Network Neutrality: The Long Term Implications

As a U.S. District Court weighs a legal challenge to the Federal Communications Commission’s authority to promulgate network neutrality rules, European regulators are tussling with the same issues. One wonders whether the debate also misses a much larger point.

The future communications ecosystem might in fact require the creation and use of many quality-enhancing mechanisms, used to support services created and delivered (assembled) dynamically, to support both end user application requirements, application innovation and service provider financial health.

In other words, some of the key network neutrality concepts, especially quality of service mechanisms that discriminate between packets, could be a foundation for tomorrow’s sustainable ecosystems.

If one assumes that the revenue required to sustain continuous investment in next generation networks always is generated by revenues earned by serving end users and business partners, then it is axiomatic that if the current revenue underpinning is threatened by changing demands, then new revenue mechanisms will have to be created.

Some might argue that is not the public’s problem. Such people also likely see no problem were a major trade union to prefer the death of its members’ jobs by causing an entity bankruptcy, rather than modify their wage and benefit demands.

This actually happens. Eastern Airlines unions in the late 1980s had a choice: agree to contracts they apparently abhorred, and keep Eastern Airlines flying, or refuse, and see Eastern go bankrupt. The union chose bankruptcy .

Assuming an observer is not such a nihilist, the health of the ISP and the communications infrastructure matters to everyone, since all useful and entertaining applications require a fast, low latency, affordable, capable and flexible network.

Let us assume that today’s access provider business model is unsustainable, driven by erosion of the legacy revenue model, competitive impact on retail pricing and a shift of value to “over the top” applications whose key characteristic is that the value and revenue is mostly captured by third parties using access and communication networks.

PwC, for example, has argued that massive telecom network investments over the past decade or so have failed to generate a financial return. In fact, PwC argues that the average long-term return has been a mere six percent or just 300 basis points less than its cost of capital.

If you think there is no problem, you might not care about ISP survival and flourishing. The rest of us ultimately do have a stake in this matter.

Many would argue that ISPs need to create new sources of value derived from more flexible use of their networks. In the past, some have argued that “bandwidth on demand” could be part of the answer.

Others prefer something more along the lines of applications or computing resources on demand, or end user information (location, type of device now connected, preferences and past behavior) on demand, but you get the point: flexible networks able to create customizable features and services often are seen as one key way access networks will provide new value.

It is difficult to envision how quality, not just flexibility, would fail to be part of the raw material for such an approach to creating network value.

Resources that are “what you want, when you want them, the way you want them” would seem to require some assurance of quality, especially if rated (priced) on an “on demand” basis.

Users already assume Internet connections are relatively ubiquitous, rather reliable and reasonably affordable.

Beyond that, they have few expectations. And that is the value ISPs must create.

The telecom business used to exist to make its own apps work. Now the telecom business exists to enable third party applications. That is a huge shift.

And it is hard to see how that works very well as a revenue model for the access providers unless they have something more valuable to provide their application providers. Quality of service attributes would seem to be one of the more promising avenues.

In that sense, network neutrality is an impediment. Without packet shaping, quality of service features are hard to create. Sooner or later, that will become obvious.

Verizon Headed for Net Neutality Win?

At least one equity analyst thinks there is trouble for U.S. network neutrality rules.

“We believe a D.C. Circuit panel majority signaled today at oral arguments that it’s inclined to pare back FCC Open Internet rules in a way that would allow cable and telco broadband providers to charge Internet edge providers for improved connections to broadband customers,” said Christopher C. King, Stifel , Nicolaus & Company equity analyst.

“We believe that both Judge Tatel and Judge Silberman signaled they believe the FCC’s current Open Internet rules violate a prohibition against applying traditional “common carrier” regulation to broadband providers,” said King.

“The two judges seemed to agree with Verizon’s contention that the agency had thwarted

its ability to negotiate paid agreements with edge providers, King argues.

Judge Tatel repeatedly suggested the court could throw out the FCC’s anti-discrimination rule that restricts the ability of fixed broadband providers to charge edge companies. But King thinks Judge Tatel also wanted to prevent ISPs from charging app providers for best effort access.

Judge Silberman at times suggested the court should also throw out the anti-blocking rule, but

Judge Tatel seemed disinclined to go that far, King reports.

There could be additional legal challenges, but any reversal of the network neutrality could have long-term implications for ISPs and major app providers, especially those providing bandwidth-intensive applications such as streaming video.

Net Neutrality in Court Again

The U.S. Court of Appeals for the District of Columbia Circuit is hearing oral arguments Sept. 9, 2013 in a lawsuit brought by Verizon Communications challenging the Federal Communications Commission "net neutrality" rules.

Some paint the dispute as involving “Internet access.” That isn’t actually the case. The FCC already mandates that users have access to all lawful applications. The FCC also agrees that Internet service providers have the right to manage traffic on their networks to maintain quality of experience by alleviating congestion problems.

The issue is whether ISPs have the right to shape traffic by providing class of service features, for example giving priority to voice or video traffic under conditions of network congestion.

Some supporters of net neutrality worry about the business ramifications for end users and application providers, while ISPs maintain they have the right to create and enforce policies that provide better end user experience, while also creating potential new revenue streams.

The concern is that a “two-tier” Internet could develop, where some end users and some application providers would be able to use or provide a “faster” or “better” experience, in the same way that content delivery networks now are used by app providers.

That could happen if end users are able to pay for such expedited handling of their traffic, or if ISPs could charge app providers for providing such expedited handling.

Critics of network neutrality rules argue that potential business abuses (ISPs giving priority to their own streaming video services compared to rival services) are prevented by existing antitrust laws.

Supporters of network neutrality argue that prohibiting class of service offers levels the playing field for small and big app providers alike. That is a reasonable argument, but also ignores sources of business advantage that bigger and wealthier firms always have, when competing with smaller firms, especially the ability to pay for content delivery and other quality-enhancing features.

Beyond that, the network neutrality argument resembles other challenges ISPs and regulators also face. In Europe, for example, communications regulators face crucial challenges about the ways they promote competition and at the same time encourage investment.

By setting low mandatory wholesale rates, European regulators have succeeded in spurring competition. But those same rules have depressed investment in next generation networks.

Network neutrality rules similarly discourage some types of network investment, while arguably encouraging investment in raw access capacity, since quality of service measures cannot be used.

At a high level, customers or business partners always pay for every investment in network infrastructure. Part of the issue is whether network neutrality rules encourage or discourage some forms of innovation, and encourage or discourage network investment.

It’s a difficult balance to strike.

Consumer Devices Using Organization Networks will Double Over 2 Years

Information Technology professionals surveyed by CDW expect expect the number of personal smart phones and tablets accessing their networks to more than double in the next two years. About 90 percent of respondents say the effect will be to grow bandwidth requirements 63 percent.

About 39 percent of those respondents also expect to encounter increased network latency. Some 44 percent expect increased server requirements, while 37 percent say storage requirements also will grow.

Core messaging functions (email, text,voice/voicemail) are the single most important end user function to be supported. as you might guess. About 48 percent of respondents said core messaging was important.

Accessing organizational data was viewed as key by about 47 percent, illustrating the importance of content consumption. Some 36 percent indicated storing organizational data or

documents was important.

Viewing or creating documents was deemed important by about 33 percent, the same percentage indicating collaboration (conferencing, webinars, document sharing) was important.

Regulators Favoring New Entrants in Spectrum Auctions

European Community Competition Commissioner Joaquin Almunia said while monopolies and duopolies of European mobile telecoms companies were unacceptable, he had no objection in principle to a mobile market with three or four players.

The biggest long term issue is whether “three” or “four” providers is the market-dictated outcome. For the moment, regulators and some policy advocates in most countries seem to favor “four” is the preferable number of contestants to sustain competition.

Beyond that, auctions for new Long Term Evolution fourth generation networks will, in principle, create the foundation for possible new competitors to enter the mobile markets as well.

That preference for adding some new competitors can be seen in numerous instances.

The New Zealand auction of Long Term Evolution spectrum will include provisions intended to encourage entry of new contestants into the market. Perhaps the single biggest difference is that new spectrum winners who are not already providing mobile service in New Zealand will have five years to build networks covering at least 50 percent of the population, while any spectrum winners already in the New Zealand mobile market  will have to build networks reaching at least 75 percent of their current rural 2G and 3G base station sites within five years.

The New Zealand auction is scheduled to begin in October 2013. For sale are nine 700MHz licenses (2x5MHz).

Bidders will be limited to three licenses each, unless there is excess spectrum left unsold after the first round of bidding.

In Austria, national regulator Telekom-Control-Commission (TKK) will reserve two blocks of spectrum in the 800MHz band for a new entrant. TKK also has put together a “newcomer package” allowing that 800MHz spectrum to be combined with 2.6GHz frequencies, with the ability to enable national roaming.

That auction, originally scheduled to be held in September 2013, has been postponed due to merger activities under review affecting three of Austria’s four mobile service providers.

H3G wants to buy Orange and A1 is buying the YESSS! mobile network. TKK reckons that it does not make sense to hold an auction now, before the outcome of those mergers is finalized.

TKK want to avoid awarding frequencies to what are now distinct service providers, only to find those assets combined in the near future.

TKK wants to ensure sustainable competition by allocating frequencies to competing providers. In fact, it is TKK policy that a minimum of four national mobile providers are required to maintain competition in the Austrian mobile market.

In the U.S. market, there is debate about rules for upcoming spectrum auctions in the former analog TV bands, where some advocated bidding rules that give clear preference to Sprint and T-Mobile US, for example, whether that actually leads to better outcomes for consumers or not.

The larger point is that regulators seem to be acting rationally, in terms of their obligations to protect the public by preventing a monopoly or duopoly market from developing.

On the other hand, the long term implications are that few if any markets will be able to sustain more than three or four national providers, and some would argue the stable market structure is just three providers.

Amazon Launching a Free Smart Phone? Maybe Not.

Amazon now says it has no plans to launch a free smart phone in 2013, despite rumors to the contrary. 

Precisely what that means for future launches is not completely clear. Amazon might have been planning a 2014 launch. Amazon might only have considered the economics of a "free" device, and decided against it. 

Or Amazon might later decide to do it. Firms often deny such rumors, even when they are substantively true. 

Amazon was said to be considering launching a “free” smart phone, according to technology writer Jessica Lessin. 

Since nothing ever is truly “free,” the question is what revenue model Amazon might have expected to use, or to have considered.

As Google’s answer might be “advertising,” Amazon’s answer would likely be “additional e-commerce sales.” Also, the “no cost” phone does not necessarily imply “free mobile service.” It seems unlikely Amazon would attempt that, and instead would simply create a way to distribute the devices, with users obtaining their own service on a third party basis.

Some might argue that could prove a boon for T-Mobile US, which already encourages its customers to consider devices and service two distinct and separate purchases.

As you would guess, such an effort would be a formidable undertaking. Some might guess that Amazon would bundle the phone with a required Amazon Prime subscription. That would provide an immediate $79 a year recurring revenue stream, and also encourage more people to take advantage of the streaming video and free shipping features Amazon Prime provides.

Ad sales might form part of the revenue stream as well, some would speculate.

Lessin says she has been told an Amazon smart phone would be powered by a “forked” version of Android.

The plan might not actually come to fruition, some also would argue, especially if Amazon cannot convince at least one manufacturer to build such a device, or if some of the leading mobile service providers decide not to cooperate, or if the revenue model cannot be solidified.

Up to this point, there arguably has been more thinking and experimentation about ad-supported services, compared to commerce or ad supported devices. But lower-end Kindles already partly defray manufacturing costs by displaying ads to users.

Hong Kong Mobile Operators Each Could Lose 33% of Their 3G Spectrum

Changes in spectrum policy always have huge consequences. So it is no surprise that  four incumbent Hong Kong 3G network operators warn of dire consequences if the Hong Kong regulator proceeds with a plan to reassign some 3G spectrum whose licenses expire in October 2016.

SmarTone Telecommunications, CSL, Hutchison Telecommunications Hong Kong and PCCW's HKT argue that the government must follow long-standing industry practice and automatically renew their 3G spectrum licences on the 2.1-gigahertz band.

Regulators want to put up some of the spectrum for another auction process. The plan calls for taking away about 33 percent  of the 3G spectrum at 2.1GHz from each of the four incumbent 3G mobile operators for re-auctioning when the spectrum assignment period expires in 2016.

China Mobile, the world's largest wireless network operator, has expressed interest in bidding for the re-assigned spectrum. Some immediately will suggest that is the real reason for the spectrum plan.