Reason Foundation

The Future of Video? Beggar Thy Competitor

Posted on June 29, 2012, 10:48am | Steven Titch

In an investigation into the "Future of Video" this week, the House Communications and Technology Subcommittee heard testimony from a number of representatives from the cable companies, satellite companies, wireless companies, and providers of "over-the-top" programming on demand via the Internet Protocol (IPTV), including Netflix. The question at hand is whether recent plans by cable companies to shift their Internet pricing from the flat-rate "all-you-can-download" model to tiered rates based on amount of use is anti-competitive. Netflix and Hulu, which deliver programming directly to viewers over a broadband Internet connection say pricing tiers discriminate against them because usage-based data consumption applies their programming, while for conventional cable TV pay-per-view, the usage meter, so to speak, is not running. 

My hope is that Congress and any other agencies watching are cautious. Complaints by IPTV providers appear to be just the sort of "regulate my rival" demands that FCC Commissioner Robert McDowell warned about yesterday in a speech in Rome. 

Indeed, IPTV and cable companies compete for on-demand business. And consumers may not be interested in the distinction between their respective business models; all they want is greater choice in video options. Thus far, all groups--cable players, satellite companies and IPTV providers seem to be meeting that goal. Moreover, far from being victimized, IPTV providers are making significant inroads into the on-demand sphere. Cable providers, which in 1992 had a 92 percent share of paid television viewers, now hold only about 57 percent of the market, according to data cited by the Washington Post.

But before making any decrees about how on-demand downloads should count in any data metering scenario, regulators must consider that cable companies and IPTV providers have selected different platforms for programming delivery. Each platform has its own set of costs and trade-offs which are not functionally interchangeable.

Cable TV companies have traditionally separated TV delivery from their Internet service. Cable pay-per-view is accessed and delivered via the set-top box through an interface that can exploit inherent set-top box capabilities. Cable companies can use the set-top box interface to provide advertising, promotions, trailers and other information aimed at encouraging a sale.

IPTV is set up as a broadband application delivered via cable modem. The user interface is generally loaded onto TVs and game consoles per agreement with device manufacturers. But compared to cable box counterparts, these interfaces are simpler and scaled down.  

The nature of the delivery platform changes the cost equation for a company like Netflix. I'll admit some more research can be done here, but the Netflix cost-model is closer to client-server than the transmission-distribution model the cable companies use. Netflix doesn't need to maintain head-ends for satellite signal reception, and fleets of trucks to maintain physical plant.  

From the supply side, programmers see cable companies and over-the-top providers as two different distribution channels. The fee structure Comcast pays Disney, Viacom and Fox for programming is vastly different than what Netflix's. Licensing rules are different. It's one reason cable companies get pay-per-view rights to film releases within a few months of their theatrical release, or TV episodes the night after they air, while companies like Netflix might have to wait a year. For consumers, the trade-off comes in cost. Generally a recent film release costs $5 to $10 for pay-per-view. Netflix offers unlimited viewing for $8 a month. The difference reflects the cost of the respective platforms.  

Finally, IPTV companies also derive benefits from their decision to ride the Internet independent of a relationship with a cable company. As mentioned above, the cable company is responsible for maintaining its facilities, on which IPTV depends for delivery. The ongoing development of cable modems (e.g., the DOCSIS 3.0 specification), funded by the cable industry, makes quality streaming of high-definition IPTV possible.

So that's why these demands for "fairness" from Netflix and other over-the-top provider ring hollow. Congress should see through this "beggar thy competitor" call for a mandate that forces cable companies to price their own pay-per-view in ways that artificially make IPTV more attractive. There's no evidence that cable companies are blocking service or otherwise interfering with consumer access to service. It's difficult to see how bowing to IPTV provider complaints, and essentially forcing the cable companies (and by extension cable company customers) to shoulder the cost of Netflix's business model trade-offs, would be fair to anyone.  

The Battle Over Spectrum Intensifies

Posted on January 31, 2012, 11:56am | Steven Titch

The bureaucrats at the Federal Communications Commission are set to make their play at picking wireless winners and losers, aiming to get Congressional approval to set conditions for winning bidders of the next round of spectrum auctions.

Unlike previous auctions, which involved largely unused frequency bands, this time the FCC must re-allocate portions of the 700 MHz spectrum currently in the hands of broadcasters. The FCC needs Congressional approval to move forward with a plan to transfer those licenses.

While the Senate and House both have no problem with the transfer itself, the FCC has won key allies in the Senate, including Sen. John Kerry, in an effort to win more expansive power in setting auction rules, mostly to favor bidders who pledge to honor pet ideas of the progressive Left, like network neutrality. The House, on the other hand, simply wants the FCC to do its circumscribed job of spectrum allocation and brooks no such central planning adventures.

Here's how The Hill sums it up:

The proposed law would authorize the FCC to auction airwaves, or spectrum, that currently belong to television broadcasters, splitting some of the revenue with the stations that choose to participate. The spectrum is potentially worth billions of dollars to wireless carriers, which are struggling to meet the growing data demands of smartphones and tablet computers.

The House GOP version of the legislation would restrict the FCC's ability to impose conditions on the companies that buy the spectrum and would prohibit the FCC from designating the spectrum it reclaims from broadcasters for unlicensed use. Unlicensed spectrum, which can be used by any company for free, powers technologies such as WiFi, garage-door openers and remote controls.

All the concern for the unlicensed aspect in this auction (such as today's forum) is a feint in the direction of public interest arguments. There's no spectrum crunch for home WiFi and garage doors. The FCC, rather, is looking for a back door way to impose network neutrality on wireless service. Net Neutrality, while a great theory, is unworkable in practice, especially in 4G wireless, which this round of spectrum will support. It is even arguable that 4G wireless technology itself is a network neutrality violation, because of the sophisticated way it can adjust bandwidth and throughput based on second-to-second capacity demands.

What's disingenuous about making special rules for bidders who "promise" to follow politically favored technology models is that, in the end, engineering and physics trump bureaucratic vanity. If the FCC gets the power to set technology conditions, within a year or two the "winners" will be back asking for "exemptions." The consumer harm is that companies that know how wireless networks should be properly engineered will be hobbled at the expense of companies who only know how to tell the current regulators what they want to hear. Can you say Solyndra?

Rethinking Telecom Regulation from the Ground Up

Posted on November 10, 2011, 12:59pm | Steven Titch

Has the digital economy reached a point where all ex ante regulations should be discarded?

Three top free-market policy experts think so. The need for a uniform ex post approach to overseeing the Internet sector as a whole was the rough consensus of yesterday's panel, A New Framework the FCC, sponsored in Washington by The Mercatus Center of George Mason University.

For those not versed in legalese, or were absent the day their Latin class covered prepositions, ex ante regulations are generally prophylactic-they address harms that regulators speculate might emerge from a given course of market action. Conversely, ex post regulation comes in response to a situation where actual harms can be alleged. Network neutrality, being debated again this week on Capitol Hill, is an example of ex ante regulation because it would place restraints on how carriers can manage their networks purely as a precaution against potential abuse.

The Department of Justice's lawsuit to stop the merger of AT&T and T-Mobile, on the other hand, serves to illustrate ex post regulation.

As a jumping off point, the panel used a paper by economist and GMU law professor Jeffrey Eisenach that explored theories of broadband competition. The paper, published in June, challenges the "edge-core" model of the Internet ecosystem, offering instead a more inclusive (and accurate) platform of four "perfect complements:" communications, applications, content and devices. "Take any one out and you don't have [an Internet] product," Eisenach said.

Each one of the four segments has its own group of competitors, as well as a degree of overlap with those in other segments, Eisenach said, yet of the four, only communications is regulated differently-largely with ex ante rules. This needs to change if the digital economy is to reach its fullest potential, he said.

Using this reasoning, Eisenach, along with the other two panel members--Ray Gifford, former chairman of the Colorado Public Utilities Commission, and Georgetown law professor Howard Shelanski, former chief economist for the FCC--said the best reform would move communications companies toward a regime of ex post regulation, in line with the way the government treats most of the other sectors of the economy, including Internet content, applications and devices.

Still, the panel cited some potential dangers, including how aggressive at any given time, U.S might be in antitrust enforcement. Shelanski pointed to the Federal Trade Commission's current antitrust investigation of Google, and the agency's recent statements about Twitter, as troublesome, especially as the FTC has been less inclined to apply a consumer harm test.

Gifford, however, did say that in an ex post regime such as antitrust, there tends to be a greater degree of honesty about what can be known about markets.

There's something to be said for this. Returning to network neutrality, the theory of which hinges on accepting that the outmoded edge-core model still applies, and we see the debate has gone completely off-base. The idea that carrier networks can, let alone should, be prohibited from incorporating any management or QoS functions on data is ludicrous given what applications developers want the network to do. Yet the misperception exists, most recently voiced by Sen. Al Franken, that some Eden-like era of network neutrality once existed and needs to be preserved in order to safeguard innovation.

Compare this to the discussion around the AT&T-T-Mobile suit, where the debate centers on market concentration and spectrum availability. No matter which way you come down on the merger, these are the right questions to consider.

The Regulated Internet: How We Got Here

Posted on February 10, 2011, 10:36am | Steven Titch

In the March issue of Reason, Peter Suderman takes us on a tour of the recent telecom and Internet regulatory scene as he looks at the Federal Communications Commission Chairman and Obama hoops buddy Julius Genachowski and his push to regulate the Web.

The article, which recaps the five-year network neutrality battle that reached a watershed moment this December when Genachowski all but rammed through the new rules as the rest of D.C. was heading out for the holidays, punctures many of the myths of the network neutrality rationale--including the notion that it is a small site-vs.-large-site issue and that large ISPs were exploiting their bottlenck position.

Suderman succintly shows how Genachowski, following the lead of groups like Free Press, framed what is essentially a geeky tug-of-war about network engineering concepts as wholesale market failure that demanded regulation, with himself as top Intenet cop.

But the net neutrality debate doesn’t really pit the Goliaths against the Davids. It’s a battle between the edge of the Internet and the center, with application and content providers (the edge) fighting for control against infrastructure owners (the center). Large business interests dominate both sides of the debate. Google, for example, has long favored some form of net neutrality, as have Facebook, Amazon, Twitter, and a smattering of other big content providers, who prefer a Web in which the network acts essentially as a “dumb pipe” to carry their content. Mom-and-pop sites aren’t the issue.

Google makes its support sound as simple and earnest as its corporate motto of “don’t be evil.” Much like Genachowski, it defines net neutrality as “the concept that the Internet should remain free and open to all comers.” But the freedom and openness that Google claims to prize bear a distinct resemblance to regulatory protection. An Internet in which ISPs can freely discriminate between services, prioritizing some data in order to offer enhanced services to more customers, is an Internet in which content providers may have to pay more to reach their customers. Under Google and Genachowski’s net neutrality regime, ISPs may own the network, but the FCC will have a say in how those networks are run, with a bias toward restrictions that favor content providers.

The entire article can be found here,

Network Neutrality Backlash

Posted on January 14, 2011, 1:52pm | Steven Titch

Don’t look for the network neutrality controversy to go away anytime soon.

The Federal Communications Commission’s “Christmas Surprise”—its December 21 vote to adopt new network neutrality—touched off criticism from mainstream pundits despite the distraction of the holiday season. Political cartoons like this, plus a column by George Will, which succinctly linked net neutrality to the Obama adminstration’s overall regulatory bent, belie the notion that the issue was only front-and-center among tech policy geeks.

What’s most frustrating about the new rules is that they all but concede there’s no real problem.

Larry Downes, in the first of a series of posts about the net neutrality order at Technology Liberation Front, points out that the new rules likely would not prevent three of the four so-called violations that neutrality advocates repeatedly cited as egregious abuse (Comcast-BitTorrent, an on-line payment service blocking use of competitive payment services, and AT&T’s restriction of certain iPhone apps). The fourth—the Madison River-Vonage case already had been dealt with under the existing rules.

In his ensuing posts (catalogued here), Downes cites the real problem: the creation of a framework that can be arbitrarily applied by either Genachowski or future chairpersons, and can spark a series of petitions and complaints aimed at rent-seeking or delaying competition.

Under the new network neutrality rules, the FCC is a referee stepping onto the field and declaring he will make the rules up as the game progresses. Teams won’t be told what plays are legal or illegal and won’t know if they’ve committed a foul until the ref tells them have. And a fair play in the first quarter may be ruled a foul in the fourth and vice-versa.

It also doesn’t help that in the run-up to the neutrality decision, a neutrality complaint came not from some tiny website that activists like Free Press claim the rules are designed to protect, but from Level 3 Communications and Netflix, two large companies, who asked the FCC to prevent Comcast from charging them more to cover the cost of the massive bandwidth Netflix’s video-on-demand service was going to consume.

Now comes the first neutrality complaint since the new rules were adopted. Note it concerns neither AT&T, Verizon, Comcast or any of the large service providers accused of monopolizing access. Instead, neutrality proponents Free Press, Media Access Project and the New America Foundation have accused Metro PCS, a second-tier wireless service provider with little brand recognition beyond Dallas, Texas, with a violation because it offered a low-priced "all-you-can use" data plan that blocked access to YouTube and other high-bandwidth sites. Never mind MetroPCS’s competitors offer wireless YouTube access, and never mind that Metro PCS made the package available on the assumption that a subset of customers may not be interested in using their phone for YouTube and would happily pay less if the choice were offered. So there you have it—network neutrality used to force consumers to pay higher prices for services they don’t want, rather than allow a small company to peel off a bit of market share by addressing a subset of the market with particular needs.

So much for the Free Press argument that network neutrality would safeguard competition. Here, regulation would close off an incentive that might lead some consumers to switch from a larger, dominant carrier and thereby strengthen a small one. This is exactly the sort of unintended consequence that opponents of neutrality regulation warned of—and it is showing up mere weeks after the new rules were adopted.

Now that net neutrality's problems are emerging for all to see, there’s been some pushback from antiregulatory circles. Rep. Marcia Blackburn (R-Tenn.), now part of the House majority, already has reintroduced a bill to prohibit the FCC from further regulating the Internet. Blackburn had sponsored this bill during the last Congress, too, where it went absolutely nowhere. This time around, is has gained 59 cosponsors. As Ars Technica reports, “it contain[s] only a few lines, chief of which was this one: ‘In General—The Federal Communications Commission shall not propose, promulgate, or issue any regulations regarding the Internet or IP-enabled services.’ National security issues and wiretapping rules would be exempt from this restriction.”

Meanwhile, according to Downes’s reporting from last week’s CES, Neil Fried, senior counsel to the House Energy and Commerce Committee, told a packed session on net neutrality that the Committee would take up the FCC’s “overreaching” as its first tech agenda item. In the same session, Verizon Executive Vice President Tom Tauke refused to dispel rumors that the company is preparing to challenge them in court.

Good news all round.

Tech Neanderthals as Regulators?

Posted on December 29, 2010, 11:57am | Adrian Moore

As FCC aggressively takes and end run around Congress and asserts the power to regulate the highly competitive world of Internet access--in order to "ensure fairness" of course--realize there is no problem they seek to solve, just a theory that a problem might come up at some point.

I can't help but think about how hopelessly behind the regulators always are in high tech areas.  Their fumbling efforts, always a few steps behind the latest technology and the latest thing the kids are using to take advantage of the Internet will be nothing but a hindrance to progress.

Nate Beeler's cartoon captures it well:

The Era of Internet Regulation Begins

Posted on December 21, 2010, 4:01pm | Steven Titch

FCC Chairman Julius Genachowski can now strike “Get Net Neutrality Done” from his 2010 to-do list.

The rules enacted today represent something of a compromise with the industry and are better than the sweeping regulation the FCC proposed last year—if you consider a club to the knee better than a sharp stick in the eye.

The FCC gave the most ground on the so-called “fifth principle,” which, in original form, would have placed strict rules on the way service providers could manage their networks, even if the aim was to make certain applications, particularly video, work for users the way they were intended. The new rules appear to allow ISPs to takes steps that are not "unreasonable." Wireless networks are pretty much exempt from this rule – good thing, too – as the engineering wireless carriers did to support smartphones such as the iPhone and those using the Droid operating system would likely be immediate neutrality violations under such rules.

And, as the owner of any of these devices can tell you, it’s pretty easy to see that wireless is where broadband access is going. This will present a quandary for the commission a few years down the line as they try to do backflips to rationalize separate sets of rules for data that travels by wires and data that travels by radio. For myself, I was following Cecilia Kang’s tweets from the FCC all morning, and have her Washington Post story open on my phone as I write this. So much for the paucity of access that the FCC seems to think requires neutrality regulations.

Most troublesome about these regulations, however, is that the FCC seemed to go out of its way to warn ISPs about creating tiers where application and content companies “pay for priority,” that is, charge more for content to be delivered at a guaranteed bit rate or with special handling. This is especially relevant now that Level 3 Communications, which services Netflix’s on-demand video rental service, has complained that Comcast has asked for higher fees to handle the increased volume of data traffic Netflix will generate. Strip away the Internet jargon and what you have is basic supply-and-demand issue covered in Economics 101. Level 3 wants more access to a limited resource, yet doesn’t want to pay. The FCC would be unwise to interfere here with what would likely be thinly-disguised price-controls. Yes, there is a lot of bandwidth out there. It’s also true that video consumes a great deal of it. In the end, the TANSTAAFL principle will play; and despite what the FCC says about “no pay for priority,” someone will have to bear the cost Level 3 will place on Internet capacity. Rightfully, it should be Netflix and Level3. Under network neutrality, it will default to you and me.
  
In the end, the new network neutrality rules stand to create a boatload of legal issues about what constitutes proper network management, adequate quality of service and fair pricing. Last week, I wrote about this as regulation for regulation’s sake—the need to “do something” even though there is no fault that needs to be corrected. The availability of Internet access is not shrinking and no web sites and services are routinely being blocked. Quite the opposite, the unregulated market environment has delivered competition and choice among access methods, along with innovation that makes use of the open nature of the Web, has ballooned in the six years this issue has been debated.

Yet even toned down, net neutrality regulation can’t help but get the FCC involved in quagmire after quagmire of technicalities, which as they add up will have toll on investment, service and development.

Curtains for Net Neurality legislation?

Posted on November 5, 2010, 11:23am | Steven Titch

It looks like Tuesday's election ended the likelihood of any network neutrality legislation getting through Congress.

CNN Money reports:

Before Tuesday's midterm elections, there were 95 House and Senate candidates who pledged support for Net neutrality, a bill that would force Internet providers to not charge users more for certain kinds of Web content.

All of them lost -- and that could mean the contentious proposal may now be all but dead.

Network neutrality bills were introduced in Congress in 2006 and 2008, but went nowhere. Although the issue picked up some steam in the spring after the D.C. Court of Appeals ruled that the Federal Communications Commission would need further congressional authorization to regulate broadband, Still, alongside calls to pass net neutrality came pushback from free-market oriented legislators, who sponsored bills that would specifically keep the FCC's eager hands off of broadband.

The FCC still has the reclassification card to play, and such a move could end up part of a broader White House strategy to use of executive powers to enact regulations that a more Jeffersonian Congress would oppose.

It's also worth noting that the proposals for limiting FCC reach were reactive to calls for greater broadband regulation. With the loss of the Democratic majorty in the House may come the loss of momentum for specific regulatory countermeasures, It may come down to how activist the FCC decides to be.

Facebook Was the ‘Next Google’

Posted on October 5, 2010, 5:47pm | Steven Titch

Since I contributed $10 to the $23 million The Social Network grossed nationally this weekend, I see no reason not to blog some thoughts on the film.

First of all, the movie, which purports to be a history of the founding of Facebook, succeeds wildly as entertainment. As you may have heard by now, the film basically posits that if its founder, Harvard student Mark Zuckerberg, had not been dumped by his girlfriend for questioning the academic credibility of her school, Boston University, Facebook may never have existed at all.

Whether or not the film’s facts are straight on this is another matter. Nonetheless, it is not my purpose to comment extensively on either the film or its veracity, other than to recommend it highly as long as you ingest the story and characters with the copious grains of salt.

But some facts the film depicts are undeniable. The most significant for my purposes here is that the idea that became Facebook was germinated in the fall of 2003, just six years ago, and, as a website, was launched on the Harvard campus in February 2004.

This coincidentally is the same time I started my work as an analyst in telecom policy circles. In that period, Facebook has gone from a fairly localized Ivy League phenomenon to encompass 500 million “friends” and made social networking a significant dimension to the online experience.

Yet, even now, in the face of this one incredible example, I find myself, as I was six years ago, still challenging the assertion that the telecom industry is re-consolidating into a monopoly and that regulatory policies such as network neutrality are required to ensure innovation thrives for consumers, connectivity grows and applications remain inexpensive or free.

In fact, one of the rallying cries for network neutrality is that it is needed to ensure the viability of the “next Google.”

Well, Facebook was the next Google, and what it and its founders have accomplished, completely devoid of Internet regulation, is extraordinary. Moreover Facebook’s success is testimony to the free market counterclaim that network neutrality is a government solution in search of a problem.

On the technical side, as the film covers in broad strokes, Facebook’s biggest resource requirement was server space. That’s what Zuckerberg and his friends need most of their start-up capital for. In the film, as was the case in real life, access to bandwidth, which net neutrality proponents say carriers have monopolized into artificial scarcity, never is an issue.

Despite all the alleged backstabbing and double-crosses the film depicts, at no point does an evil telecom executive show up and demand a king’s ransom for the right to use its network. Zuckerberg’s biggest fear is a server crash, not the threat of being stuck in an “Internet slow lane.” On the contrary, throughout the film, broadband access to Facebook is taken for granted. Broadband wireless connections work flawlessly. When a character says he viewed the video of a regatta on Facebook within minutes of the race’s conclusion, the filmmakers assume audiences will accept it without further exposition.

So, while the film presents Facebook’s founders as dysfunctional, it does not extend that judgment to the telecom and Internet industry. My enjoyment of the film was enhanced—and I hope yours is, too--by its tacit acknowledgement that, in America, a high-tech idea still can go from a dorm room to household word within six years, and that there is no broadband monopoly bottleneck strangling start-ups, whether or not they are fueled by beer and bad break-ups.

Net Neutrality’s Declare-Victory-And-Go-Home-Moment?

Posted on September 29, 2010, 10:20am | Steven Titch

Will the House pass a Net Neutrality Bill before the session ends? Rep. Henry Waxman’s (D-CA) draft bill surfaced yesterday amid reports that Waxman, the Chairman of the House Energy and Commerce Committee, was hoping to get the bill introduced this week with an eye toward passage during the post-election lame duck session.

Top line, the bill would prevent the Federal Communications Commission from reclassifying broadband Internet services as “telecommunications services” in order to invoke a more intrusive regulatory hand. The bill then addresses the network neutrality issue, which sparked the FCC’s reclassification proposal inthe first place.

As Larry Downes notes in separate pieces at CNET and the Technology Liberation Front, the bill attempts to address the objections of all stakeholders. While endorsing the controversial non-discrimination clause, which would require ISPs to treat all data traffic the same way as it crosses their networks, Waxman’s bill concedes a need for “reasonable network management,” words the FCC uses in its network neutrality proceeding. Unlike the FCC proposal, however, Waxman’s bill includes specific language defining what the “reasonable network management” means.

The term “reasonable network management” means a network management practice that is appropriate and tailored to achieving a legitimate network management function, taking into account the particular network architecture or technology of the provider. It includes appropriate and tailored practices to reduce or mitigate the effects of congestion on a broadband Internet access provider’s network; to ensure network security or integrity; to address traffic that is harmful to or unwanted by users, including premise operators, or to the provider’s network, or the Internet; to meet the needs of public safety; and to provide services or capabilities to effectuate a consumer’s choices, including parental controls or security capabilities. In determining whether a network management practice is reasonable, the Commission shall consider technical requirements, standards, or best practices adopted by one or more independent, widely-recognized Internet community governance initiative or standard-setting organization. In determining whether a network management practice for wireless broadband Internet access service is reasonable, the Commission shall also consider the technical, operational, and other differences between wireless and other broadband Internet access platforms, including the need to ensure the efficient use of spectrum.

Just as important, the draft bill, which can be found here, also considers the unique requirements of wireless, and subjects it fewer restrictions.

All in all, the bill comes close to the solution Google and Verizon proposed in August. For this reason, Downes predicts it might have a "rocky road" to passage, particularly because the most vocal network neutrality enthusiasts, such as Fress Press will push back against the network management language excerpted above aw well as any wireless exemptions.

I'm a little more optimistic. While it is only in draft form, the bill also may be the closest we’ve come to resolving the network neutrality policy debate, which while occupying a segment of the tech set, is barely registering with the public. Meanwhile, you have many large high-tech companies inthe Internet ecosystem who once were favorably disposed toward net neutrality, voicing second thoughts about using reclassification to achieve it. With the support Waxman, a member of the Democratic leadership, the bill may provide cover for the net neutrality proponents in Congress and deliver a nominal policy win for the President Obama, who voiced support for net neutrality on the campaign trail. Yet the bill would also put the brakes on an expansionist FCC and its investment chilling plan for "Mother, May I?" oversight of Internet innovation.

Some Early Takeways from the Verizon-Google Net Neutrality Proposal

Posted on August 10, 2010, 4:01pm | Steven Titch

Scott Cleland at Precursor.org has weighed in with his first impressions of the joint policy proposal on network neutrality from Verizon and Google yesterday, He cites two important takeaways, condensed here. See his blog entry for more insights.

First, it is even more clear that the FCC should give the legislative process time to play out on net neutrality.

While this is a legislative proposal of only two of the many major stakeholders in the net neutrality debate, it still sends a strong signal to Congress and the FCC that the stakeholder negotiating process -- that has been occurring over the last several weeks -- holds real potential for substantive progress and resolution, if the FCC is patient and gives the process the appropriate time and breathing room to play out....

Second, Google's many major concessions are an important reality check for the FCC and net neutrality absolutists. While FreePress and the net neutrality fringe demand the pure absolute net neutrality of a monopoly regulated utility under Title II, Google now apparently believes that extreme position is no longer credible....

In short, Verizon and Google appear to have changed the overall dynamic with their announcement, showing that stakeholder negotiations and the legislative option may be viable and should be given time and support to further develop.

Those who don't want a negotiated compromise, but seek a heavy-handed edict from the FCC, like FreePress, will surely push the FCC to go it alone, ignore Congress, and abandon the potential for a much more broadly negotiated settlement of this mess -- that will only get messier 'if the FCC rushes to usurp both Congress' and the Court's authority.

With the FCC's broadband regulatory authority up in the air after Comcast v. FCC, Verizon and Google are looking to demonstrate that the market can deliver a solution without a strignant regulatory regime. The ball is in FCC Chairman Julius Genachowski's court now.

Net Neutrality, Verizon and Google: A Separate Peace?

Posted on August 5, 2010, 12:29pm | Steven Titch

The buzz in telecom policy circles this morning is the word that Verizon and Google are close to an agreement that will allow the search giant to purchase from Verizon a faster tier for delivery of its bandwidth heavy services, notably YouTube, its video-sharing site.

If the two companies reach an agreement, it could be a death blow to the entire “non-discriminatory” idea behind network neutrality: that no service provider should be give favored treatment to any service or application. FCC Chairman Julius Genachowski has made it a mission to get the “non-discrimination” principle encoded into law, to the point of calling for reclassification of broadband ISPs as regulated telecommunications carriers.

If Verizon sets up tiered pricing for Google applications, the non-discrimination genie is out of the bottle for good. It would be a direct "I dare you" challenge to the FCC to block it. Armageddon indeed. Adding to the significance is that Google itself is party to the deal. Until today at least, Google has been the loudest company behind the call for a non-discrimination rule, even as one-time allies have fallen away (the latest being Amazon.com).

As has been the case in the past, Google is sending mixed messages. The New York Times broke the story last night, and the Wall Street Journal followed up today, noting that a formal announcement could come as early as Friday afternoon. On the other hand, a Tweet about 10:50 a.m. ET from Google Public Policy Blog said flatly, “The New York Times is wrong. We've not had any convos with VZN about paying for carriage of our traffic. We remain committed to an open internet.”

Google’s public policy side has been left out of the loop before, so let’s take that denial with a grain of salt. The Times and the Journal seem to have enough detail to suggest this is not something made up out of whole cloth. The Times article, by Edward Wyatt, however, goes into more detail about the closed-door meetings (nine in the past seven weeks) that have been taking place on M Street ever since Genachowski unveiled his reclassification plan. The talks, according to an unidentified source in the article, have produced some agreement on smaller matters, but there has been little movement “on the few big issues that are the most important.”

You can read this two ways. The first instinct is to conclude ISPs are still at odds with the content providers over basic net neutrality rules. Or you can see it more dramatically: that the telecom industry is now at odds with the FCC’s net neutrality regulatory grab. Sure, there’s some Kremlinology to this, but when we see Amazon.com concede that 1) Internet content discrimination already exists at the edge, and 2) such prioritizing and partitioning serves consumers; then add the news of a potential tiering agreement between Verizon and Google, we begin to wonder if Genachowski has managed to pull off what years of policy disputes and rulemaking have failed to do: Unite the entire telecom and Internet industry against more regulation.

Amazom.com Switches Sides on Net Neutrality

Posted on July 23, 2010, 10:19am | Steven Titch

In a startling guest column on CNET yesterday, Paul Misener, vice president for global public policy at Amazon.com, for all practical purposes reversed his company’s stand on network neutrality, particularly the controversial non-discrimination rule, which would prohibit ISPs from creating and charging providers of large-scale content, applications and commerce for faster broadband connections and tiered quality of service.

In his column, Misener concedes what many free market bloggers and friends have argued for years: that the net neutrality rules are a solution in search of a problem, and that large providers like Amazon already invest in techniques that ensure quality delivery of content and apps, albeit at the edge, not within the network cloud. Misener writes:

First, there have been almost no Net neutrality violations. Opponents of Net neutrality rules say this record demonstrates that regulation is unnecessary--that Net neutrality is "a solution in search of a problem." But actually, the threats of legislation (since 2007) and FCC regulation (since 2009) have kept the network operators on their best behavior.

Moreover, Net neutrality has become a populist consumer issue in a way that few FCC issues ever have (try Web-searching the terms "Net neutrality" or, more humorously, "series of tubes"). So, it's hard to imagine policymakers adopting laws or rules that would condone popular notions of Net neutrality violations.

Second, the legal/regulatory uncertainties have, understandably, dissuaded network operators from making investments in new technologies and services that might subsequently be found to violate Net neutrality. Unfortunately, some observers seem to think that this uncertainty hurts only the network operators and their suppliers, but consumers and content providers also are suffering, albeit unwittingly, from the lack of new services that might otherwise be available.

Misener goes on to suggest that if freed from the uncertainty regulation, ISPs might develop competitive alternatives to leased lines and web caching that will serve consumer, carrier and content provider interests—the “win-win-win” of the article’s headline.

If paid performance enhancement for some content is equally available and does not degrade the performance of other content, then it should be permissible. And, following this principle, in addition to moving, leasing private lines, and edge caching, Internet content providers (and consumers) should be able to purchase "quality of service" or "managed services" from network operators on the same basis--equal availability and no harm to other content.

Along with Amazon, Microsoft, Expedia, Yahoo and Sony also have backed off from onetime hardline support. Just last October, it’s CEO Jeff Bezos, co-signed an Open Internet Coalition letter supporting regulation. Back in 2006, Misener himself was warning about the potential of ISP abuse of their network to throttle Internet discourse.

Even Google, which has been funding the Open Internet Coalition, has been sending mixed messages on the regulation for more than a year.

What changed? Well, the FCC Chairman Julius Genachowski’s plan to reclassify broadband Internet service as a regulated “telecommunications service,” all for the sake of pushing a network neutrality agenda, is shaking the entire U.S. Internet industry to its senses. For companies like Amazon, when the FCC’s power was circumscribed around carriers, network neutrality was “regulation for thee, but not for me.” It’s significant that Misener raises the issue of investor uncertainty, an ISP talking point that network neutrality proponents have in the past pooh-poohed. Reclassification would give the FCC broad discretionary powers over the entire supply chain for broadband services. And if the FCC can regulate ISP business models, which is essentially what net neutrality is all about—who says it won't, under its new self-styled mandate to regulate all things broadband, it won’t start regulating other Internet business models as well? Given the Obama administration’s immense appetite for regulatory adventurism and its willingness to use (and arguably abuse) discretionary executive branch powers to get around Congress, it could be that many companies that once thought themselves outside Washington's regulatory purview are now rethinking their desire to ride the president’s industrial policy tiger.

Using the same reasoning applied to ISPs and their network technology, regulatory zealots have started talking about “search neutrality” in the context of the Google and its search algorithms. Apple’s exclusive iPhone arrangement with AT&T draws regular fire. Amazon’s Kindle is proprietary to Amazon—you can’t use the e-book reader for books purchased from other on-line retailers (although I understand Kindle will read PDF documents). Who’s to say the FCC won’t demand e-book neutrality?

I don’t like to make predictions, but I think that Genachowski’s push for reclassification is going to blow up in his face. Congress, which sees it as an executive branch overstep, is already unhappy about it. In business circles, regulatory jockeying and rent-seeking might be part of the Washington culture, but it’s notable that companies like Amazon are signaling that, given the choice between paying ISPs for tiered quality of service or the threat of wholesale imposition of a “Mother, may I” regime on their present and future business relationships, they will stand up for their the freedom to conduct business without government intrusiveness.

The FCC’s Fool’s Crusade

Posted on June 19, 2010, 11:35am | Steven Titch

Choose your analogy: He pushed the button. He turned the key. He cried havoc and let slip the dogs of war.

FCC Chairman Julius Genachowski Thursday launched what could end up being a decade-long court battle over the government’s power to regulate the Internet. Genachowski’s initiative takes the form of a Notice of Inquiry into reclassifying broadband Internet service under Title II of the 1996 Communications Act, that is, as a regulated telecommunications service akin to single-line dial-up phone service. The Telecom Act currently classifies broadband access under Title I—as an unregulated information service. The decision to move forward with the NoI passed 3-2 by partisan vote.

This is a battle Genachowski can’t win. The only question is how many opportunities, enterprises and jobs his fool’s crusade takes down in the process.

The primary issue isn't even technical; it’s legal. Whatever opinion Genachowski has about how broadband services should be classified, the U.S. Constitution is quite specific on the process of legislative change. The Title I and II classifications in the Telecom Act were established as law by Congress. They can only be changed or amended by Congress. The FCC, as part of the executive branch, cannot take scissors and paste to legislation.

If Congress fails to put the brakes on the FCC’s attempt at law-by-fiat, and the commission follows through with reclassification, expect a legal challenge on constitutional principles. Unfortunately, the process could last years, and the ensuing regulatory uncertainty will stanch investment. This is all the more unfortunate because, after nearly a decade of incredulity, a nervous Wall Street is coming around to the idea that broadband is going to be the economic engine optimists have long believed. Now that the consumer benefits of innovations such as the iPhone and Droid are palpable and measureable, and larger portions of the populations are opting for platforms such as fiber to the home, the FCC is going to stop all that momentum over what appears to be the Chairman’s personal frustration over his inability to enact network neutrality rules.

Yes, that what this is all about. Ironically, in the face of a court decision, Comcast v. FCC, that specifically said the FCC needs Congressional authorization to enact network neutrality rules, Genachowski has doubled down by attempting to gin up that authorization by rewriting the law himself. Maybe it’s the nature of federal agencies to reach for as much power as they can, but year after year, every time the FCC has tried to stretch the interpretation of its Congressional mandate—be it in terms of broadcast indecency, forced line-sharing or, as with the recent Comcast decision, “ancillary” authority to regulate the Internet, the courts have pushed back, enforcing a much more limited reading. Jurisprudence does not bide well for Genachowski’s tactics here, which go way beyond interpretation of the law to outright amendment of it. The problem is that the fight will be as costly to the economy as it will be unnecessary for the public.

For more, see Reason TV's video "Three Reasons the FCC Shouldn't Touch the Internets."

Net Neutrality Advocates Get Silly

Posted on May 13, 2010, 10:35am | Adrian Moore

The many statist groups that want the government to regulate the Internet under the guise of "network neutrality" have gone off the deep end, hyping a student marketing competition as an industry conspiracy. The details are pretty funny.

The student's project--NoNetBrutality.com--is actually pretty useful.

The FCC Goes Backwards

Posted on May 7, 2010, 10:08am | Steven Titch

I have an op-ed on the FCC's broadband re-classification plan on AOL today, paired with a counterpoint commentary from Megan Tady of Free Press. My piece focuses on how the plan will lead to FCC intrusiveness in almost every area of broadband.  But "third way" labels notwithstanding, it is sheer folly to try to wrap a monopoly era regime around competitive broadband services. The FCC is about to embark on a lengthy legal battle that will cost tons of political capital while offering it very little chance of winning.

Bottom line: No matter what the information, the faster it is allowed to move and the easier it is for people, businesses and government agencies to link it together to produce value, the better it is for everyone. Until this week, even the FCC expressly understood and endorsed this approach.

Telephone service is about one-to-one connection. Broadband is about many-to-many interconnections. That's why the FCC separated the two to begin with. Constraining broadband with rules that applied to another service in another era can't help but end up as a policy disaster.

Find the piece here.

BitTorrent Was a Bad Case from the Start

Posted on April 20, 2010, 2:09pm | Steven Titch

After reading over some of the postings from the few weeks and exchanging emails with Richard Bennett at Technology Liberation Front, I am coming to see how disastrous a decision it was for the FCC to pursue sanctions against Comcast over its throttling of BitTorrent files.

True, the case, and the court decision has allowed activists to foam at the mouth about a “crisis” in Internet service. Yet despite the breathless warnings, none of this resonates with the public. The results of a recent Rasmussen Reports poll, posted here by Adam Thierer, that found that 53% of Americans oppose FCC regulation of the Internet. Perhaps Americans are sanguine because there is no Internet censorship problem.

Even though the issues in the BitTorrent case are a bit technical, the public groks on some level that claims by proponents of regulation that the recent U.S. Court of Appeals decision in favor of Comcast would lead to rampant Internet censorship don't ring true. That’s because first and foremost, the BitTorrent case was not about blocking or “censorship.” In fact, in the more than four years of debate, the only real instance of a network neutrality violation, that is, an outright flouting of the guidelines set up by former Chairman Michael Powell, came in 2005 when Madison River Communications blocked Vonage’s VoIP service. And Madison River got caught and fined.

Since the rather short-sighted actions of Madison River Communications, a small North Carolina competitive local exchange carrier, hardly generate the emotions or headlines that an AT&T or Comcast would, network neutrality activists were left scrounging for any “censorship” tidbit they could find, even if it had little to do with the Internet access (Jim Harper’s recent podcast critiques recent claims of neutrality violations).

Aside from being a bad example of a network neutrality violation, the Comcast-BitTorrent case brought out specific problems with the neutrality concept, including the idea of whether the Internet is neutral at all. But in plain language, the Court of Appeals asserted an age-old principle about freedom and boundaries: Your right to swing ends where my nose begins.

Now let’s look at what BitTorrent is and what Comcast actually did.

BitTorrent is a file transfer protocol. That is, it is a set of instructions for encoding and decoding content for transmission. It is one of many protocols the Internet uses, which include the basic Internet Protocol (IP) itself. Other examples are the Hypertext Transfer Protocol, which is long form of the “http” abbreviation used in web site URLs. There are also other protocols that users rarely encounter but govern the way computers on the Internet exchange information and execute programming. The Session Initiation Protocol (SIP) and the Simple Object Access Protocol (SOAP) are two examples, for those who want to get granular.

IP, HTTP, SIP, SOAP and BitTorrent are all open protocols. That is, the coding languages are available to anyone who wants to use them. They are also intentionally built to be compatible with the underlying Internet protocols. But while a protocol may open, it may not always be license-free.

This is the first major misunderstanding in the BitTorrent case. The BitTorrent protocol takes its name from BitTorrent Inc., the company that developed it. BitTorrent Inc. itself is not a content or applications provider. BitTorrent Inc., rather, develops content delivery technology, of which the BitTorrent protocol is an example. In order to create a market for the BitTorrent protocol, BitTorrent supplies clients and plug-ins—pieces of software that tie into your browser—to consumers for free. With millions of BitTorrent clients attached to consumer browsers, there is an incentive for larger content providers to pay BitTorrent Inc. for the right to use the BitTorrent protocol to encode their content. Trouble is, because of the way it is designed, the BitTorrent protocol tends to increase congestion on networks owned and operated by Internet service providers like Comcast. BitTorrent files could move easily across the network, but Comcast said they were decreasing quality of service for the majority its customers and applied countermeasures that slowed the rate of BitTorrent transfers.

This is why Comcast v. FCC will be remembered as a bad test case for network neutrality. The court exposed the FCC’s blunder of framing what was a legitimate dispute over network management as an issue of Web censorship. The Comcast-BitTorrent dispute was not about a giant service provider squelching consumer access to the Web, it was a business conflict between two companies with competing agendas. BitTorrent’s interest in maximizing the use of the BitTorrent protocol ran up against Comcast’s interest in preserving high quality of service for the overwhelming majority of its customers. Pointedly, the two companies worked out this conflict within weeks, mostly because as businesses, they understood each other’s motivations.

The BitTorrent decision raises more questions going forward, especially when it comes to the idea of “reasonable network management,” which the FCC’s current notice of proposed rulemaking on net neutrality would permit. But if Comcast’s throttling of BitTorrent was not reasonable, what is?

Comcast’s initial attempt to manage BitTorrent files was ham-handed, but its tactic, it could be argued, was content-neutral. Comcast targeted files that used the BitTorrent protocol, regardless of what they contained. It certainly made good headline when AP decided to use BitTorrent transmit the King James Version of the Bible, only to have it throttled. But the same thing would have happened if AP had used instead chosen the entire issue library of Playboy magazine, only it would not sparked the dramatics from the Christian Coalition (as reported here).

Finally, the BitTorrent protocol itself is a neutrality workaround. The protocol was developed to accelerate the transmission of rich media, in other words, to help providers of hefty content like TV shows, movies and other hefty content, carve out a “fast lane” for their data—an idea that runs directly counter to the so-called network neutrality principle. Here’s how BitTorrent describes its software, branded BitTorrent DNA, on its website:

BitTorrent DNA is a disruptively effective content delivery technology. It significantly reduces bandwidth costs for popular files while dramatically improving the performance and scalability of websites. BitTorrent DNA enables websites to seamlessly add the speed and efficiency of patented BitTorrent technology to their current content delivery infrastructure, requiring no changes to their current Content Delivery Network (CDN) or hardware in the origin infrastructure. Businesses can benefit from the efficiencies of peer-assisted content delivery while improving the end-user experience.

As an interesting thought-experiment, let’s suppose Comcast, or any other Internet service provider, was to acquire BitTorrent. Now, in the above quote, substitute the name of the ISP for BitTorrent. What you end up with is something like this: “Comcast DNA enables websites to seamlessly add the speed and efficiency of patented Comcast technology to their current content delivery infrastructure.” Under the current guidelines, as well as the proposed rules, this would be a network neutrality violation.

But wait, the FCC already attempted to sanction Comcast for throttling the BitTorrent protocol. The FCC’s underlying assumption, then, is that the BitTorrent protocol is beneficial and that an ISP should not be allowed to impede it. Under a neutrality regime, however, the FCC could turn around and sanction any ISP that chose to market it, or, more realistically, another protocol or technique like it. Here’s where network neutrality breaks down and presents an inherent contradiction, not to mention all sorts of equal protection issues.

Yet regulation proponents dismiss the idea that network neutrality would slow network investment. Simply put, no ISP, software developer, or venture capitalist would know in any given instance how the FCC would treat any innovative technology that would add “speed and efficiency” to “content delivery infrastructure.” On Monday, one technique could be acceptable. On Tuesday, another technique might not. The D.C. Court understood all these problems, and they were among the reasons it reined in the Commission.

The FCC Loses Another One

Posted on April 6, 2010, 4:41pm | Steven Titch

The Federal Communications Commission keeps grabbing and the judges keep slapping its hands.

The big news today is that a federal appeals court has ruled the FCC has no legal authority to regulate the Internet. This throws the entire FCC broadband policy agenda into turmoil.

The decision, by the United States Court of Appeals for the District of Columbia Circuit, concerns sanctions the FCC imposed on Comcast after the cable company slowed down the rate of transfer for certain peer-to-peer files using the BitTorrent protocol. Although Comcast and BitTorrent settled the dispute, the FCC nonetheless sought to fine Comcast for violating the FCC's network neutrality guidelines against content discrimination. Comcast sued, claiming it had the right to manage its own network to serve the interest of the 95 percent its customers who don't use BitTorrent.

The industry was watching the case because it was the first major test of the FCC's interpretation of its "ancillary authority" to regulate Internet service providers. In what amounts to the latest blow against FCC overreach, the court ruled that under current law, the FCC's regulatory purview does not extend to the Internet. Any change to that effect would have to come from congressional legislation.

Starting with the FCC's Notice of Proposed Rulemaking on network neutrality, and extending to much of the FCC's Broadband Plan issued last month, the decision blows a hole in a year's worth of policy planning at the commission. FCC Chairman Julius Genachowski took office last year with a progressive agenda to set what is arguably a government-driven industrial policy for the country's telecom and information technology sector, using the "ancillary authority" argument to justify increased oversight of not simply telecom and wireless spectrum issues, but of influential applications and content companies such as Google, Apple and Disney.

Outside of a new law, the FCC could attempt to reclassify ISPs, now lightly regulated as Title I (information services providers) to heavily regulated Title II (telecom services providers). This stands to be even more of a stretch as the ancillary authority rationale, as it would essentially treat any competitive ISP as the equivalent of a wireline narrowband phone company.

This would create a regulatory nightmare, simply because the ISP category is so broad--i.e., Google can be considered an ISP.

If there is any good news is that the courts keep pushing back against FCC overreach. The closest thing it's had to a win in recent years has been in FCC v. Pacifica Foundation, better known as the "seven dirty words" case that erupted from a radio airing of a famous George Carlin monologue. Even then, the court limited the FCC's authority to regulate broadcast content to times when its is reasonable to believe children might be listening.

In fact the courts consistently have pushed back against FCC attempts to abrogate both speech and property rights, no matter who holds the chair. When the commission tried to force cable companies to share  infrastructure with competitors (FCC v. Brand X), the courts struck it down. Three times the FCC tried to require phone companies to unbundle their network elements. Three times the courts halted it. Its $550,000 fine against CBS over Janet Jackson's wardrobe malfunction? Dropped by court order. Its attempt to regulate Internet content under the Children's Online Protection Act (COPA)? Unconstitutional. Indecency rulings and fines against Fox and NBC? "Arbitrary and capricious," said an appeals court.

You'd think by now the FCC would be getting the message--stick to the job Congress gave you. From reading Adam Theirer's comment at Technology Liberation Front, it seems that the D.C. court is making an extra effort to drive that point home. Either way, it's gratifying to see one branch of the government willing to fight "mission creep."

Net Neutrality’s Threat to Innovation: Far from ‘Ridiculous’

Posted on February 24, 2010, 6:07pm | Steven Titch

There’s been some considerable comment over my February 11 post that, had the the FCC’s proposed Network Neutrality regulation been in force a few years ago, products like the Apple iPhone and Amazon Kindle would not have been possible.

In fact, the otherwise levelheaded Mike Masnick at TechDirt called my assertion “ridiculous.”

I beg to differ.

The premise behind mandated network neutrality is the concern that ISPs like AT&T, Verizon and Comcast are in a position to exploit their control of the “last mile” broadband connections to unfairly influence the market success or failure of a third-party Internet-related product or application.

Former vice-president Al Gore summed up the position best in a Reason TV video posted on the other day: “I just think that’s it’s unacceptable to have the folks that control the pipes get into anything that smacks of controlling the content or favoring their content over other content. Whoa!”

OK. So let’s look at the iPhone. To market the iPhone, AT&T and Apple established a value-added partnership in which AT&T made modifications in its wireless network--its “pipes” as Gore says--to ensure they are optimized for iPhone and its applications. Many of these applications--news, maps, games, video, social networking or various mash-ups of all of them--are exclusive to the iPhone and not available to users of other devices. Even when they are, they are not as user-friendly. Compare, if you will, Google Maps on an iPhone to Google Maps on a BlackBerry. The iPhone version is faster, presents more information, and its interface is more intuitive.

Walk into an AT&T store and ask for a smartphone and the sales rep will likely steer you to an iPhone. AT&T benefits financially from iPhone sales, as does Apple as its exclusive partner. And yes, Apple has been known to refuse to make certain apps available through its apps store channel, sometimes for the most arbitrary of reasons. So it is discriminatory. This entire arrangement is precisely the scenario Gore finds “unacceptable.”

But let me address the matter Masnik raises in his blog, using this quote from my February 11 post:

The non-discrimination principle that [FCC Chairman Julius] Genachowski seeks to mandate would prohibit service providers such as AT&T, Verizon Wireless, T-Mobile and Sprint from using their network resources to prioritize or partition data as it crosses their networks so as to improve the performance of specific applications, such as a movie or massive multiplayer game. Yet quality wireless service is predicated on such steps. The iPhone, for example, would not have been possible if AT&T and Apple did not work together to ensure AT&T's wireless network could handle the increase in data traffic the iPhone would create.

Masnick says I conflate the issue. “What's described in the first sentence as what would be banned,” he writes, “is not the same thing that's described in the second sentence as what AT&T and Apple did.”

Masnick may have a point, but it doesn't matter because the FCC, in its Notice of Proposed Rulemaking on net neutrality, makes no such distinction. On the contrary, the FCC is seeking the right to review and regulate any service provider arrangement that seeks to leverage its ownership of network facilities to gain an upper hand in the delivery of specific content and applications, with or without a partner.

As proposed, the FCC, as set out in paragraph 109 on page 43 of its NPRM, would set “a bright-line rule against discrimination,” which, it believes  “may better fit the unique characteristics of the Internet.”

Masnick argues that net neutrality rules would not apply because iPhone applications discrimination is not direct nor is it done at the network level. Yet nowhere does the FCC make any qualification that it will limit the scope of the non-discrimination rule to modifications an ISP makes in its physical network. All the NPRM says is this: “We propose draft language to codify a fifth principle that would require a broadband Internet access service provider to treat lawful content, applications, and services in a nondiscriminatory manner.”

That’s the test the FCC will apply. Well, AT&T and Apple  collaborated on a device that discriminates both on content and content delivery.  There are applications and interfaces on the iPhone that you can’t get on a BlackBerry or Glide, or from other service providers. And when the same apps are available on more than one smartphone, AT&T optimized its network to ensure the quality of  iPhone apps. There is no reason to think that under the proposed regulation, the FCC won't see a future collaboration like this as a neutrality violation.

The NPRM sets up a regime to question, investigate, regulate or ban “anything that smacks of” content favoritism, to repeat erstwhile Internet inventor Al Gore’s words. Want more evidence? Back in 2007, when the iPhone was introduced, Rep. Ed Markey (D-MA), author of network neutrality legislation in the House, used it as an example as to why the FCC should devise and enforce neutrality regulations. Masnick says my linking of network neutrality to the iPhone is “ludicrous.” But here Markey holds an iPhone in their hand and makes it clear that it’s precisely the problem that neutrality regulation is needed to fix.

Masnick may have jumped on the “No More iPhones” headline, but after a few sentences it’s easy to tell that my point is not that the iPhone will be banned retroactively, but that the sweeping neutrality and non-discrimination rules being proposed will chill any innovation that requires close work between service providers, hardware providers and content providers. As the Web 2.0 environment drives more processing in the network, and concepts such as cloud computing put a premium on speed, authentication and user interface, it’s becoming apparent that ISP collaboration at the device, network and applications levels will be a necessity to ensuring efficient Web functionality. That accounts for the new wariness on the part of companies like Google and Amazon toward the neutrality regulations they originally supported. In the five years the debate has raged, the value that ISPs bring to applications quality and value has become much more concrete.

Overall, Masnick is right to have his doubts about network neutrality. But he and others who believe that the FCC will regard the iPhone and future devices like it as exempt from non-discrimination rules are making a huge assumption about the FCC’s regulatory mindset. All we know is what’s in the NPRM. And under these proposed rules, there’s nothing to stop the FCC from taking dead-aim at future iPhone-like agreements. And frankly, in this climate, I’m not betting on government self-restraint.

Net Neutrality Means No More iPhones

Posted on February 11, 2010, 2:01pm | Steven Titch

The Reason Foundation releases my policy brief today looking at the effect network neutrality regulation will have on wireless applications and services.

Much has been written about the deleterious effect that regulating network management would have on broadband investment and innovation, and when applied to wireless, which is what FCC Chairman Julius Genachowski proposes to do, problems would only get worse.

The non-discrimination principle that Genachowski seeks to mandate would prohibit service providers such as AT&T, Verizon Wireless, T-Mobile and Sprint from using their network resources to prioritize or partition data as it crosses their networks so as to improve the performance of specific applications, such as a movie or massive multiplayer game. Yet quality wireless service is predicated on such steps. The iPhone, for example, would not have been possible if AT&T and Apple did not work together to ensure AT&T’s wireless network could handle the increase in data traffic the iPhone would create.

The irony is that the argument for network neutrality is that it would prevent service providers from controlling the so-called bottleneck between the Internet and end-users. The worry is that carriers are in a position to pick and choose winners or block competing players by choosing to improve or impede the performance of their respective applications, although there is no pattern of this behavior to justify preventative regulation.

The iPhone story is relevant because, while Apple and AT&T collaborated, it was Apple that was calling the shots while AT&T took most of the risk. Fred Vogelstein addressed the significance of this in “The Untold Story: How the iPhone Blew Up the Wireless Industry,” which appeared in January 2008 issue of Wired, January 2008.

After a year and a half of secret meetings, [Apple Chairman Steve] Jobs had finally negotiated terms with the wireless division of the telecom giant (Cingular at the time) to be the iPhone’s carrier. In return for five years of exclusivity, roughly 10 percent of iPhone sales in AT&T stores, and a thin slice of Apple’s iTunes revenue, AT&T had granted Jobs unprecedented power. He had cajoled AT&T into spending millions of dollars and thousands of man-hours to create a new feature, so-called visual voicemail, and to reinvent the time-consuming in-store sign-up process. He’d also wrangled a unique revenue-sharing arrangement, garnering roughly $10 a month from every iPhone customer’s AT&T bill. On top of all that, Apple retained complete control over the design, manufacturing, and marketing of the iPhone. Jobs had done the unthinkable: squeezed a good deal out of one of the largest players in the entrenched wireless industry.

Further down, the article continues to elaborate on the broader significance of the iPhone deal.

But as important as the iPhone has been to the fortunes of Apple and AT&T, its real impact is on the structure of the $11 billion-a-year US mobile phone industry. For decades, wireless carriers have treated manufacturers like serfs, using access to their networks as leverage to dictate what phones will get made, how much they will cost, and what features will be available on them. Handsets were viewed largely as cheap, disposable lures, massively subsidized to snare subscribers and lock them into using the carriers’ proprietary services. But the iPhone upsets that balance of power. Carriers are learning that the right phone — even a pricey one — can win customers and bring in revenue. Now, in the pursuit of an Apple-like contract, every manufacturer is racing to create a phone that consumers will love, instead of one that the carriers approve of. “The iPhone is already changing the way carriers and manufacturers behave,” says Michael Olson, a securities analyst at Piper Jaffray (emphasis author’s).

These observations have been borne out in the two years since that article appeared. The iPhone sparked a new market in smartphones. Research in Motion rolled out new BlackBerry devices. LG, Samsung and Motorola also entered the fray. The collaborative model has since moved beyond smartphones and takes in e-book readers like Amazon’s Kindle and devices such as Apple’s new iPad.

The fundamental flaw in network neutrality policy is that it assumes that service providers are in a position to dominate Internet service and applications. This premise was questionable to begin with, but the market forces that have come into play in the past two years has been shown it to be plain wrong. Competition has always served as a check on applications blocking. Now, it’s plain to see that service providers rely on equipment and applications providers to create differentiated devices and services that attract customers in greater numbers, bucking the recession. According to research firm NPD Group, smartphones accounted for 28 percent of all handset sales in the United States in the second quarter of 2009—a 47 percent increase in the category’s share since the same period in 2008.

It has turned out that the most effective wireless broadband business model is cross-platform collaboration. This should be enough to give the FCC pause before mandating a non-discrimination rule that would prohibit it. If a non-discrimination rule had been in force two years ago, the iPhone, the Kindle and the iPad would never have happened.

In my longer network neutrality policy study published last year, I argued that the evolution of Internet access service was a movement away from the neutral conditions that existed at the Internet’s birth. Users went from text commands to graphical browsers. Web sites went from dedicated servers to multi-site caching. Video compression algorithms were refined so video could be streamed. XML was developed so different Web applications could work together smoothly. Now, greater collaboration and bundling among service providers and other companies in the information services supply chain that are as large or larger is becoming an important way not simply to compete, but to build a strong business case for greater broadband investment.

As the industry comes to understand the benefits of these collaborative business models, it has become more unified in its opposition to network neutrality. A look at some of the filings in response to the net neutrality Notice of Proposed Rulemaking finds that most of the companies that had supported it a few years ago—Google, Apple, Amazon—are now urging caution.

The FCC would be well-advised to listen. The telecommunications industry no longer fits into neat silos of service provider, applications provider and content providers. It’s all a big mash-up, to use a buzzword of our time. These regulatory efforts to create and enforce structural separation between service providers and apps providers are now running directly against strong market and technology winds. The U.S. digital economy has been one of the few bright spots in what has been an otherwise dismal two years. The FCC needs to rethink its network neutrality plan lest the commission be remembered as the regime that killed U.S. broadband growth and innovation.

Deleted Scene from my NPRM Filing

Posted on January 14, 2010, 4:30pm | Steven Titch

In my researching the wireless competitive picture for my comments on the FCC Network Neutrality NPRM, one of my contacts was kind enough to point me to a Bank of America/Merrill Lynch paper that used the Herfindahl-Hirschman Index (HHI) to compare the market concentration of wireless service providers in the 26 Organization for Economic Co-Operation and Development (OECD) countries.  HHI is one of the metrics used by the Department of Justice to determine market concentration. It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, 20 percent, the HHI is 2600 (30² + 30² + 20² + 20² = 2600). The higher the number, the greater the market concentration. When the formula is applied to the U.S. wireless market share percentages determined by Bank of America/Merrill Lynch (28.5, 26.7, 18.2. 12.1 and 14.5), the U.S. HHI is the smallest at 2213. This number is substantially less than the HHIs for all the other OECD companies with the exception of the U.K.  Otherwise, no other HHI is under 2900.

Here’s the OECD market share data for Q4 2007 as it appears in the Bank of America/Merrill Lynch's Global Wireless Matrix.

Based on the HHIs derived from this data, here's how OECD countries rank going from least concentrated to most concentrated.

Country                    HHI

I used some examples in my comments, although I refrained from showing the data from all 26 countries. However, I thought it would be interesting to post, simply because the case for network neutrality is based on the false premise that U.S. service providers are consolidating into fewer and fewer companies. Second, many of the advocates of Internet regulation ironically point to Europe and Asia as the model for better competition, when, in truth, it is in these markets are far more concentrated.

Genachowski Widens the Net Neutrality Loophole

Posted on December 2, 2009, 3:44pm | Steven Titch

FCC Chairman Julius Genachowski linked spectrum management, universal service and network neutrality in a speech yesterday at the Innovation Economy Conference in Washington, and in the process may have signaled some comprehension of the negative consequences network neutrality regulation may have.

His most significant statement was a concession that network management will be required to keep wireless networks and services economically sustainable. The FCC’s Notice of Proposed Rulemaking on network neutrality seeks to apply a “non-discrimination” principle to wireless—that is, to prohibit service providers such AT&T, Sprint, T-Mobile and Verizon Wireless from using network intelligence from grooming, partitioning or prioritizing data to ensure quality performance of voice, data, gaming or video applications.

Yet yesterday, as reported by Wireless Week, Genachowski acknowledged that the explosion of data use was placing “unsustainable strains” on operators’ wireless networks.

“[There] are real congestion and network management issues that operators must address, particularly around wireless networks, and we must allow reasonable network management...,” he said, emphasizing the importance of developing policies that “encourage investment and the development of successful business models.”

While the NPRM does allow for “reasonable network management,” it never really defines what that may be. In light of this, Genachowski’s injection of “investment” and “business models” into his side of the debate is both startling and welcome.

For one, it acknowledges the rising chorus of critics (two examples here and here), who, independent of ideology, have questioned the economic wisdom of barring carriers from recouping their investment in intelligent network technology from large applications providers who generate these necessary costs. A recent conference on Capitol Hill, sponsored by the American Consumer Institute (full disclosure: I was a participant), featured comments a number of economists who said mandated non-discrimination was a recipe for higher consumer prices, lower quality and ultimately, declining investment in broadband infrastructure. Much of the Q&A discussion focused on whether numerous wireless data services and applications that have arisen out of innovations such as the iPhone, because of the continual network management they require, would be possible under a network neutrality regime.

Genachowski also deserves credit for tying the network neutrality issue in with spectrum management and universal service. Previous commissions have tended to pursue these issues separately, as if the policies addressing one had no effect on the others. Contemporary telecom policy must be holistic, understanding how spectrum allocation affects wireless network management, and how allowing the industry greater freedom to formulate the business models and partnerships can yield the investment needed to deliver universal service.

Trouble in 'Net Regulation Paradise

Posted on November 2, 2009, 2:28pm | Steven Titch

One of the White House's most vocal supporters of Internet regulation has quietly resigned, creating speculation as to whether there is mounting West Wing concern about the scope of President Barack Obama's plans to tighten federal oversight of Internet business.

Susan Crawford, Obama's advisor on telecom and Internet policy, resigned last week amid "little fanfare," reports The American Spectator.

White House sources say that she ran afoul of senior White House economics adviser Larry Summers, who claimed he and other senior Obama officials were unaware of how radical the draft Net Neutrality regulations were when they were initially internally circulated to Obama administration officials several weeks ago. "All of sudden Larry is getting calls from CEOs, Wall Street folks he talks to, Republicans and Democrats, asking him what the Administration is doing with the policies, and he isn't sure what they're talking about," says one White House aide. "He felt blind-sided, and Susan was one of those people who heard about it." In the end, the proposed regulations were slightly moderated from the original language FCC chairman Julius Genachowski, a Crawford ally, circulated.

Read the full text here (second item).

Hat tips to Jerry Ellig at George Mason University and Jeffrey Eisenach at Empiris LLC for the spreading the word.

The Free Market, Not Government Net Neutrality Mandates, Will Best Serve Consumers

Posted on October 1, 2009, 7:29pm | Adam Summers

In an editorial from earlier this week entitled "Net neutrality not so neutral," the Orange County Register quoted me from an article I wrote on the subject for The Freeman: Ideas on Liberty last year ("Net Neutrality or Government Brutality?" July/August 2008 issue).

On the issue of government regulation of the Internet versus private-sector incentives, I wrote: "In the free market, competition ensures that customers receive the services they demand. Government control, by contrast, ensures that they receive whatever services the politicians and bureaucrats in power at the time deem appropriate."

Below are some additional excerpts from the Freeman article. Read the full article here.

Net-neutrality proponents contend that they want to use regulation to increase competition and innovation, but their remedies would have the opposite effect. The growth in demand for bandwidth-intensive applications, such as streaming video, multi-player online gaming, and telemedicine, will require vast capital investments. Broadband providers will not invest in such projects, however, if there is not a good chance they will be able to recoup their costs and turn a profit. This is not unlike how cable companies currently rely on richer customers paying for premium services so that they can invest in less-profitable ventures, such as providing infrastructure for services to rural areas.

[. . .]

The costs of stifling competition and innovation through net-neutrality regulations would be significant. A May 2007 American Consumer Institute study estimated that regulation would cost consumers $69 billion over ten years. According to study author Stephen Pociask, “Despite proponents’ best intentions, net neutrality proposals would be a twofold problem for consumers. Innovations that require a guaranteed level of service won’t come to market, and consumers would have to pay more for the services they receive.”

Price discrimination is another concern of neutrality advocates. Despite the negative connotation associated with the word “discrimination,” price discrimination is a common and efficient way of allocating scarce resources and satisfying consumer demand. Children and seniors get discounted ticket prices at movie theaters; people pay different prices for different seats at concerts and sporting events; and some toll roads charge different prices depending on the time of day and the resulting levels of traffic congestion. In response to an FCC Notice of Inquiry regarding broadband practices, the Department of Justice’s Antitrust Division (of all things!) heralded the value of price discrimination in a September 2007 statement, noting the example of the U.S. Postal Service: “The U.S. Postal Service, for example, allows consumers to send packages with a variety of different delivery guarantees and speeds, from bulk mail to overnight delivery. These differentiated services respond to market demand and expand consumer choice.” The Department concluded, “Whether or not the same type of differentiated products and services will develop on the Internet should be determined by market forces, not regulatory intervention.”

In other words, the government should simply get out of the way and allow the market to work. Government should not try to pick winners and losers.

When neutrality proponents say that people have a right to “neutral” provision of information over the Internet, they are really saying that the public has some sort of right over the private property of the companies that provide the access to that information. Some have tried to justify this argument by claiming that the Internet was designed to be neutral, but it is the freedom from government restrictions that has encouraged innovation and allowed the Internet to flourish.

[. . .]

The concept of the “tiered” Internet is not something to be feared. On the contrary, it could be a means of enhancing services to broadband customers, providing revenue for ISPs to invest in accommodating increasing demand for bandwidth-intensive and delay-sensitive applications and making further improvements to data delivery, and of increasing fairness by ensuring that content providers responsible for the most Internet congestion pay the higher costs of assuring a high quality of service for Internet users. Choking off this potential revenue stream through net-neutrality mandates will only ensure that instead of an Internet with regular lanes and “fast lanes,” all consumers will be stuck in the slow lane.

Other Resources:

My colleague and Reason's telecom/IT analyst, Steven Titch, has done some great work on this issue. See his blog from Tuesday on Net neutrality and the FCC's recent proposal to mandate it, as well as policy study from earlier this year, The Internet Is Not Neutral (and No Law Can Make It So). The rest of his work can be found here.

Net Neutrality and Basic Freedoms

Posted on September 29, 2009, 4:42pm | Steven Titch

In an opinion piece on NPR.org, Scott Cleland, chairman of NetCompetition.org, gioves some succinct reasons why network neutrality, aside from inviting a cascade of unintended consequences, runs afoul of basic constitutional rights.

Here’s how he enumerates them. Full version is available here.

First, they offend due process. The FCC proposes to take away the freedom of enterprise from about 2,000 companies, because of only two problematic incidents over several years. Imposing an extremely restrictive industry-wide "solution" in the absence of a proven industry problem is like being found guilty until proven innocent.

Second, they offend equal protection under the law. While the FCC previously urged all Internet-related companies to voluntarily comply with its policy statement, the FCC now proposes to selectively and unfairly apply the rules to only some Internet distributors and not to all. This selective regulation approach would have the perverse effect of punishing competitive broadband companies that the FCC admits have done nothing wrong yet, to advantage application "netopolies," like Google and eBay, because the FCC believes they can innovate better in the future.

Third, the regulations offend the Constitution's protection of property. The FCC's position that users have an absolute freedom to access the content and applications of their choice, with no regard to the rights of others, is extreme given that net neutrality freedoms are found nowhere in the Constitution or law. Surely, a newly proposed FCC net neutrality freedom does not trump two-century-old property-right protections that allow property owners to require permission and payment for the use of their property. Surely the FCC does not have the authority to effectively transform the current Internet free market into an information com mons where competitive property owners would have no rights to set the terms of use of their property or get fairly compensated for their products and services.

Fourth, they offend freedom of speech. Like it or not, the Supreme Court has affirmed that corporations have constitutionally protected free speech. The FCC-proposed ban would perversely conclude that to protect the free speech of Internet users, who have many outlets of free speech, the FCC must ban the free speech rights of corporations.

At the core, the FCC's proposed pre-emptive "net neutrality" regulations to preserve an "open Internet" are not at all about promoting freedom but exactly the opposite. Freedom is not a zero sum game, where taking it away from some gives more to others. Taking away freedoms of some takes away freedom from all.