11.09.18

The New New Space Thing…

Posted in Broadband, Financials, Operators, Regulatory, Services, SpaceX, Spectrum at 5:32 pm by timfarrar

Michael Lewis’s book “The New New Thing” was published the same week as I moved to Silicon Valley in October 1999 and provided a great tour through the landscape at the high point of the Dotcom Bubble, just as his Liar’s Poker was a signature story of the 1980s Wall Street boom. Unfortunately we don’t have anything quite the same about New Space, although Tim Fernholz’s book comes close.

However, just as it was obvious back in 1999 quite how untethered Silicon Valley had become from real world business models, the New New Space industry seems intent on demonstrating the same about the space sector. In recent months I’ve heard about numerous planned nano-satellite constellations that are struggling to raise funding (beyond their $10M or so in proof of concept venture capital) and may run out of money soon, because they simply don’t have a credible business plan.

Looking elsewhere, it seems that 5G IoT and “Armani WiFi” are not really such convincing buzzwords after all (sorry Charlie and Jay), and Ligado’s lobbyists can’t outwit Brad Parkinson’s “fervent ally” in the White House, so some if not all of those multi-billion dollar investments will soon prove to be a complete debacle as well.

But the poster child for the bursting of the bubble can be seen in SpaceX’s increasing frantic attempts to raise money in the face of a rapid decline in launch demand, and increasing competition from Blue Origin, which doesn’t need to make a profit. Firing your bankers because they are nervous about how much additional debt you will take on in the future is a bad sign, and redesigning your constellation to hide its problems seems even more bizarre.

SpaceX’s launch tempo is already falling, with 10 launches now scheduled for the second half of 2018 compared to 12 in the first half, far short of the 50% increase in 2018 launches and medium term 30-40 launches per year that the company predicted only a year ago. So its an open question what the core business is worth, but with $270M in LTM adjusted EBITDA (which counts deposits and excludes some R&D) and a declining revenue outlook for 2019, the valuation of $28B achieved this spring is clearly ludicrous.

SpaceX’s attempts to find new sources of revenue are also proving deeply problematic because the broadband satellite constellation business now appears to be in even more dire straits than the launch business. Recently rumors have circulated that SoftBank is looking to exit from OneWeb (before the next tranche of its $1B equity commitment is due after the test satellites are launched in early 2019), as the system costs increase and questions abound over the size of the market opportunity for satellite broadband. Certainly Masa Son’s attitude to the project appears to have changed dramatically in the last year, from touting satellite as an alternative to fiber, to not even mentioning satellite in a recent lengthy feature on the Vision Fund.

And finally, given the lack of demand for launch services, the need for the BFR now seems highly questionable, except as a vehicle for space tourism. Since SpaceX is likely to have investment needs of $1B+ per year just for BFR and the debt capacity of the company is unlikely to be more than about $2B, it therefore wouldn’t be in the least surprising if the company’s next step in 2019 is to start taking more deposits from potential tourists who want to emulate Japanese billionaire Yusaku Maezawa. In the meantime, soliciting contracts from anyone who might offer a cash deposit seems like another avenue SpaceX will be exploring.

Looking back once again to 1999, it seems quite relevant to note that the first major meltdown (the Iridium bankruptcy) came in August 1999, well before the bursting of the wider tech bubble. And it now appears that there are several multi-billion dollar satellite projects that could suffer the same fate within the next year. What will that mean for investor perceptions? Will incumbents benefit? And which elements of this new technology will prove to be useful in the long run?

09.28.18

Fake it till you make it?

Posted in Broadband, Financials, Operators, Regulatory, Services, SpaceX, Spectrum at 1:03 pm by timfarrar

As students of history and those who were there at the time (such as FCC International Bureau chief Jose Albuquerque) know only too well, sometimes a dud satellite can be just as good as a real one for promoters of a new broadband LEO system. Back in February 1998, the Teledesic BATSAT apparently never worked properly (some say not at all), but the launch was instrumental in causing Prince Alwaleed to invest $200M in the company in April and more importantly in persuading Motorola to abandon its own Celestri LEO system and join forces with Teledesic in May 1998, investing $750M for a 26% stake.

So the question now is whether SpaceX is in the same position with Starlink? After all, when basking in the glow of apparent back-to-back successes with Falcon Heavy and Starlink during February 2018, followed by receipt of its constellation license from the FCC, SpaceX raised $500M the following month at a reported valuation as high as $27B, supposedly to develop the Starlink constellation.

And subsequently, SpaceX has been positioning itself to play a role in DARPA’s Blackjack satellite constellation program, which will provide total funding of up to $117.5M to be split between several bidders. Notably, SpaceX filed a new experimental application with the FCC in August 2018 “to reflect additional test activities undertaken with the federal government” and add “two new types of earth stations, one of which will transmit uplink signals to the Microsat satellites first from the ground and later from a moving aircraft”. In that application, SpaceX told the FCC that:

“These experimental engineering verification vehicles are currently engaged in the test regimen as authorized, in order to enable the company to assess the satellite bus and related subsystems, as well as the operation of space-based and ground-based phased array technologies.”

As he looks to secure both DARPA funding (which should be announced in the next couple of weeks) and FCC approval of the new experimental license application, Elon Musk is certainly extraordinarily sensitive to any suggestion that there might be a problem with Starlink. Notably, within a few hours after my previous blog post appeared on September 18, it seems he planted a (rather bizarre) question on Twitter so that he could state that “Starlink should be active by then [2023]“. Indeed, he was so keen to get this assertion out there that the same question was posted twice.

And if we look back to Elon’s previous tweet about the status of Starlink, its hard to believe it was purely a coincidence that this information was released the day after DARPA’s Blackjack solicitation.

But the reality is that the Starlink satellites have not performed in accordance with the plan that SpaceX presented to the FCC as recently as February 1, 2018, when Patricia Cooper told the FCC that:

“As set out in the original application, after system checkouts are performed and the system is evaluated as ready to proceed, SpaceX will engage in orbit-raising maneuvers until the spacecraft reach a circular orbit at an altitude of 1,125km.”

And the original application stated that:

“After system checkouts are performed and the system is evaluated as ready to proceed, the orbit-raising phase of the mission will commence. This segment will last approximately half a year depending on system performance.”

But what has actually happened? Both satellites have remained around the launch altitude of 514km, with TinTin A not showing any meaningful evidence of propulsion since at least early March, and TinTin B not experiencing any significant change in altitude after attempting a few orbital maneuvers. So it seems all but certain that there has been a major issue with the propulsion system onboard both of the Starlink satellites.

When confronted with the rumors of a satellite failure by SpaceIntelReport, SpaceX stated that the satellites “were delivered to their intended orbit, communicated with ground stations, continue to communicate with ground stations, and remain in operation today.” That may all be true, but says nothing about whether the propulsion system has failed.

Unsurprisingly such a failure would put SpaceX in a very awkward position, when there were already many questions about whether Starlink would go forward, not least because the satellites may not reach the correct orbit to bring SpaceX’s ITU filing into use, and the FCC’s experimental authorization was based on the assumption that mission operations would be conducted at 1125km. And if SpaceX cannot build satellites with a reliable propulsion system, that would reinforce concerns expressed by FCC Commissioner Rosenworcel in SpaceX’s license grant that “the FCC has to tackle the growing challenge posed by orbital debris.”

09.18.18

420,000 km. Funding secured!

Posted in Broadband, Financials, Operators, Regulatory, Services, SpaceX, Spectrum at 7:32 am by timfarrar

Yes I know it’s only 384,000 km to the Moon, but just like Elon, I decided to round up. After all, it’s apparently “better karma”!

Last night’s SpaceX event raised a lot of questions for many observers, not least because it “caught some SpaceX employees off guard” and was rushed out so fast that some of the promotional imagery was incorrect. However, I suspect that the reason for this surprise announcement was to distract from impending bad news about the Starlink project, namely that the project has for all intents and purposes been put on hold.

We already knew that there was a significant reduction in hiring in early July, but I’m told the cutbacks went much deeper, with a significant fraction of the Starlink team departing. SpaceX was also looking to develop a more concrete business plan for the project in Q2, but I believe it proved impossible to come up with anything remotely close to the ludicrous forecasts from 2016 reported by the Wall St Journal that suggested the project would have over 40M subscribers and $30B in annual revenues by 2025.

Ironically enough, the principal mention of Starlink last night was as a source of funding for the BFR development. It makes no sense whatsoever to think that Starlink will generate profits to fund a $5B+ BFR development between now and 2023, so the only logical conclusion is that money raised for Starlink will now be diverted to the BFR. Another hint that Starlink is going away was the statement that BFR is expected to consume the majority of engineering resources after the commercial crew development has been completed for NASA next year, despite Starlink supposedly costing more to develop than BFR ($10B+ compared to ~$5B) over the next 5 years.

However, without Starlink to support the business plan, SpaceX will face significant challenges in sustaining its reported $27B valuation, as it grapples with an expected reduction from 28 to 18 launches next year, which will very likely cause overall revenues to decline in 2019. It’s also notable that when Viasat decided to contract with ULA (seeking a US launch provider so as to support its upcoming expected request for Ex-Im Bank funding), it reportedly did not even invite SpaceX to bid, presumably because of a lack of confidence in the future of Falcon Heavy (since the upgraded Falcon 9 Block 5 will now suffice for most GEO satellites).

It’s only natural that SpaceX would look for a replacement market that can be projected to generate billions of dollars of profitable revenue, and the company now appears to have settled on space tourism, as previewed by Gwynne Shotwell last week, when she suggested that it “will probably be the majority of our business in the future, flying people” with “7 billion potential payloads“.

However, the critical question is whether investors will remain sanguine about such a dramatic transformation in where over 80% of SpaceX’s future revenues are supposed to come from. Do investors that thought they were investing in the future of connectivity, really want to invest in taking rich people to space? And does the checkered track record of space tourism give them confidence that Elon’s promises will actually be realized, especially as it will take 5+ years and $5B+ of additional investment (even by Elon’s optimistic estimates) before the BFR is ready to transport passengers to the Moon?

05.22.18

Please don’t throw me into the briar patch!

Posted in Intelsat, Operators, Regulatory, SES, Spectrum at 4:50 pm by timfarrar

It took a while, but it seems that in April investors in Intelsat finally noticed my January blog post, and started to believe in the potential for a windfall from C-band monetization, causing the share price to jump from well under $5 to over $14 now. That’s brought out a lot of new skeptics, who are highlighting differences in both the share price performance and results call commentary at Intelsat and SES.

Some even appear to believe that SES is opposed to ever monetizing more than 100MHz of spectrum, when in fact Intelsat and SES have jointly conveyed the opposite message to the FCC, stating in April:

“For these reasons, Intelsat and SES have proposed an amount of spectrum clearing – 100 MHz available for terrestrial mobile use plus additional transition band spectrum needed to ensure that 5G operations are compatible with ongoing Fixed Satellite Service (“FSS”) to customers in the uncleared spectrum – that they believe can reasonably be accomplished within 18-36 months following a final Commission order. The Parties stated that if the terrestrial demand for mid-band spectrum is as robust as claimed, their market-based approach could result in additional spectrum being cleared in the future – but in a manner and timeframe that protects Intelsat’s and SES’s customers and their businesses.”

So it’s hard to understand why people would see Commissioner O’Rielly’s remarks that “To make this worthwhile, an adequate amount of spectrum – at least 200 or 300 megahertz to start – needs to be made available in this band” as a sign of opposition to a private transaction. That’s especially true when he also said that “This method provides an attractive option that should be thoroughly considered, particularly because of the speed in which it could bring the spectrum to market” and it aligns perfectly with Republican ideals, as described in Tom Hazlett’s book “The Political Spectrum”, that the FCC should allow market forces to reallocate spectrum to the highest and best use.

Certainly there are concerns about the pace of reallocation, given the complexity of moving current users around, and ultimately unwinding the substantial cross-subsidies from large to small cable companies that are inherent in the way distribution of content via satellite is paid for today. However, an outcome along the lines of “sell 100MHz now, then another 200MHz+ within 5 years” (with the option to clear the remainder within say 10 years), is certainly plausible.

At that point any complaints from satellite operators about being forced to clear too much spectrum would be reminiscent of Brer Rabbit saying to Brer Fox “please don’t throw me into the briar patch” because even skeptics like FT Alphaville indicate that the C-band spectrum should be worth more than the ~$0.13/MHzPOP paid in the recent UK spectrum auction (£1164M for 200MHz of spectrum from 3400-3600MHz), putting a valuation in excess of $20B on the entire 500MHz spectrum band.

Another concern expressed by skeptics is that any proceeds would take years to be realized, which is hard to comprehend for the first 100MHz of spectrum (worth $4B+ according to the FT’s assumption), since as in all spectrum sales, the buyer pays upfront and only then is the spectrum cleared. Indeed, if Intelsat and SES were to accept a pre-emptive offer for this initial slice of spectrum (as suggested in my January blog post), a deal could be even in hand at the time that a final FCC order is issued, rather than a process being run after the order is approved. Assuming the initial NPRM is issued soon (plausibly at the July FCC open meeting), that could advance the timing of receipts to the middle of 2019 rather than the very end of 2019 or more likely some time in 2020.

One remaining question raised above relates to the divergent performance of Intelsat and SES’s share price in recent months. But I think this is easily explained by investors believing that SES might well re-invest any windfall into more O3b satellites (where the ultimate return on capital is far from certain), while Intelsat will pay off its debts, stop spending money on new satellites, and return capital to shareholders.

Indeed if you believe that the future of large parts of the FSS industry could look a lot like the dial-up internet business in the mid-2000s, the best bet for Intelsat might then be to sell off its Ku-band data satellites to OneWeb and run the company purely to generate cash from running its legacy satellites and from monetizing its spectrum over time.

So despite me being one of the most skeptical people around on the ability of DISH, Ligado or Globalstar to realize a windfall from their spectrum holdings, I simply don’t understand why investors who apparently don’t know much about spectrum issues think now is a good time to be shorting Intelsat. In early 2017, I didn’t believe that Straight Path would find a buyer that was desperate to establish a leadership position in 5G spectrum in the shape of Verizon, let alone draw AT&T into a bidding war (not least because much more mmWave spectrum will be auctioned in the future). Though at least I wasn’t alone, because even Straight Path’s management was left in disbelief about the result.

But with that as the example, and the C-band now representing the most obvious (and perhaps only) opportunity to acquire a very large block of spectrum for high power mobile use, with much better propagation characteristics than mmWave spectrum and at a fraction of the price of DISH, Ligado or Globalstar’s spectrum, I think it would be foolish to assume that a Straight Path-like outcome won’t happen again.

03.31.18

Lost in SpaceX…

Posted in General, SpaceX at 10:17 am by timfarrar

In the run up to Satellite 2018 on March 12 it became clear that Elon Musk was once again spending most of his time on SpaceX business rather than at Tesla (which has pre-occupied him for most of the last year), when SpaceX director of communications John Taylor unexpectedly left the company in early March. Musk confirmed as much in his SXSW conference appearance that weekend, which focused primarily on SpaceX and appeared to put SpaceX ahead of Tesla when talking about how he allocated his time.

So my joke to satellite operators and insurers at Satellite 2018 was that they’d better watch out for an increase in launch risk, if Elon is going to suck up the best talent at SpaceX for his BFR project. Or perhaps some of those people will simply decide to leave the company, like SpaceX’s director of software engineering.

Since then we’ve seen Musk burning absinthe in Israel, presumably as part of the dealmaking with Spacecom to launch the replacement for the Amos-6 satellite that blew up on a SpaceX rocket in September 2016. Then Musk was focused on deleting SpaceX’s Facebook page (with Tesla’s page only deleted as an afterthought). And last night, when controversy was swirling over the fatal Tesla crash in Silicon Valley, Musk was busy tweeting about SpaceX’s latest successful launch and some random music video, pausing only for an unfortunate remark about how “Everything’s better with fire”.

As Musk continues serenely on with his SpaceX focus, at Tesla things have been going from bad to worse this week, with Tesla’s heads of engineering and production writing a (conveniently leaked) memo on how they planned to free up workers for the Model 3 line this week in order achieve the “incredible victory” of producing 300 Model 3s in a day. No one seems to have remarked that back in September 2016, a near identical memo came from Elon Musk personally (and was even leaked to the same reporter), which seems to confirm that Musk has stepped back from direct involvement in Tesla’s production woes.

That’s all in sharp contrast to Musk’s camping expedition on the roof of the Gigafactory last fall, and raises the question as to how long Musk will be lost in SpaceX affairs, and how he will divide his time between the two businesses in future. Certainly he will be critical to Tesla’s upcoming fundraising efforts, and I’m sure Tesla’s investors thought they would be getting a lot more of Musk’s attention in exchange for his latest $2.6B pay package.

03.19.18

Will Silicon Valley go three for three?

Posted in Broadband, Eutelsat, Operators, SES at 4:44 pm by timfarrar

At Satellite 2018 last week it was interesting to note how after dominating some recent conferences, the role that Silicon Valley companies might play in rolling out new global broadband satellite networks was barely even mentioned. That’s probably because betting on these companies to anchor new satellite systems could now be said to have cost two industry leading CEOs their jobs, and it remains conceivable that the same could happen to a third.

Back in October 2015 Michel de Rosen took the decision to step down as Eutelsat CEO after his spectacular embrace of Silicon Valley’s T-shirt culture at Satellite 2015 only led to a modest partnership with Facebook for capacity on Amos-6. Facebook ultimately didn’t invest in Eutelsat’s Africa Broadband satellite and even the initial partnership disintegrated after Amos-6 was lost in the Falcon 9 launchpad explosion. So Eutelsat was left to go it alone with much reduced expectations for its broadband data business.

Then last month, SES announced that Karim Michel Sabbagh was stepping down as CEO, after his decision last year to skip Satellite 2017 because of the “number of exciting things we are working on”. At that time he suggested that “Some of these will come out in early April” but in fact the major announcement was delayed until early September, when SES ordered the O3b mPOWER satellites from Boeing.

In the interim, SES had been working to secure an anchor tenant from Silicon Valley, highlighting its collaboration with Google to provide backhaul for Project Loon in Peru and pointing to its deal with Facebook in Africa as an example of its redefined enterprise market strategy. SES even went so far as to select Boeing’s much more advanced and expensive architecture for O3b mPOWER in an attempt to convince prospective partners that the system would meet their future needs, but was forced to go ahead without the partner that SES’s board had expected to see in order to justify their investment commitment, undermining Sabbagh’s position.

Now it appears that Telesat is seeking partners for its own NGSO satellite project, which its CEO was very bullish about at Satellite 2018. We hear that Telesat may also be looking to Silicon Valley for an anchor tenant commitment to its new system, which it hopes to announce in the next few months. However, I have to hope that Dan Goldberg is not placing all his eggs in that basket, or else he may end up being the third satellite industry CEO in a row to suffer from the inability of Silicon Valley companies to commit to major investments in satellite connectivity projects.

01.29.18

The art of the deal…

Posted in AT&T, DISH, Operators, Regulatory, Spectrum, T-Mobile, Verizon at 5:40 am by timfarrar

Before yesterday’s Axios article suggesting that President Trump’s National Security Council has set its sights on using the 3.7-4.2GHz satellite C-band downlink spectrum for a national 5G network, it was clear that analysts were underestimating the importance of this spectrum band for the US wireless industry. For example, Morgan Stanley’s January 17 downgrade of DISH Network identified Verizon as the “only suitor” for DISH’s spectrum but only suggested the CBRS auction as an alternative option for Verizon to acquire more spectrum.

It seems few people have read the reply comments filed by wireless operators in the FCC’s mid-band spectrum proceeding last November, where Verizon suggested there should be a a near term NPRM with market-based clearance mechanisms, rather than FCC-run auctions for this band. In contrast, AT&T asked for “substantial record development, including additional analysis and modeling” before the FCC moves forward with an NPRM, and T-Mobile said the FCC should reject Intelsat’s proposal and instead take control of the auction process, with a defined post-auction band plan and payments to incumbents from the auction proceeds, part of which would fund the clearance of existing users.

A logical conclusion is that Verizon believes it could be the sole player to acquire spectrum rights in this band (to supplement its 5G mmWave buildout plans) via a deal with Intelsat, while AT&T has relatively little interest due to its focus on the 700MHz FirstNet buildout and securing additional mmWave spectrum allocations, and T-Mobile is trying to ensure that Verizon is unable to monopolize this spectrum band by asking for a more open auction process.

One important consideration is that the power restrictions that will apply to the CBRS band to permit spectrum sharing may not be necessary above 3.7GHz and therefore with MIMO this band could be deployed for urban coverage on approximately the same cell grid used for PCS and AWS spectrum, as Qualcomm and Nokia have indicated, and as is planned in Europe, where the 3.4-3.8GHz band is being auctioned.

Since the reply comments were filed, Intelsat has continued to push hard for a near-term NPRM and given the difficulties that the FCC would encounter in defining how a “market-based” transaction should occur, it is entirely plausible that an exclusive spectrum deal between Intelsat and Verizon could be struck shortly after a draft NPRM was issued. By selling say 100MHz of spectrum to Verizon, Intelsat would establish a benchmark valuation for its C-band spectrum assets, while being able to maintain existing video distribution services within the remaining 400MHz of spectrum. Of course, Verizon would also presumably be happy to see Charlie Ergen left at the altar without his “only suitor”.

The Trump NSC memo only serves to increase the pressure to execute such a transaction, and pre-empt any (still remote) possibility of the spectrum being “nationalized”. Verizon could certainly promise to build a 5G network using this spectrum within 3 years, without government intervention, and gain an even more concrete lead in 5G network superiority. Meanwhile Intelsat (and other satellite operators including SES) could keep providing their existing C-band video distribution services and receive billions in cash plus additional billions in attributed spectrum value for the remaining 400MHz of spectrum, and the FCC could achieve a pioneering market-based transfer of spectrum to higher value uses. What’s not to like about that deal (unless you are AT&T, T-Mobile or DISH)?

01.09.18

Viasat’s curious antenna issues

Posted in Broadband, Financials, Operators, Services, ViaSat at 1:54 pm by timfarrar

Last fall, I found Harris’s announcement on its 2017Q3 results call that “we received our largest order for a single commercial satellite covering four reflectors, bringing total orders to eight over the past two years” to be particularly odd because the only commercial satellites on order with four unfurlable reflectors are ViaSat-3.

Viasat then effectively confirmed that they had made this order in their 10-Q, which showed that Viasat’s total satellite purchase commitments increased from $1037.5M to $1106.6M during the quarter and that the size of Viasat’s contract with Boeing had increased by $11.2M in the same quarter (presumably to cover integration of the Harris antennas).

Not only was Viasat’s order quite late in the game (some knowledgeable observers assumed that it would have been ordered back in 2016), but it is also just for one satellite, not for both of the ViaSat-3 satellites that are under contract with Boeing. Viasat may well have another purchase option (which it can exclude from its purchase commitments for the time being), but it is still surprising that it took so long to reach an agreement with Harris. And it may suggest that the construction schedule for Boeing’s second ViaSat-3 satellite will be longer than originally thought.

Another curious issue was Viasat’s decision to use a fake image of ViaSat-2, which Viasat’s President Richard Baldridge later admitted “in fact is not the actual ViaSat-2″ satellite, because “we obscured the sensitive parts”. It is hard to understand why Harris’s antennas are deemed so sensitive by Viasat when Harris themselves were happy to publish a mockup image back in 2016 (which has since been removed from their website) and the size of the antenna can easily be worked out from Viasat’s own FCC submissions.

Although I have no evidence to suggest this is actually the case, one possible reason for these two apparent coincidences would be if Viasat had sought to patent some features relating to deployment of the Harris antenna on ViaSat-2 in order to try and prevent rivals from making use of Harris’s unfurlable Ka-band antennas (in particular Hughes and SS/L will likely use them for Jupiter-3). That would certainly explain Harris’s decision to highlight during the Q3 results call that the commercial reflector business is “a commercial model driven business where we invest our own R&D to develop that offering. We sell it into the marketplace.”

Now we have Viasat revealing today that Boeing “has identified an in-orbit antenna issue, which has caused some spot beams to perform differently than they did during ground testing.” It seems very likely that the issue is related to the unfurlable 5m Harris antennas, since “Viasat believes the issue will not affect the coverage area of the satellite” and the smaller solid antennas will provide most of the geographic coverage, while the larger unfurlable antennas will provide the high capacity coverage within the continental US.

It also seems somewhat more likely that this is a deployment problem (i.e. an issue primarily for Boeing/Viasat) rather a problem with the antenna itself (i.e. an issue primarily for Harris), since the antenna performed “differently” (and presumably correctly) during ground testing. If this problem relates to a new feature that Viasat or Boeing introduced, then that would clearly be particularly contentious, especially if it was related to any patent issues that might have been in play previously. So now we need to wait and see how the blame game develops and what this means for the future relationship between Harris and Viasat.

12.14.17

Ajit Pai wins the internet!

Posted in General, Regulatory, Spectrum at 2:12 pm by timfarrar

A couple of weeks ago I pointed out that the net neutrality debate has been overwhelmed by ludicrous hyperbole that this is “the end of the internet as we know it“. Of course, that won’t be the case, making Chairman Pai’s mockery of these predictions a winning political strategy.

In fact, ironically enough, the current outcry has made it easier for the new disclosure-based regime to operate effectively: consumer advocates will be watching out for perceived violations of net neutrality principles and if they can drum up sufficient outrage about unfairness or antitrust violations, then the FTC will be forced to take action. However, its hard to see technical violations which (at least in the short term) benefit consumers, such as zero rating or content bundling, prompting much of an outcry. And even supporters of net neutrality agree that the big tech companies are likely to benefit from the new rules.

But what I find interesting here is the long political game. Its amusing to see net neutrality proponents accusing Pai of being a shill for Verizon and the cable companies. While many past FCC commissioners have simply gone through the revolving door to make millions in the industry, Chairman Pai has the talent and ambition to achieve much bigger goals.

Its already been reported that Pai turned down the offer to run for a seat in the House of Representatives, preferring to wait for the opportunity to be governor of Kansas or a senator. Now he’s become such a household name that The Onion can joke his face is on every computer screen in the nation. And this signature win on net neutrality even caused the New York Times to describe him as “one of the most effective FCC chairmen in decades”, before they decided(!) to delete that phrase.

Given how easy it will be to portray net neutrality opponents as “fake news”, Pai has a clear political platform to run on and it wouldn’t be in the least bit surprising to me to see him ultimately figuring as part of the Presidential or Vice Presidential race in 2028 or 2032. In that context its intriguing to consider what other hot button political issues might come within the overall ambit of the FCC. One area is freeing up spectrum, where there are possibilities for a big bipartisan win with the satellite C-band downlink.

However, an even bigger issue (as highlighted in my last post) is that Pai has already shifted to raising questions about whether you can you trust Silicon Valley companies, such as Google, Facebook and Twitter. And as noted above, many people think these companies are likely to get even stronger after the abolition of net neutrality rules. So a winning populist theme in the latter part of this administration could well be to threaten to cut these companies down to size, potentially with the helpful side effect of limiting their influence (which next time around will more likely reflect these companies’ preference for Democrats) in the 2020 election.

As a result, I think Silicon Valley now has to be concerned not just about losing the favors it has been granted on a regular basis for the last 20 years, but a rising hostility within government to the big tech companies and their role both in the economy and in political dialog.

11.29.17

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.

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