Tilting the playing field…

Posted in AT&T, Operators, Regulatory, Services, Spectrum, Verizon at 11:08 am by timfarrar

Over the last week its been frustrating to see what should be a technical debate about the best way to regulate access networks deteriorate into ludicrous hyperbole about how “repealing net neutrality would end the internet as we know it” when in reality it “isn’t the end of the world“.

At its core this is really a debate about whether you can trust businesses in general and ISPs in particular, with Republicans declaring that a free market is the best solution to promote investment, whereas Democrats are saying that regulation is needed due to the lack of competition in access networks. Thus one side says “Net neutrality rules are unnecessary because ISPs will do the right thing” whereas the other side says its “the very laziest of anti-net neutrality tropes [to say] that the wolf hasn’t eaten the sheep yet so let’s trust the wolf.” And of course, once politics are involved, the current climate means that everything gets blown out of proportion.

In reality the right answer probably lies somewhere in the middle, which is what sensible commentators like Ben Thompson and Dean Bubley are trying to feel their way towards. Ben’s commentary in particular has come under criticism because he “assumes public intervention is costly and corrupt, that telecoms are accurate, and that there’s no role for morality” despite there being plenty of evidence of previous regulatory failures in Tom Hazlett’s recent book “The Political Spectrum”. However, its not unreasonable to think that trying a light touch approach backed up by antitrust enforcement is a good idea and that “framing these trade-offs as moral choices” is unhelpful.

Perhaps it is true that the best answer would have been to push harder on unbundling local loops to facilitate service-based competition on telco networks, just as in Europe, but that ship sailed 15 years ago when the CLECs went bankrupt. Instead, going all the way back to the 1996 Telecom Act, the US has focused on infrastructure-based competition between cable and telcos, which unsurprisingly hasn’t produced the same level of competition, due to the cost of maintaining multiple access networks.

Maybe this is a failed model and we now have to be content with regulating the current oligopoly of cable and telcos to ensure they don’t behave badly (and we can certainly debate exactly how much regulation is needed to achieve that). But perhaps wireless broadband will provide some level of new competition for fixed providers. I dismissed that possibility 6 years ago, but now I’m increasingly convinced that the enormous efficiency gains coming from MIMO will provide wireless operators with more capacity than they know what to do with, enabling them to deliver wireless broadband in the home to at least some (meaningful) number of consumers.

Whether that’s ultimately 10% or 30% of households very much depends on how much capital is available to invest in those networks. And how good the performance will be remains to be seen – after all the 13% of adults who are smartphone only internet users are mostly doing it for cost reasons and “often encounter difficulties like accessing and reading content, as well as trouble submitting files and documents.”

But that’s not my primary focus here. One point made by net neutrality proponents such as Barbara van Schewick is that for the last 20 years, the regulation of telecom networks has been backed by both Republican and Democrat administrations and so the current proposal is a radical change in precedent. You can argue with the truth of that prediction, depending on whether you think the FTC will actively enforce antitrust law to deal with future net neutrality problems, but what is interesting to me is that many of the actions cited by van Schewick were taken to support content providers like Netflix or Google when those companies had a lot less power than they do today.

Some of those actions had significant costs, such as (Republican FCC chairman) Kevin Martin’s decision to attach “lifetime net neutrality conditions to parts of the 4G spectrum that [the FCC] auctioned off in 2008″. That action was taken at the behest of Google, but the result was that Verizon acquired 22MHz of upper C-block spectrum for only $0.76/MHzPOP, a 41% discount to the average price in the auction, and a more than 70% discount to the price paid (mainly by AT&T) for the lower B-block. Thus Google’s “net neutrality” lobbying effort potentially cost the government somewhere between $5B and $10B in lost auction proceeds, without having any substantial impact on the wireless services you receive today (are you more likely to choose Verizon because some of its spectrum comes with “open access” conditions?).

Of course net neutrality has not been the only area where Silicon Valley companies have sought or obtained favorable regulatory treatment compared to telcos and cable companies. The last Commission’s set top box proceeding and proposed privacy regulations were both seen as favoring Google, Amazon and Netflix over Verizon and Comcast. The current Commission is tilting the playing field back towards access providers by abandoning these efforts and dismantling the net neutrality rules, and opponents argue that it is going too far, because of the lack of competition in access provision and because they don’t trust the wolves at Comcast, Verizon and AT&T.

But if its now a debate about whether you can trust businesses in general to behave reasonably, can you trust Silicon Valley companies any more than ISPs? Do Google and Netflix need regulatory advantages over ISPs now they are so powerful? Are ISPs any more of a monopoly than Google or Facebook or Twitter, and which of them are more likely to be disrupted in the future? Those are the questions that are now being raised, most explicitly in Chairman Pai’s speech yesterday, where he noted that:

“despite all the talk about the fear that broadband providers could decide what Internet content consumers can see, recent experience shows that so-called edge providers are in fact deciding what content they see. These providers routinely block or discriminate against content they don’t like

Nonetheless, these companies want to place much tougher regulations on broadband providers than they are willing to have placed upon themselves. So let’s be clear. They might cloak their advocacy in the public interest, but the real interest of these Internet giants is in using the regulatory process to cement their dominance in the Internet economy.
And here’s the thing: I don’t blame them for trying. But the government shouldn’t aid and abet this effort. We have no business picking winners and losers in the marketplace. A level playing field, not regulatory arbitrage, is what best serves consumers and competition.”

In fact a more directly relevant example than speech censorship comes from Netflix itself, which proclaims its support for “strong Net Neutrality” (and is seen as one of the key beneficiaries) but back in September was trying to muscle inflight connectivity providers into zero rating Netflix video content if they wanted access to Netflix’s improved codecs to minimize bandwidth consumption onboard. Ironically enough, inflight connectivity is seen by net neutrality supporters as a good example of what non-neutral networks might look like.

I’ve been warning for a while that Silicon Valley is not well positioned to succeed in building telecom networks (or cars) and so would not be favored under this infrastructure-focused administration. And that’s far from the only cause of a backlash. But now I think there’s good reason for “the entire tech industry [to be] flipping its shit” because tech companies are the most likely losers even if we don’t end up in all-out partisan warfare, but simply remove the regulatory favoritism that Silicon Valley has benefitted from for the last 20 years.