Court Deals Blow to Network Neutrality: Will FCC Overreach?

Wall Street Journal "Digits" video about the Overturning of Federal Communications Authority over broadband access services.

Small Business, Consumer Portions of Economy Still Struggling

Virtually all observers now say the U.S. economy has past the bottom of the recent economic recession. The common understanding in financial markets also is that the markets climb a wall of worry. And in the small business and consumer segments of the economy, there is plenty of worry.

The National Federation of Independent Business Index of Small Business Optimism lost 1.3 points in February, falling back to the December 2009 reading of 88.0 (1986=100), only seven points higher than the survey’s second
lowest reading reached in March 2009 (the lowest reading was 80.1 in 1980:2).

Separately, analysts at Deloitte say rising tax rates, combined with declines in real wages and median home prices, drove the third straight monthly decline in the Deloitte Consumer Spending Index during February 2010.

To emphasize what that means, consider that "the persistence of Index readings below 90 is unprecedented in survey history," says NFIB Chief Economist William C. Dunkelberg. "Unprecedented."

The new NFIB survey confirms what other surveys suggest: there is a recovery under way, but it is painful. Employment per firm, seasonally adjusted, fell 0.13 workers, an improvement over the 0.5 workers per firm that had been lost every month for the previous fourteen months.

About 10 percent of the owners increased employment by an average of 5.0 workers per firm, but 19 percent reduced employment an average of 3.2 workers per firm, seasonally adjusted.

Over the next three months, eight percent plan to reduce employment and 13 percent plan to create new jobs, yielding a seasonally adjusted net negative one percent of owners planning to create new jobs.

The frequency of reported capital outlays over the past six months was unchanged at 47 percent of all firms, barely ahead of December’s record low reading. Capital spending is on the sidelines as is the demand for loans to finance these activities.

A revival of capital spending will require a significantly improved business outlook and some support from reluctant
customers. Plans to make capital expenditures over the next few months were unchanged at 20 percent, four points above the 35 year record low.

Four percent characterized the current period as a good time to expand facilities, down one point from January. A net negative nine percent expect business conditions to improve over the next six months, down 10 points from January.

Deloitte points out that real wages, exacerbated by rising energy costs, have been serving as a drag on consumer spending since December 2009. However, in February 2010, state and local tax increases and possibly weather-related weakness in home prices also contributed to a 7.8 percent dip in the consumer spending index.

Despite this recent downward trend, Deloitte still advises retailers to be prepared for an increase in consumer spending in the near future, though.

“Consumers have been resilient in the face of adversity and have gradually shown they are regaining their willingness to spend,” says Stacy Janiak, vice chairman and Deloitte’s US retail leader. “In the coming months, retailers should be prepared to respond to a potential uptick in activity, or risk having empty shelves when consumers are ready to replenish. Retailers that have systems in place to quickly analyze and respond to customer data may be better prepared to replenish inventory and stock the right assortment to capitalize on a release of pent-up demand.”

Unemployment claims have come down sharply during the past nine months, which historically has been a reliable signal of economic recovery. In the past month, however, claims have gone back up slightly.

Real wage growth, the biggest contributor to the Index until recent months, is down slightly compared to a year ago as energy prices are pushing up the price level and hurting the real purchasing power of modest wage growth.

The housing market deteriorated in the most recent month, possibly due to weather. Mortgage applications are declining sharply. The weakness in home prices could be a weather-related phenomena or it could be a sign that the economy is deteriorating after a brief second half bounce in 2009.

As we are a couple of weeks away from the start of the first quarter financial reporting season, observers will be looking for signs that sales and earnings are increasing at most reporting firms, especially as the year-over-year comparables should be favorable.

FCC Loses Net Neutrality Case on Appeal: No Authority to Regulate Broadband

Flash! The Federal Communications Commission does not have authority to regulate broadband services, the U.S. Court of Appeals for the District of Columbia Circuit has ruled.

The FCC had fined Comcast in 2008 for subjecting BitTorrent to traffic-management practices. The federal court has reversed a lower court decision, ruling that the FCC does not have authority to regulate broadband, in essence. The full text of the ruling is not yet available, but the decision potentially sets in motion a new direction in broadband regulation by the FCC, which now must either get new legislative authority from the Congress to regulate broadband services, or must take a potentially-divisive alternative approach: attempting to regulate broadband services as "common carrier" services.

That would set off a nuclear war between the FCC and telecom and possibly cable companies, who would feel compelled to fight the change with every weapon at their disposal. Should the FCC ultimately prevail, the nation will face years of ruinous lawsuits, bringing new broadband investment to a grinding halt as private investment drys up.

The FCC can appeal the decision, but the big question now is whether it is willing to risk nuclear war with the telecom and cable industries.

iPad Halo Effect on Netflix

Despite immediate reactions about sales volume for the new Apple iPad, it is way too soon to make an assessment of the device's importance. But it is not too soon to note that the iPad already is having some direct impact on other firms in the ecosystem. 

Shares of Netflix, for example, hit a 52-week high early this week to $80 a share after its app for Apple Inc.'s iPad became available. 

Netflix members can watch an unlimited number of TV episodes and movies on the new iPad at no additional cost. Subscriptions begin at $8.99 per month.

And though the iPad has been widely seen as a competitor to the Amazon Kindle, Kindle inventory is immediately available on the iPad, which should help sales of content, even if eventually reshaping demand for the Kindle hardware reader. 

Touch Screens Lead to Higher Device Satisfaction, Survey Suggests

Overall satisfaction among smartphone and traditional handset owners whose phones are equipped with touch screens is considerably higher than satisfaction of owners of phones that have other input mechanisms, according to J.D. Power and Associates. That likely comes as no surprise, given the impact the Apple iPhone has had on the entire handset business.

Among smartphone owners whose device has a touch screen, satisfaction averages 771 on a 1,000-point scale, nearly 40 index points higher than among those whose smartphone uses other input methods, such as a text keyboard.

In order of importance, the key factors of overall satisfaction with traditional wireless handsets are: operation (30 percent); physical design (30 percent); features (20 percent); and battery function (20 percent).

For smartphones, the key factors are: ease of operation (26 percent); operating system (24 percent); physical design (23 percent); features (19 percent); and battery function (eight percent).

Apple ranks highest in customer satisfaction among manufacturers of smartphones with a score of 810, and performs particularly well in ease of operation, operating system, features and physical design. RIM BlackBerry (741) follows Apple in the rankings.

LG ranks highest in overall wireless customer satisfaction with traditional handsets with a score of 729, and performs well in all five factors, particularly physical design, features and operation. Sanyo (712) and Samsung (703) follow LG in the rankings.

The study finds that both smartphone and traditional handset owners are increasingly using their phones for entertainment and sharing media. Among traditional handset owners, 25 percent indicate they frequently send and receive multimedia and picture messages, an increase of 25 percent from just six months ago.

Smartphone users are nearly twice as likely to share multimedia messages. In addition, nearly one-fifth (17 percent) of smartphone owners with touch screen-equipped handsets indicate they frequently download and watch video content on their device, which is significantly higher than the segment average.

Global Positioning System capabilities are a desired feature among both traditional mobile phone and smartphone users. More than one-third (35 percent) of traditional mobile phone owners say they want GPS features on their next handset purchase, while 15 percent of smartphone owners say they want GPS.

Some 60 percent of smartphone owners say they download third-party games for entertainment, while 46 percent say they download travel software, such as maps and weather applications.

About 31 percent say they download utility applications, while 26 percent say they download business-specific programs, indicating that smartphone owners are continuing to integrate their device usage into both their business and personal lives.

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Title II Debate Redux

If you were following debates over Federal Communications Commission policy relating to the Internet back in 2006, you might remember that we were debating whether the Internet, and broadband access, should continue to be regulated as other data services are, under Title I, or as common carrier services, under Title II.

The economic, financial and policy stakes are no less important this time around, as we might be setting up for yet another lengthy battle over how best to regulate broadband access. Lots has changed since 2006. Broadband access by fixed line networks has become a legacy service. Mobile broadband is about to explode. Application innovation arguably is more robust than it was in 2006, and almost all of the innovation has something to do with mobility, not the fixed line Internet.

Congress could "remedy" the situation by passing new laws directly the FCC to take regulatory control of broadband access services. A majority of Americans might regard almost any such congressional moves with derision, given the general contempt that institution now inspires in the overwhelming majority of Americans who are polled about their impressions of Congress.

Will FCC Take "Nuclear Option"?

With the caveat that there is no direct relationship between the Federal Communication Commission's "National Broadband Plan" and the separate issue of "network neutrality," the two arguably might be related. The reason is that
a U.S. Court of Appeals for the District of Columbia Circuit could rule that, in fact, the Federal Communications Commission lacks sufficient authority to regulate broadband services, for reasons of network neutrality or mostly anything else related to broadband access and applications.

The Court of Appeals challenge by Comcast argues that the FCC has no authority to censure Comcast for throttling Bittorrent access by its broadband access customers.

New and express authority could, of course, be granted by Congress, but that would take some time. And if the FCC has not current statutory authority to create rules for broadband services, does it have authority to push through a reallocation of 500 megaHertz of wireless spectrum, arguably the centerpiece of its national plan?

If it loses, the FCC can appeal to the Supreme Court. But the court might not take the case, and even if it does, it could take years to get a decision.

So the FCC might try to move based on its current authority to regulate "telecommunications" services such as voice. That would overturn all existing federal rules relating to data services, and would incite a nuclear war with telecommunications providers, just as a threat to regulate cable TV industry as a common carrier also would trigger an all-out legal war with the cable industry.

Whether the FCC wants to trigger first an industry uprising and then years of legislation that will introduce massive uncertainty into the market, is unclear. Certainly the FCC cannot be unmindful of the industry response.

That is why any moves to reclassify broadband access, now a "Title I" data service, as a "Title II" common carrier service, will be a nuclear option. It guarantees that the full weight of the telecommunications industry, and possibly the cable TV industry as well, could be marshalled against any such changes.

And since all FCC thinking now is that only private investment will lead to advances in broadband access, a nuclear war with those interests seems self defeating. Not only will the regulatory fights be huge and determined, but no matter what the outcome, lawsuits will fly for years, further obstructing any serious progress. In the five years after the bloody battle, we will be about where we are now, but five years will have passed.

At a time of tumultuous change in the larger business, a six-year to seven-year period of extreme regulatory uncertainty would be damaging in the extreme, partly because investors would balk at investing and service providers would stop investing in wired facilities.

That's thing about what we used to call "mutually assured destruction." The problem with nuclear weapons under the old "deterrence" doctrine is that actual use of the weapons means failure. The only logic to nuclear weapons is not to use them. Oddly enough, we might stand on the precipice of just such a failure.