attempting to explore societal problems, young filmmakers are using VR to take viewers into environments ranging from an Ebola treatment center to a Syrian refugee camp. Others are developing platforms that allow men to experience the world from a female perspective, and let different racial groups exchange places. People will better understand each other’s points of view when each of us can experience another’s perspective via virtual reality.
The future of virtual reality is bright. Investors are bullish, users are excited to consume novel entertainment and educational applications, and engineers are developing new products. While innovators create exciting hardware and content, a VR future is only possible if policymakers make the right decisions today. Virtual reality will require new and upgraded broadband networks, both wired and wireless, that will be capable of satisfying future bandwidth needs of the technology, which consumes massive amounts of data.
Policymakers need to make more spectrum available, too. People are using their iPhones and Android phones for the early versions of VR, but today’s tools will not be adequate for a fully immersive, high-definition virtual reality future. Whether it is 4K, 5K, high-definition or ultra-high definition, each next-generation technology will require retrofitting our infrastructure. It’s time to rethink, rebuild and reinvest.
Some 30 years ago, some policymakers understood that HDTV would start a digital video revolution. Forward-thinking policymakers today should anticipate the virtual reality needs of tomorrow. President Obama and the rest of us have been given a glimpse of our media future. Now we need to make the policy decisions to ensure that future becomes reality.
Originally published by Recode.
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.