Net Neutrality: Time for Evidence-Based Policy

By Thomas W. Hazlett, published in the Financial Times

A federal appeals court has bopped the Federal Communications Commission yet again. In Comcast v. FCC – the “network neutrality” case – the agency was found to be making up the law as it went. In sanctioning the cable operator for broadband network management it found dubious, the Bush-era FCC exceeded its charter. Cable modem services and digital subscriber line (DSL) connections provided by phone carriers compete – officially – as unregulated “information services.”

Congress could now mandate broadband regulation. This could have happened four years ago, when the Democrats took majority control and announced that they would impose network sharing mandates. That has not happened, and – with unemployment running at above 9 per cent – is not likely now. Net neutrality is seen, bluntly, as a jobs killer. That’s one take Congress has actually gotten right.

Alternatively, the FCC could flip its own rules, going back to a DSL regime discarded in 2005. But it would have to go further, extending “open access” to cable broadband, something is has always rejected. In 1999, when AOL and phone carrier GTE lobbied hard for cable regulation, Clinton-appointed regulators stood firm. “We don’t have a monopoly, we don’t have a duopoly,” stated FCC Chair Bill Kennard, “we have a no-opoly.” Forget regulation, encourage investment, get amazing new stuff.

But “open access” rules for DSL remained. These permitted phone company rivals to lease capacity at rates determined by regulators. It was not until February 2003 that the major requirements were ended. In August 2005, remaining rules were scrapped. A test was created. Deregulation would further investment and deployment, or quash competition and slow broadband growth. FCC member Michael Copps predicted the latter. He challenged the Commission to see if the policy would “yield the results” anticipated. “I’ll be keeping tabs,” he warned.

Yet, the market’s verdict is in – and the proponents of regulation have ignored them. Obama economic adviser Susan Crawford, arguing in the New York Times for broadband re-regulation, said that ending government DSL mandates was “a radical move… [that] produced a wave of mergers,” raising prices and lowering quality.

It is simply untrue. Mergers, governed by the FCC and antitrust agencies, have had no material impact on broadband rivalry. And the rate of broadband adoption significantly increased following deregulation. This pattern continued a trend.

Cable, unregulated, led DSL in subscribers by nearly two-to-one through 2002. Then, with DSL deregulated, phone carriers narrowed the gap, adding more customers, quarter-to-quarter, than cable operators by 2006. The spurt in DSL growth relative to cable modem usage takes place at precisely the time the former was shedding “open access” mandates, and cannot be explained by overall changes in technology. In short, DSL subscribership was up 65 per cent by year-end 2006 compared to the predicated (pre-2003) trend under regulation.

The story in ultra-high-speed fiber-to-the-home (FTTH) services is similar. There was virtually no deployment until the Commission, in late 2004, declared that fiber networks would not be subject to access regulation. That move, according to industry analysts, unleashed investment. FTTH is now offered to over 15m homes, and networks are capable of supplying 100 MBPS downloads, on a par with services delivered anywhere.

Not only has access regulation been shown to retard advanced networks, the Internet is loaded with “non-neutral” business deals where Internet Service Providers (ISPs) give preference to favored firms or applications. These negotiated contracts rationalize resource use, and drive incentives for innovation.

Data flows, unregulated, across large backbone networks that pay no fees to exchange their traffic, but collect billions from smaller networks that must fork out to inter-connect. This pay-to-play structure pushes networks to invest, grow, and cooperate.

Cable TV systems reserve broadband capacity for their own branded “digital phone” services. This special “fast lane” provides a premium service not available to independent VoIP applications. It has also transformed the competitive landscape, helping to forge fixed line competition for over 100m US households -- what the 1996 Telecommunications Act tried failed to do via network sharing mandates (tossed out by a federal court in 2004).

And the corporate history of Google offers a landmark date: on Feb. 1, 2002, the company’s search engine popped up as the default choice on 33m AOL subscribers’ home page. The coveted spot was purchased; the young firm mortgage its future to outbid search engine rivals. An application provider paying the country’s largest ISP for preferred access to its customers. That may not be a violation of net neutrality. But if not, many lawyers will be very busy explaining why.

Today’s FCC Chair, Julius Genachowski, has made a pledge: the Commission’s “processes should be open, participatory, fact-based, and analytically rigorous.” That would be a refreshing approach. In addressing new regulations for broadband, let’s first see how these markets actually work, and how well the last batch of network sharing mandates performed.

Let’s all keep tabs.

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The Very Best Android Phones For Each Carrier

As it turns out, some think the "very best" Android devices available on any U.S. mobile carrier are made by just one company: HTC. The firm seems to be betting its future on Android, and from the looks of things, is doing a heck of a job rolling out top of the line Android devices for every leading U.S. carrier.

The Very Best Android Phones For Each Carrier

For T-Mobile customers the most future-proof choice is a Nexus One. For Sprint 4G customers, it is the HTC Evo. At AT&T the top device is the Nexus One. Verizon customers should get the HTC "Incredible," at least when it goes on sale on April 29, 2010.

A Canadian's Take on U.S. Net Neutrality: Big Company Ploy to Squash Competition

The biggest companies in major markets generally tend to favor heavy-handed regulation, says a Canadian IT consultant.  That's why Google, among others, has spent tens of millions pushing for “net neutrality” regulations in the United States, he argues. That's an unusual twist on the debate. 

"Just go ahead and net neutrality on your own network and for your own users. Day one you’re going to find that net neutrality requires you to give incoming porn packets exactly the same forwarding priority on your network as text messages to sales or voice traffic for the CEO’s office - and as soon as you decide to block one set while giving the other a priority boost, you’ll have both demonstrated the fundamentally Orwellian nature of the whole net neutrality sales pitch and turned yourself into one of its opponents."

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Google Enhances Docs

I admit I do not use Google Docs as much as I used to, only because so much of what I write is uploaded directly to a Web site, or in some cases sent as an email message. That's wasn't the case several years ago, when the primary form of document I was required to create was a "Word" document.

I still sometimes need to do a bit of modeling, create a presentation or create a document, so it isn't as if an office productivity suite does not get used, they simply get used less, as most of my daily routine involves creating Web-compatible content.

The exception seems to be that I frequently must capture a graphic or chart of some sort from a .pdf file or Web page and reformat it as a picture for insertion into a post. In that case I find myself using the presentation software simply to launder an image into a .jpg file. That wasn't why presentation suites were created, but that is how I generally will be found using a presentation program, day in and out.

But there is another point about new developments to Google Docs. Lots of people are required to create documents in a word processor, read or create spreadsheets and presentations on a regular basis. And, up to this point, with some salient exceptions, that has meant using Microsoft's "Office" suite.

Google Docs has been useful for students and some enterprises, but has not matched Office feature for feature and with equal and transparent functionality. Most of us still find the default format for any shared bit of work is "Word" for documents and "PowerPoint" for presentations and "Excel" for spreadsheets.

But any attacking company will start low and then gradually begin to enhance the utility of a competitive offering, and that is what Google is doing with Docs.

These Days, It's All About Mobility

These days most innovation happening in applications, features and devices is happening in the wireless realm or in the world of over-the-top applications. That can be discomforting for some.

I recently moderated a panel of application developers and enablers recently and asked where they panelists believed there were opportunities to work with "service providers" such as telcos and cable companies. There was an initial awkward silence, then some mutterings even I cannot remember. But I think that tells the story: over-the-top application providers largely assume the existence of broadband; broadband is not a required "partner" in the delivery.

People in the telecom or cable or satellite business hate the term "dumb pipe," but it resonates because it sums up the essential nature of today's application environment, captured by the term "loosely coupled."

And matters might change even more. The Wi-Fi-only version of the iPad does not require any sort of relationship with a wireless access services provider. In fact, if, as some believe, devices such as the iPad wind up being devices picked up and used casually, when people are sitting on a couch in their homes, and not primarily as a substitute for a netbook or notebook PC, there might never been a need for such relationships. People will simply use their at-home Wi-Fi connections.

Still, it is hard to ignore the fact that most innovation these days is happening in the mobile space.

U.S. Mobile Gaming Down 13% Annually, Feature Phone Drop is 35%, comScore is Still Bullish

You might not think a market that declines 13 percent year over year, and declines a whopping 35 percent, year over year, is a "growth" market. But that undoubtedly is the case. U.S. mobile gaming activity declined 13 percent between February 2009 and February 2010, posting a sharper drop of 35 percent among owners of feature phones, according to comScore. So why the optimism?

As it turns out, mobile gaming by smartphone owners increased 60 percent over that same period.
“Although the number of mobile gamers has declined in the past year, there is reason for significant optimism about the future of this market,” says Mark Donovan, comScore SVP. “As the market transitions from feature phones to smartphones, the dynamics of gameplay are also shifting towards a higher-quality experience," and that seems to be why smartphone gaming is up so much.

The inevitable ascent of the mobile gaming market depends not only on smartphone subscribers’ higher propensity to play games on their mobile devices, but also their heavier gaming activity across nearly every dimension, comScore says.

Smartphone subscribers (47.1 percent) are three times more likely than feature phone subscribers (15.7) to play games on their device at least once a month, comScore says.

They are more than five times as likely to play games almost every day and far surpass their feature phone counterparts across various methods of game play.

Smartphone subscribers also install significantly more games on their devices with 27.3 percent having installed at least one game compared to just 5.6 percent of feature phone subscribers.

A third of smartphone subscribers with games have more than five games installed on their phones, while less than one percent of feature phone subscribers have that many games installed.

“Smartphones offer a more accessible and compelling mobile gaming experience that is enabling adoption of this behavior, even among consumers who have not traditionally been gamers,” says Donovan.

And of course we haven't yet seen the impact of devices such as the iPad, which offer bigger screens and therefore potentially better gaming experiences.

Smartphone subscribers are more likely to play mobile games than feature phone subscribers across every gaming genre. The genre with the highest penetration among smartphone subscribers is arcade puzzle games at 12.9 percent, followed by card games (11.9 percent), word/number games (11.4 percent) and casino games (7.6 percent).

Wireless Carriers Need More Spectrum, But Can They Handle the Borrowing?

Though acquisition of more mobile spectrum is a key strategic imperative for leading U.S. mobile operators,  it is not clear how much capacity and flexibility Verizon Communications and AT&T have within their credit ratings to absorb future spectrum purchases, say analysts at Fitch Ratings.

That is a significant opinion. Despite the apparent belief in some quarters that the largest U.S. telecom providers are so well positioned they can handle any shock to their financial models, Fitch Ratings does not believe that is the case.

In fact, a number of factors, including the cost of acquiring new spectrum, ability to monetize broadband services more effectively and competition from application-based wireless services all pose "longer-term threats to telecom operators' balance sheets and cash flows," Fitch Ratings say.

Fitch believes Verizon Wireless and AT&T Wireless, because of their scale, market power, and financial strength, will be in a better position to cope with these challenges than many lower-margin contestants, should the market environment shift. But increased reliance on wireless communications is an issue for many other contestants as well.

A key issue for cable companies is whether their wholesale arrangement with Clearwire can bundle competitive offerings that can successfully offset the significant threat from next generation broadband wireless networks as the telecom industry transitions more and more traffic longer-term to wireless, Fitch analysts say.

The Federal Communication Commission's "National Broadband Plan" aims to release 70 megaHertz of spectrum available for auction in the 2011 time frame.

Depending on the timing of the auction, the final amount of spectrum available, and the aggressiveness of the bidding, it’s not clear how much capacity and flexibility Verizon Communications Inc. and AT&T Inc. have within their credit ratings to absorb future spectrum purchases.

The good news is that, by the end of 2010, leverage is expected to decline for Verizon and AT&T due to strong free cash generation and management commitment to debt reduction. Both companies’ leverage has been at the high end of Fitch’s expectations due to past acquisitions and spectrum purchases.

Other well-capitalized, smaller operators or new entrants with strong balance sheets and good
free cash flow prospects should be in a favorable position to acquire additional spectrum.

New entrants or smaller companies without good operational cash flow characteristics or
strong balance sheets would likely have a difficult time funding any commitments for
spectrum purchases or buildout requirements.

That suggests the coming spectrum auctions will reshape the competitive environment in significant ways, favoring the well-capitalized contestants and weakening the financially weaker firms.

The transition to 4G networks also would seem to provide an opportunity for operators to
implement a new pricing model for data services. But it is not clear the opportunity is all "upside."

Clearwire, for example, already offers unlimited mobile data usage for $40 per month. Clearwire does not currently cap subscribers’ data usage, where most cellular operators limit monthly data
usage at 5 gigabytes. Since AT&T and Verizon offer capped plans costing $60 a month, Clearwire is using its 4G spectrum to disrupt current levels of pricing.

The company’s management has indicated that Clearwire’s mobile WiMAX subscribers already average approximately 7 GBytes of data usage per month.

Given the current indication by operators that Internet video will be a key driver of traffic on 4G networks, operators will need to create larger “data bucket” plans with tiered pricing, as the current 5 GB 3G plans currently offered for aircards and netbooks would not be sufficiently large enough to handle subscriber demands from streaming video.