Tuesday, May 13, 2014

FCC Has to Thread a Needle on Net Neutrality

Predictably, as potential regulation of Internet access as a common carrier service is at least raised by the Federal Communications Commission, opponents and proponents are making clear their respective views on whether such a move would harm, or would not harm, investment in gigabit and other faster networks.

Proponents of Title II Title II regulation include Netflix and Mozilla, though that is not the dominant position. Most app providers are not calling for such big changes, but only for a clear “best effort only” rule for Internet access, as they generally have been doing for years.

ISPs predictably warn of investment slowdowns.

The FCC says it wants public input on reclassifying broadband access a common carrier service as well.

As always, the public positions stake out negotiating positions, in addition to reflecting the perceived business interests of Internet participants and also have political value for the FCC, as a very drastic stick (Title II regulation) will make new "best effort access" rules more palatable for ISPs--and provide political cover for the FCC--after all have had their say.

As always in such highly-political proceedings, the FCC will face strong opposition from some, and strong strong support from other quarters. By essentially moving the goalposts further apart (common carrier regulation on one hand and no effective best effort access rules on the other), the FCC will ultimately have more room to craft a compromise that leaves both sides with something they can live with.

To do so, the FCC will have to thread a needle, in the end choosing not to impose Title II common carrier rules, but also being able to claim it is protecting best effort access, while leaving some room for content delivery networks that stretch all the way to end user locations.

For the moment, we will see the "extremes" of proposed solutions. 

In the end, we will see something that is not a complete victory for proponents of best-effort-only Internet access nor a complete victory for advocates of content delivery features as one possible form of access.

Still, the debate will be fierce, especially initially, until a workable consensus can be crafted and a political consensus reached.

To reach that point, the strongest positions offered by ISPs and some app providers will have to be aired, pressure brought to bear by both sides, and then a workable solution with broad support crafted.

The argument by Internet service providers will be that such regulation will have clear and negative impact on future investment. 

Supporters of common carrier regulation of access services will argue the ISPs are bluffing, and that common carrier regulation will not reduce investment.

But that is why the Title II reclassification is unlikely to happen. There are risks to investment if common carrier rules are applied.

The dispute about future investment is not limited to the U.S. market, though. In Europe, ommon carrier regulation arguably has restricted telco investment in faster networks, while cable TV networks, not covered by common carrier regulations have invested significantly.

The European Commission’s Connected Continent proposals, for example, are a direct response to regulator concern that not enough investment is happening.

The relatively low cost of upgrading cable TV networks, and the widespread availability of cable TV networks in the United States has meant high availability of “superfast” broadband access in the U.S. market, a report by Ofcom, the U.K. communications regulator, suggests.

The high amount of facilities-based competition also has spurred matching investments by U.S. telcos, Ofcom says.

In Europe, where similar  fixed-infrastructure competition is less common, regulators have opted instead for robust wholesale access requirements on telco fixed networks. That has lead to lots of retail competition in the high speed access market, but at the cost of lower investment  in faster facilities.

High speed access provided by cable TV companies, in fact, accounts for much of the higher-speed market share in European Union countries.

McKinsey analysts have estimated it will cost about 200 billion euros to 250 billion euros to upgrade half of EU homes to fiber to the home networks capable of delivering 100 Mbps service.

Though government subsidies will help, the bulk of that investment will have to be made by private firms making rational decisions about the financial return from making such investments.

One might argue that common carrier regulation of Internet access within the EU has contributed mightily to the problem of lagging investment in next generation access faciliities.

An Ofcom report on U.K. broadband infrastructure illustrates the inherent tension between promoting investment in next generation networks and fostering robust competition between suppliers of such services.

Put simply, there often, if not always, is a tension between policies that promote competition and policies that create incentives for investment.

In addition, different nations have historical differences on the supply side that create different outcomes on the demand side.

For reasons having to do with widespread facilities-based cable TV networks being deployed, competition in the United States, for example, is inter-platform (between cable and telco networks), where in Europe, because of less-prevalent cable TV deployment, competition has been intra-platform, based on competitor wholesale access to the telephone network.

Ofcom notes that infrastructure-based competition between local incumbent telcos and local cable companies lead to early investment in faster access networks.

By way of contrast, in Europe fixed-infrastructure competition is less common, so regulators have required that incumbent telcos provide wholesale access to their networks, fostering competition but also creating negative incentives for investment in faster networks.

Ofcom also argues that retail pricing policies have differing impact on demand, though some might attribute much of the difference to supply constraints, in particular the longer average loop length in the United States, compared to Europe.

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