For Next Generation Emergency Calling, "Punishment" Must Fit the Crime

If you have been in the telecom business for a long a time, you might have encountered, in discussions about emergency calling issues, quips that go something like “we spend 70 percent of our time dealing with an issue that is a cost of doing business, not the business.”

That’s an exaggeration for most people whose responsibilities do not directly concern emergency calling operations.

But the gist remains: an essential part of operating a communications business entails dealing with lots of other issues that are a necessary part of the business, but actually cost money and take lots of time.

And 911 emergency calling is that sort of issue. What is different now is that emergency calling now occurs in a context where fewer people actually use the fixed network for calling, where most people rely on mobiles for voice, and where revenue actually is driven by all sorts of services other than “calling.”

Without minimizing the importance of issues related to emergency calling, all effort there is expended on a shrinking, soon to be “very small” revenue source.

Also, at least for the moment, that effort is expended on multiple networks, one of which--the copper access network--is supporting fewer and fewer customers all the time.

Voice--and emergency calling--remains a key function for a communications network, if increasingly not its revenue underpinning.

And that raises a larger, tough to solve issue: how much capital and time should be spent supporting even vital functions on multiple networks that will not be sustainable for much longer?

Yes, the essential emergency calling feature has to be supported on new IP and optical networks. But that also occurs in a context where most calling happens on the mobile networks, and revenue is not driven by voice on any of the future networks.

The point is that “proportionality” is important. Proportionality is a concept dealing with fairness and justice under law. As applied to criminal law, proportionality is the idea that the punishment of an offender should fit the crime.

Under international law, proportionality is the concept that the legal use of force in an armed conflict should be bounded.

In European Union law, for example, proportionality requires that there must be a legitimate aim for a measure.

The measure also must be suitable to achieve the aim. The measure must be necessary to achieve the aim, that there cannot be any less onerous way of doing it.

The measure must be reasonable.

Dealing with next-generation emergency calling must be “proportional,” one might argue. It is a legitimate objective, but the measures to achieve the objective must be suitable, not onerous, reasonable and effective.

AT&T, Verizon Boost Data Allowances for Some Plans

AT&T Mobility has boosted data allowances on $40 a month and $70 a month Value Share Value plans.

The new plans boost the data allowance from 2 GB to 3GB for the $40 a month plan. The $70 a month plan used to feature 4 GB, and now offers 6GB more data.

Verizon Wireless, for its part, has boosted allowances for customers (new or existing) as well. Customers on $80 a month plans get 10 GB data allowances, up from 6 GB. Customers on $100 a month plans receive 15 GB data allowances, up from 10 GB.

Those moves reflect the continuing mobile marketing wars in the U.S. market, and represent a non-price form of competition that helps both firms maintain prices while providing more value, a rather typical form of competitive packaging in the Internet access business.

Over time, as has been the case for PCs and other computing devices, retail prices tend to decline over time, even as processor speed, memory or other attributes tend to improve.

That is an analogous process to what is happening in the U.S. mobile market, as Sprint and T-Mobile US attack retail packaging, both in terms of retail price and data allowances. AT&T and Verizon now are forced to react.

For some of us, the more surprising development is not that Moore's Law continues to operate, but that in the realm of Internet access, despite nearly continual criticism, Internet access speeds in the U.S. market have continued to improve nearly as fast as Moore’s Law suggests processing will improve.

That is somewhat shocking, as Internet access is a civil engineering exercise, while Moore’s Law operates at the device level. And it is far easier to replace devices than access infrastructure.

But Internet access bandwidth in fact does advance nearly as fast as Moore’s Law would suggest for devices.

Consumer Internet access bandwidth has grown about as fast as Moore’s Law would suggest, according to Jakob Nielsen, Professor Rod Tucker and Phil Edholm, former Nortel's CTO.

That is shocking, but historically accurate. That is why some of us are sanguine about prospects for U.S. Internet access speed advances, providing blockages (regulatory intervention, massive economic disruption, re-monopolization) do not develop.

source: Bureau of Labor Statistics

Consider a 2004 prediction (remember that in 2000 most U.S. Internet users were on dial-up connections): “Edholm's Law says that in about five years (that would have been 2009) 3G (third-generation) wireless will routinely deliver 1 Mbps, Wi-Fi will bring nomadic access to 10 Mbps, and office desktops will connect at a standard of 1 gigabit per second.”

History has shown that prediction to be about right for mobile, possibly too conservative for Wi-Fi, while too optimistic about desktop connections.

Starbucks Claims 90% Share of Mobile Payments Market

With the caveat that the mobile payments market is very early in its development, Starbucks now is touting its early success.

“In 2013, payment for purchases by use of all mobile devices in the U.S. totaled $1.3 billion,” says Howard Schultz, Starbucks CEO. “Over 90 percent of those purchases taking place in a Starbucks store.”

“That means we had 90 percent share of (U.S.) mobile payments in 2013,” said Schultz, who noted that “close to seven million transactions” now happen each week, 16 percent of all transactions conducted in U.S. Starbucks stores, on a mobile device.

“No company and no retail store, domestically or internationally, even comes close,” he said.  

Of course, observers might rightly notice that the mobile payments business is nascent, with most of the growth yet to come.

But Schultz suggested “Starbucks Coffee Company has cracked the code at tying mobile payment to loyalty.” So the issue is whether Starbucks might now see a way forward to a bigger, more generic role in mobile payments.

“Starbucks is the only local, national or global business of any kind to succeed in crossing both the most difficult and the most critical chasm standing between success and failure in mobile payment, transforming consumer behavior,” Schultz said.

Whether Starbucks should do so, and whether it want to do so on a wider basis is the issue.

App Providers Should Beware Unintended Consequences of Title II

As much as arcane and esoteric as communications regulatory debates often can be, there is a good reason so much attention gets paid to it. Such rules create the framework that determines who can be in the business, how they can be in the business and to some extent how much money they can make in the business.

There are a few interesting angles to the possible new network neutrality framework the Federal Communications Commission is expected to propose, and a person might be forgiven a bit of uncertainty about whether the proposal will be deemed lawful, whether it is workable and whether the actual outcomes will be as its supporters hope.  

The plan now under consideration would separate broadband into two distinct services, with different rules.

The Internet access business, where ISPs sell connections to the Internet, would be less regulated, using the “information services” framework.

But the “back end” relationships between access ISPs and content providers would be regulated as a common carrier utility service under Title II of the Communications Act.

Some question whether the FCC has authority to regulate in that manner, so any such move would immediately be met with legal challenges. At least in part, that line of reasoning is based on Commission precedent.

The FCC has found, on four separate occasions, that broadband Internet access providers do not offer a common-carrier telecommunications service, and instead offer an integrated information service exempt from common-carrier regulation under Title II, Verizon argues.

Though some support Title II regulation as a way of preventing “paid prioritization” of consumer apps delivered by access ISPs to end users, Title II might ironically create new payments by those same app providers to access ISPs (which would become the functional equivalent of terminating carriers), it would seem.

In other words,  such “back end” regulation under Title II could lead to interconnection tariffs that reflect carrier interconnection principles, namely that imbalances in traffic exchanged trigger payments to the traffic receiving carriers by the traffic delivering carriers.

One of the clear features of network interconnection under Title II are termination payments made to network operators who deliver traffic.

Presumably the FCC already is thinking about how its new rules for interconnection would obviate the traditional traffic-based payments, but how that could be done is not clear.

Also, the new rules would essentially acknowledge that retail ISPS now act as “content delivery networks” for application and content providers.

The irony is that content and app providers have vocally opposed the notion that ISPs act in that manner, in the sense of accelerating content delivery, a service Akamai and other content delivery networks routinely provide.

Still, the new rules would be based on the principle that the key feature of the modern Internet is that it has become a content distribution vehicle.

“We ask the FCC to recognize that technological evolution has led to two distinct relationships in the last mile of the network: the current one, between an ISP and an end user, which is unchanged, plus a “remote delivery” service offered by an ISP to an edge provider...connecting the provider to all of the ISP’s end users,” argued Chris Riley, Mozilla senior policy engineer.

“Edge providers” are app providers, essentially, though the term can include any consumer hosting a server or a backbone network as well.

The idea of bifurcated regulation, essentially categorizing end user retail Internet access as a more lightly regulated information service, while “back end” interconnections between access ISPs and content or app networks would be considered “common carrier” or regulated services, initially was proposed by Mozilla.

Unintended consequences occur all the time. If the FCC bifurcated Title II proposal is adopted, and if it withstands legal challenge, app provider ISPs might wind up paying new sums to access ISPs, even if that was not foreseen.

Are Retail High Speed Access Prices Too High?

What is more important, nominal prices or prices expressed in terms of local purchasing power? That, in a nutshell, is why international comparisons of any goods or services have to be adjusted for purchasing power parity.

If that is not done, one can conclude U.S. Internet prices are too high. Adjusting for local prices, as when comparing the cost of an Internet access subscription to national income statistics, yields a different answer, namely that prices are quite low.

One might argue that consumer purchasing of products that are too expensive would be reflected in actual buying behavior.

In 2012, European Community adoption of fixed network access was about 27 percent of households, where U.S. adoption was in excess of 72 percent. So in which market are prices effectively too high, or value too low?

In the MENA region, fixed broadband costs about 3.6 percent of the average monthly income per capita, while mobile broadband costs around 7.7 percent of monthly income per capita.

The point is that cost is relative to local prices. What Internet access “costs” is relevant only in the context of prices for other products people buy. The point is that Internet access is most affordable in developed markets, even if nominal prices might be “higher.”

In the 46 countries studied, the cost of entry-level broadband exceeds on average 40 percent of monthly income. That is the case in nations where daily income is US$2. In other instances, Internet access represents 80 percent to 100 percent of monthly income, according to the Alliance for Affordable Internet.

Depending on the type of Internet access, a better metric is either price as a percentage of household income or price as a percentage of per person income. According to the International Telecommunications Union, developed nation prices per capita were about 1.7 percent of gross national income, where prices were 31 percent of gross national income in developing regions, in 2012.

What if There is No Way to Survive an OTT Attack?

Control of the value chain is a new concept for communications service providers. In the old world, where apps (voice) were vertically integrated with access, there was no question but that telcos controlled the value chain.

That is the fundamental difference between the past and the present. By definition, Internet Protocol separates apps from access. New business models at different layers are inherent in the protocol.

“Because connectivity costs are paid by the user, OTT players have great flexibility in their business models,” says Vision Mobile. “OTTs can monetize ads, downloads, analytics or acquisitions, and are thus able to price their services either free (Viber), close to free (Whatsapp), or even less-than-free (in the case of Google sharing app revenues with operators).”

The vertically integrated, “all-in-one” telco business model of bundling connectivity and service costs makes it impossible for telcos to compete with free or less-than-free OTT alternatives, Vision Mobile argues.

Skype for a time was seen as a direct competitor for telcos. Google apps have from time to time likewise is viewed as a direct competitor. Obviously, Google Fiber does make Google an ISP, and in that capacity is a direct competitor to other ISPs.

In theory, Internet access is a complement to Google, Facebook and other apps. Theoretically, demand for Internet access grows as consumption of apps grows.

In practice, most ISPs probably would see matters differently. In the prevalent view, Internet access is an input to the app business, a necessary foundation for the existence of the app business, but not necessarily a direct beneficiary of app segment success.

“As OTT players put increasing pressure on traditional telco profit centers, it is tempting to see them as direct competitors,” says Vision Mobile. “Yet, OTTs do not compete for telco service revenues; instead, they compete to control key links in the digital value chain, with business models that span consumer electronics, online advertising, software licensing, e-commerce and more.”

Connectivity is as important to the app provider business model as gas to a car. But the relationship is not necessarily symmetrical. In other words, one can prosper even if they other does not do so well.

Such asymmetric business models now are a fundamental fact of industry reality. There are many implications. In some cases, the success of any particular initiative is not measured by direct revenue, but by enhancement of the earning power of the access provider overall.

Also, even if some think telcos can compete directly with OTT providers, others would argue that is not a likely tactic.

The unknown issue is what other assets access providers control that can be monetized. Vision Mobile argues localization, user targeting, privacy controls or MVNO service customization are potential areas where access providers can create revenue.

The other big problem is that companies can get an unfair competitive advantage by breaking industry boundaries. In many cases, that means expanding into ecosystem adjacencies. So an app provider becomes a device supplier; a device supplier gets into e-commerce; a content supplier becomes an ISP or video services supplier.

That can create new business models based on monetizing in some indirect way. So Google makes money not on search, email, maps or other sales or subscriptions, but on advertising.

Amazon expects to make money not on profits from hardware, but sales of content to device owners.

Apple expects to make money not on mobile payments, music or apps, but on sales of devices that use those apps.

When confronted with the disruption of asymmetric competitors, incumbents face the choice between the decline of their business, or a grueling restructuring of their core business model, Vison Mobile argues.

The key point is that an asymmetric competitor when an asymmetric competitor enters a market, it often destroys most of the value in that market.

Redistribution of profits away from incumbents is a relatively secondary impact. The big change is that the total value of an affected market shrinks.

One illustration is that when consumers use over the top services that displace paid alternatives, some amount of usage, and therefore revenue, shifts away.

But the biggest impact is that the availability of “free to use” alternatives actually shrinks the size of the former market. Not only does some market share shift, the market itself shrinks.

Service providers hear all sorts of advice about “what to do.” Much of that well-intentioned advice will prove impractical, ineffective or successful, but not at magnitudes that really make a difference.

So far, it is questionable whether any major incumbent really can claim to have found a viable and sustainable model to survive an asymmetric attack, except by expanding into new lines of business.

Ultimately, that might be the only sustainable answer: legacy markets have to be replaced by new markets and products. There might not be a sustainable way to counter a direct asymmetric attack on a legacy market.

Uncertainty Threatens Investment in Gigabit Networks?

The reason service providers abhor “uncertainty” is the same reason any entrepreneur, investor or saver objects to uncertainty: making long-term decisions is a risky proposition when there is high uncertainty.

That is as true for Brazil as for the United States, the European Community or Mexico.

Many economists, in fact, would argue that much poverty around the world is caused because people are not assured that the fruits of their labor are safe from sudden confiscation.

It is not rational for a farmer to plant a crop if the farmer is not fairly certain he or she will be able to reap the harvest, in other words. The rule of law is a prerequisite for economic development, though not sufficient.

The problem at the Federal Communications Commission, argue Dr. George S. Ford, chief economist and Lawrence J. Spiwak, president, of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, is that, despite public assurances that “regulatory certainty” is an FCC objective, the agency is behaving in ways that increase uncertainty.

And that will have consequences for capital investment.

“The reality remains that over the last few years the FCC has become entirely unpredictable, largely, we believe, because of the increased politicization of the agency's deliberative process,” say Ford and Spiwak. “Over the past five years, the FCC either has reversed, or is threatening to reverse, some of the most significant bipartisan deregulatory achievements of the past two decades.

“This dramatic reversal of FCC policy” means investors and carriers can no longer predict the agency's actions.

But some might argue that the Commission’s actions are clear, if unhelpful: increased market intervention that will lead to lower financial returns for investing in facilities.

Still, very long-term investments require “certainty,” or at least “stability,” which comes from a credible commitment to a long-term policy, the authors say.  

“Yet, the FCC has proven it will not make such commitments; its policies are anything but stable,” Ford and Spiwak say.

“Special access” circuits generally had been deregulated since 1999. But in 2012 the Commission suggested it would reimpose regulations on a product that is declining, being replaced by Ethernet connections.

Another example is the agency's decisions on forbearance from the 1996 Act's unbundling obligations. In 2005, at the request of Qwest Communications, the FCC used its authority under Section 10 to forbear from the application of (many of) the Act's unbundling mandates in parts of the Omaha Metropolitan Statistical Area based on the presence of a facilities-based competitor.

In 2009, a nearly identical forbearance request was made by Qwest for the Phoenix MSA. Not only did the FCC reject the petition, but it rejected its own precedent and created a new barriers to granting future requests.  

The agency's radical reversal towards forbearance between the Omaha and Phoenix petitions is significant, the authors say. “In these two cases, you had (a) the same carrier (b) submitting data showing a comparable competitive landscape and (c) a FCC whose staff was probably 90 percent unchanged.”

Yet, the agency reached two entirely different and conflicting decisions, Ford and Spiwak say.  

When the FCC first squarely addressed the issue of state laws restricting or prohibiting municipal broadband back in 2001, the Commission unanimously ruled that the agency lacked any legal authority to preempt such laws, a ruling which was ultimately upheld by the United States Supreme Court.

But FCC Chairman Tom Wheeler has said he believes “the FCC has the power--and I intend to exercise that power--to preempt state laws that ban competition from community broadband.”

This sharp reversal in policy and change in the agency's interpretation of its legal authority is troubling for a wide variety of reasons.

First, the law remains clear that the FCC lacks the authority to preempt state laws that restrict or prohibit municipal broadband deployment.

Second, should the agency decide to grant the Chattanooga petition, it will nakedly pick a fight with both the National Governors Association and the National Association of State Legislatures.

Third, the FCC is disregarding the advice of its own National Broadband Plan which explicitly recognized that “[m]unicipal broadband has risks” because it “may discourage investment by private companies”.

But perhaps the biggest issue is the potential reclassification of broadband Internet access from a lightly-regulated Title I “information service” to a heavily regulated common carrier “telecommunications” service under Title II.

Over a period of years, the FCC has classified cable broadband, wireline broadband, wireless broadband and even broadband over powerline as Title I information services.

“These four cases are but a sample of actions taken by the FCC that signal uncertain times for investors in this sector, especially investors in infrastructure upon which all else depends,” argue Ford and Spivak.

The mobile wireless industry has been deemed “effectively competitive” for some time. Yet, In the agency's last several reports, the FCC has refused to reach such a determination.

The great danger is that investment incentives are diminished.