Net Neutrality is Inevitable: Will It be "Good"?

Like it or not, more regulation is headed the U.S. telecom industry's way, it now seems, and the changes will come as "network neutrality" rules are applied, either by the Federal Communications Commission, or Congress, or both.

The big implications, though, will not be found in the narrow "bit discrimination" area. As typically is the case, the new rules will reshape industry profit margins, business models, marketing and operations in ways that are unforseen at the moment.

Consider the future of the video entertainment business. Most observers would agree that the goal of net neutrality rules is to prevent anti-comptitive behavior. One example would be a case where an ISP with its own Internet content operations actively blocks or slows down competing operations.

Most of us would likely agree that is an appropriate application of neutrality rules. But many would note that prevention of such abuse is already part of the Federal Communications Commission "Internet freedoms" principles.

But that's where matters get tricky. Can a content provider--whether affiliated with an ISP or not--apply some form of content acceleration to its own services or applications? Many software, video or audio content providers use content delivery networks precisely for that reason, for example.

Or consider the matter of bandwidth caps. Some would argue that such caps are needed to protect the quality of service experienced by 99 percent of users, against the one percent of users who consume 40 percent of total bandwidth.

But others see an attempt to protect linear video businesses. So are bandwidth caps legitimate ways of managing network resources (so long as the caps are generous enough to account for a typical user's needs) or anti-competitive measures to protect an existing business from new competition?

It isn't always easy to say.

The good news is that network neutrality proponents and opponents seem to have gained something important over the last couple of years: better understanding of each others' positions that seemingly has narrowed the range of differences.

The bad news is that the next couple of years will feature an additional element of uncertainty as the discussion moves toward some resolution. And though we might hope the new framework will not wind up in court, significant changes to telecom policy always have that result. So one should not bet against a rather lengthy period of court challenges, one way or the other.

Telecom regulation always is political, so elections have consequences. And since President Obama favors action on network neutrality, as does as-yet-unconfirmed FCC Chairman Julius Genachowski, as do members of the Democrat-controlled Congress, action on net neutrality seems almost inevitable.

But there seems to have been progress over the last couple of years. Recent hints from executives at AT&T and Verizon that they "could live with" a proposed fifth "Internet freedoms" principle of "network non-discrimination" that the FCC is expected to authorize.

Still, the devil is in the details. Lots of issues tangentially related to network neutrality now will be swept into the formulation of new rules. And most of those issues bear directly on business models and profit margins. That, in turn, means the new framework inevitably will affect other actions that have a direct bearing on consumer welfare.

If, for example, complete "open access" rules are applied to every network, service provider profitability could drop about 32 percent almost overnight, says Lawrence Spiwak, president of the Phoenix Center for Advanced Legal and Economic Public Policy Studies.

That inevitably would lead to higher consumer prices for things such as mobile handset prices and subscriber fees. By reducing the profit margin on any new network, such rules also would lead to less market entry by new entrants as well, as it would be harder to make a go of the business, and therefore contestants would have have a harder time raising money to enter the business.

It is common these days to rail against the virtues of markets and market-based mechanisms. But consumers and producers alike are highly sensitive to most price signals. Raise the price of gasoline to $6 a gallon and one would see nearly-immediate shifts of behavior: less driving, less purchasing of low-miles-per-gallon vehicles, higher vehicle prices (to account for more use of higher technology engines) and lower demand for vehicles overall.

And that's the real implication. Net neutrality rules almost necessarily will change the range of feasible business models. And though the desire is to protect consumers from anti-competitive behavior (a good thing), rules might also deter new entrants (bad for competition and choice) or deter or eliminate some business practices that promote consumer welfare and lead to faster innovation.

The reason is that net neutrality in its strong form tends to be viewed as "open networks" policy. But much of the incentive service providers have to roll out new features, services or devices is precisely the higher margin less-open network permit.

Subsidized handsets might generally be seen as a good thing, allowing more people to buy high-functionality handsets at affordable prices. But a full open networks regime might prohibit handset subsidies tied to service contracts.

But getting rid of the bundling also means much-higher handset prices, which will discourage adoption of newer devices. To the extent that new applications often are associated with capabilities of new devices, innovation might be slower, rather than faster, in a full open networks environment, at least in the key mobility space.

Nothing about net neutrality is going to be easy. And inadvertent damage to consumer welfare will be a constant danger.

Net Neutrality Battle Heats Up Again

President Obama, Acting Federal Communications Commission Chair Michael Copps, unconfirmed FCC Chairman Julius Genachowski and some U.S. senators say they support network neutrality. The problem, as always, is that it is tough to define what that is, and what it means.

Most people would agree that it means no blocking of legal content, or degrading of the content of rival services by Internet service providers. But many worry that "network non-discrimination," which might very well wind up on the list of FCC "Internet freedoms," could prohibit many forms of network managment.

Those principles include the freedom to access legal content, use lawful applications, attach personal devices and obtain service plan information. "Network non-discrimination" would become the fifth principle.

Few would quibble with the notion of Internet “openness,” so that consumers can freely access third-party applications, for example, without the fear that the broadband network provider will deteriorate or degrade the transmission to these third-party applications and services in favor of their own applications and services.

In that sense, network neutrality aims to prevent anticompetitive conduct; a worthy goal.

But while preventing anticompetitive conduct sounds sensible enough, it is also possible for a network neutrality rule to have the intent or effect of “commoditizing” broadband transmission and Internet access services by limiting the ability of broadband service providers to differentiate their service offerings from those of rival firms, say analysts at the Phoenix Center for Advanced Legal & Economic Public Policy Studies.

In principle, if no "packet discrimination" is permissible, then it might not be possible for service providers to provide different broadband access products, ranging from simple, lower-cost "best effort" services to other tiers of service optimized for voice, video, gaming or real-time services, as doing so might require slowing down other low-priority applications at times of congestion to preserve optimal quality for the priority services.

RUS About to Waste Lots of Money on Broadband Stimulus?

The Department of Agriculture's Rural Utilities Service might not be able to properly dispense funds supporting rural broadband as part of the American Recovery and Reinvestment Act "broadband stimulus" program, an audit of RUS by the Department of Agriculture's Office of the Inspector General for the Southwest Region warns.

In fact, an audit of RUS funding has been underway for some time, since irregularities were alleged in 2005. The problem is that RUS funds are alleged to have been disbursed in areas where broadband service already is available, rather than to projects that bring broadband to areas where there is no service.

The inspector general's audit finds that RUS has not corrected problems identified in 2005, and warns that the new "broadband stimulus" funds likewise will fail to achieve that program's objectives.

To date, irregularities have lead to wasting hundreds of millions of dollars. The USDA Rural Utilities Service has spent $1.35 billion on projects for Internet service since 2001 and of course is preparing to spend $2.5 billion or so as part of ARRA. The inspector general's report of 2005 found that RUS funds went to communities including Las Vegas and Chicago.

In fact, 77 percent of the communities that benefited from the rural broadband loans already had access to the technology, and 27 percent already had three or more Internet providers, the inspector general says.

http://www.wallowacountychieftain.info/main.asp?SectionID=6&SubSectionID=6&ArticleID=19090&TM=54946.27

http://www.usda.gov/oig/webdocs/09601-8-TE.pdf

Wireless Carterfone on the Way?

Despite all the attention that will be paid to the $7.2 billion "broadband stimulus" provisions of the American Recovery and Reinvestment Act of 2009, it is a sideshow compared to the much more important activities now building at the Federal Communications Commission, which is conducting an inquiry into national broadband policy, and a new inquiry that could radically change the way consumers and businesses buy their handsets and mobile service.

Mandatory bans on bundling of handsets with wireless service—referred to by many as “wireless Carterfone”—could be the result of a new proceeding the Federal Communications Commission already has directed staffers to open.

Acting FCC Chairman Michael Copps, in fact, says he already has authorized FCC staffers to open an inquiry into the handset subsidy issue, and that the commission will "take action if required."

Many warn that the result will be higher upfront device costs for all consumers, as the trade off for service without contracts. But others say the rules will spur innovation and free consumers from contracts that tie them to their service providers.

And though some praise wireless Carterfone (unlocked devices) as a way to spur innovation, some think the opposite could happen, as higher phone costs lead to less-frequent handset replacements. And since higher-functionality handsets are a spur to innovation and new services, slower diffusion of new handsets actually will retard innovation.

The FCC national broadband policy also could radically change the way the communications business operates, instituting strong forms of "network neutrality" that some say would radically affect the profitability of the broadband business, minimize techniques for managing network congestion and drastically affect the equity values, borrowing capability and retail strategies service providers could contemplate.

In some cases, the ability to offer higher quality of service might be limited or impossible because no packets could be offered higher priority than any others.

Depending on one's point of view, will drag the entire industry backwards into old regulatory models that will stifle continued investment, or alleviate what Acting FCC Chairman Michael Copps is the problem of "all of America being an under-served area" in terms of broadband.

The coming debates over the shape of national broadband policy,  and possible wireless Carterfone rules, will dwarf the broadband stimulus in impact.

IBM to Invest $100 Million on Easy-to-Use Mobile Internet Apps

IBM is investing $100 million over the next five years on development of easy-to-use mobile Internet services. The number of mobile Internet users will grow by 191 percent from 2006 to 2011 to reach roughly one billion users, IBM says, and emerging markets like India and China will be a main area of focus for the company.

One initiative will be developing ways for users to speak into their phones to grab content, so Web-enabled smartphones are not even needed. Two other areas IBM will concentrate on include mobile enterprise enablement and enterprise end-user mobile experiences.

http://news.bbc.co.uk/2/hi/technology/8106293.stm

U.S. Broadband Usage Grows Despite Recession

Broadband adoption appears to have been largely immune to the effects of the current economic recession, say researchers at the Pew Internet & American Life Project.

In an April 2009 survey, more than twice as many respondents said they had cut back or cancelled a cell phone plan or cable TV service than said the same about their Internet service.

About nine percent of Internet users (seven percent of all adults) say that in the past 12 months they have cancelled or cut back online service.

Some 22 percent of adults say they have cancelled or cut back cable TV service in the past 12

months.

About 22 percent of cell phone users (19 percent of all adults) report that in the past 12 months they have cancelled or cut back cell phone service.

The latest survey also shows that U.S. home broadband adoption has reached 63 percent of adult Americans as of April 2009, up from 55 percent in May, 2008, say researchers at the Pew Internet & American Life Project.

Perhaps the better news is that the greatest growth in broadband adoption in the past year has taken place among population subgroups which have below average usage rates.

Among them, broadband usage among adults ages 65 or older grew from 19 percent in

May, 2008 to 30 percent in April, 2009.

Respondents living in households whose annual household income is $20,000 or

less, saw broadband adoption grow from 25 percent in 2008 to 35 percent in 2009.

Respondents living in households whose annual incomes are between $20,000

and $30,000 annually experienced a growth in broadband penetration from 42 percent

to 53 percent.

Overall, respondents reporting that they live in homes with annual household incomes

below $30,000 experienced a 34 percent growth in home broadband adoption from 2008 to

2009, Pew says.

Among adults whose highest level of educational attainment is a high school degree, broadband adoption grew from 40 percent in 2008 to 52 percent in 2009.

Among adults ages 50-64, broadband usage increased from 50 percent in 2008 to 61 percent in 2009.

Adults living in rural America had home high-speed usage grow from 38 percent in 2008 to 46 percent in 2009.

Big Brand Online Advertising Grows 27% in First Quarter: Momentum Shift?

Anamolies always are interesting, and sometimes they are important. No doubt advertising is down overall because of the recession. 

But ad spending for display ads placed by some of the biggest brands actually increased 27 percent in the first quarter this year, compared to the first quarter of 2008.

And note where that spending went: YouTube. In fact, display ad impression volume on the site jumped by nearly 580 percent year-over-year, says Nielsen. 

Large consumer packaged goods brands have generally been incrementally increasing their digital spending. The latest shift indicates some momentum for online video and online venues generally.

http://paidcontent.org/article/419-what-display-meltdown-big-brands-actually-upped-their-spending-in-q1

Online Video Viewing Up 49%, Nielsen Online Says

People who watch online video spent 49 percent more time doing so in May 2009, compared to May 2009, says Nielsen Online. The "average" viewer watched 189 minutes of video during the month.

Unique viewers grew 13 percent over the same period, while total streams viewed grew 35 percent and streams per viewer also grew 20 percent.

None of that would surprise anybody.

http://www.nielsen-online.com/pr/pr_090615.pdf

U.K. Officials Expect 10 to 100 Times Digital Content Growth in 3 to 5 Years

U.K. officials believe the volume of digital content used by consumers will increase 10 times to 100 times over the next three to five years.

So officials at the Department for Business, Innovation and Skills and the Department for Culture, Media and Sport have proposed an interim goal of 2 Mbps connections to all U.K. residences by 2012, and also propose a new tax of 50 pence per month on all fixed copper lines to fund the next generation of access networks.

The "Digital Britain" report suggests the funds raised by the tax will be available to fund construction to the one third of U.K. homes that are unlikely to get next-generation access because costs are too high.

"We are at a tipping point in relation to the online world," the report says. "It is moving from conferring advantage on those who are in it to conferring active disadvantage on those who are without."

The report also notes that the broadband "problem" has a few sources, not just "access." Though availability is an issue, affordability, ability to use the Internet and PCs, as well as the perceived relevance of broadband all are issues.

Building facilities addresses one of the problems. The others are more difficult, ranging from disinterest to the price of service. Ofcom, the U.K. communications regulator, points out in a recent survey of its own that 42 percent of U.K. residents say they would not use broadband even if the service were provided free, and they also got a free PC to use.

Buyers are Shfiting Behavior: Will They Keep Those Behaviors After the Recession Ends?

Recessions are important not only because people spend less money, but because they sometimes change their buying behaviors, and the behaviors persist even after the immediate recession driver has past.

In the telecom space, there already is some indication this is happening in mobility services, where more users are shifting to prepaid plans, comparted to postpaid. There is evidence of a slowdown in uptake of new handsets overall, though perhaps not of smart phones in the North American market, at least.

But everyone should be prepared for other shifts, if recent sentiment is any indication.

Some 75 percent of U.S. consumers, for example, say they are making big changes in their supermarket shopping, GfK Custom Research North America says. Among the changes, more than 30 percent say they are buying more store brands. In 2006, 22 percent of respondents said they were buying more store brands.

Nearly 23 percent say they will be purchasing more private label goods next yera.

Nearly 55 percent of respondents in the GfK study say they buy private label “frequently,” up

substantially from the 41 percent who said they bought private label frequently in 2006.

About 75 percent of shoppers surveyed now say store brands are as good as national brands.

While traditional supermarkets are still the most popular place for grocery shopping, 59 percent of respondents say they now shop at someplace other than a traditional supermarket.

In 2006, 70 percent of consumers said they preferred supermarkets for their main shopping.

What people do, not what they say they will do, will prove decisive. People might not continue to behave the way they now are, they might permanently shift their behavior or they might simply express new behaviors more than they did prior to the recession.

So far there is no strong evidence that behavior in other entertainment or communications areas is changing significantly. It does not appear there has been a pronounced change in use of multi-channel video services, or some change in IP telephony adoption rates, or evidence of customers downgrading broadband services to dial-up, for example.

But it would be unusual if some permanent shifts in behavior did not occur elsewhere in the communications business, even if such changes primarily are of the market share shift variety.

A Few Tough Years for Online Advertising Ahead in EMEA, Microsoft Says

Microsoft sees a few tough years for online advertising, at least in the European, Middle East and Africa markets, with a recovery not happening until 2012 "at the earliest," says John Mangelaars, Microsoft regional VP, consumer and online International division, EMEA.

"From a Microsoft view, we don't believe budgets will go up any time soon, and I'm talking the next three years," he says.

"Not a lot of people are making money from online at the moment," he says.

http://www.clickz.com/3634074

Will ARRA Broadband Stimulus Actually Spur Much Broadband Use?

The U.S. federal government spends about $7.3 billion a year, every year, to foster broadband and telecommunications deployment. But "additional federal investments in broadband deployment...do not necessarily guarantee increased adoption," says the Government Accountability Office.

The GAO says "representatives from four organizations that provide broadband told us that between 80 percent and 90 percent of the residences in their service areas had access to broadband, but fewer than 60 percent subscribed."

For some providers, the subscribership rate was less than 40 percent.

Separately, the Pew Internet and American Life Project found that 75 percent of Americans use the Internet. About 57 percent use the Internet at home through broadband, nine percent use the Internet at home through dial-up connections and eight percent use the Internet from work or the library.

The Pew report also found that some Americans, particularly elderly or low-income persons, choose not to use the Internet, even when broadband technology is available.

A separate study by U.K. regulator Ofcoms found similar results. Even if given free PCs and broadband, 43 percent of adults who currently do not have Internet access would not use it.

http://www.gao.gov/new.items/d09494.pdf

BT Wants to Charge YouTube, Hulu, Others for Access

BT has publicly said it hopes to charge content owners for delivery of their programs over its broadband access network.

The issue has been circling around the industry for several years, and perhaps the major reasons it has not yet occurred is end user resistance, the fear that some competitors will gain share at the expense of ISPs who do charge content providers for access or other competitive responses by content owners. But the problem is very real.

A text message might consume just 140 bytes. A three-minute voice call might consume 1,800 bytes, an order of magnitude (10 times) more bandwidth than a text message.

A three-minute PC video clip might represent 33,750 bytes, another order of magnitude increase (100 times more than a text message).

A two-hour standard definition movie might represent 3.6 million bytes, an increase of five orders of magnitude (10,000 times more bandwidth than a text message).

And that's the problem. Video imposes loads far beyond anything networks have been expected to handle so far. Engineering a network for text or voice is one thing. Engineering it to handle video is something else again.

"We can't give the content providers a completely free ride and continue to give customers the service they want at the price they expect," says John Petter, BT Retail managing director.

Broadband providers such as Tiscali have been complaining for two years about the burden placed on their network by bandwidth-hungry video services.

BT says the trade-off could be quality of service guarantees for content providers.

To be sure, the issue of how to match the cost and revenue associated with broadband access is bedeviling. Consumption is growing while revenue per gigabyte is falling. Sooner or later the demand and revenue curves will converge, at which point the business model is destroyed.

Without changes in user behavior or pricing, the only question is how it takes before the converge point is reached.

European regulators also have been much more active than their North American counterparts in the area of compelling Internet service providers to assist in curbing content piracy. So it might not be surprising that BT is among the first European ISPs to publicly suggest matching video consumption with access fees.

The logic there is analogous to proposals some have made about pricing email to curb spam. Even slight charges "per message" are enough to destroy spam economics. Perhaps the same would prove true for charges to view content, one might suggest.

http://www.ft.com/cms/s/0/1c979154-5621-11de-ab7e-00144feabdc0.html?ftcamp=rss&nclick_check=1

Prepaid Wireless Interest Explodes at Virgin Mobile, TracFone, MetroPCS, Cricket, BoostMobile and Net10

Online visitors to six leading prepaid wireless sites grew 37 percent in the first quarter, compared to the first quarter of 2008, says comScore. The nearly eight million visitors represent more than four percent of the total U.S. Internet audience.

The six prepaid wireless sites include VirginMobileUSA.com, TracFone.com (América Móvil), MetroPCS.com, MyCricket.com (Leap Wireless), BoostMobile.com and Net10.com (América Móvil). 

Growth in the category was driven primarily by MyCricket.com, whose traffic was up 107 percent) and Boostmobile.com (up 105 percent), both of which more than doubled their traffic.

MetroPCS.com and Net10.com also experienced strong gains, growing 63 percent and 37 percent, respectively.

Although the marketing messages of most prepaid wireless providers target the youth market, prepaid wireless site visitation data suggest considerable interest in the plans among 35 to 64 year olds. In fact, the majority of visitors to Net10.com (60.3 percent) and TracFone.com (58.7 percent) were from this older age segment. 

Even for sites where the majority of visitors were under 35 years of age, such as Boostmobile.com and MetroPCS.com, visitors between 35 and 64 years old still comprised at least 40 percent of visitors to the site. 

While it is likely that some of this older skew can be attributed to parents purchasing phones on behalf of their children, the data nevertheless underscore the appeal of prepaid wireless beyond the youth market, comScore speculates.

Another key marketing inference can be made, though: sometimes having a clear "niche" message can rebound to a brand's overall sales. The perhaps-classic example is what Pepsi discovered several decades ago. Suffering in its market share battle with Coca Cola, Pepsi decided to rebrand as a cola for the younger generation.

You might think this "niche" strategy would lead to a limitation of market share. It didn't. Pepsi pulled even with Coca Cola. The implication is that a strong "niche" brand can pull other user segments along. 

That likely is the explanation here, as "youth" brands pull other demographics along on the strength of the value pitch.

In order to understand the marketing factors driving traffic to prepaid wireless sites, comScore also conducted an analysis of search referral activity. The results showed that while both paid and organic search are driving increased referral activity, organic search is substantially outpacing paid search referrals on the whole. 

This dynamic suggests that the underlying consumer demand for prepaid wireless services is not just being driven by paid search marketing expenditures.

A few of the sites performed particularly well in obtaining growth from organic search referrals compared to paid search referrals. 

Organic clicks to BoostMobile.com grew 310 percent, while paid clicks grew 119 percent; organic clicks to MyCricket.com grew 123 percent compared to 63 percent growth in paid clicks; and organic clicks to MetroPCS.com grew 148 percent compared to 17 percent growth in paid clicks.

http://www.comscore.com/Press_Events/Press_Releases/2009/6/Prepaid_Wireless_Services_Attract_Increased_Online_Interest_During_Economic_Downturn

Mobile Handset Market Bifurcates: Smart Phones and Low Cost Phones are Key

Annual sales of low-cost mobile handsets aimed primarily at consumers in emerging markets, with with possible implications for the prepaid segment, will grow 22 percent between 2009 and 2014, to over 700 million units, say researchers at Juniper Research.

In some ways the handset market is bifurcating, with interest focused both at the high end smart phone segment and the low end segment.

Efforts by industry players to lower the total cost of ownership for devices and services to below $5 are already reaping benefits in markets such as Bangladesh, Pakistan and India, Juniper Research says.

Meanwhile, players such as Nokia are developing invaluable content-driven services that will encourage first-time mobile users to keep on using their devices and improving their standards of living.

“With around 80 percent of new mobile users set to come from emerging markets over the next six years, it is essential that operators and vendors work together to dilute the price barriers associated with mobile technology and to provide ongoing support through the development of specific social and personal services, such as Nokia’s Life Tools suite," says Andrew Kitson, Juniper Research analyst.

The Africa and Middle East region will account for the largest annual shipment volume by 2014, with its 166 million low-cost handsets representing 24 percent of all sales that year and up by 54 percent between 2009 and 2014.

With smart phones projected to account for 27 percent of mobile device shipments in 2014 (up from 13 percent in 2008), the market is effectively polarising into two groupings: entry-level and high-end devices.

At some point, the broad trend should result in new options for lower-price smart phones, and that could open up new mobile broadband segments, including both postpaid and prepaid.

http://www.juniperresearch.com/shop/viewpressrelease.php?pr=143