net neutrality: one more time

Last week the FCC issued its latest pronouncement on net neutrality, the question of who regulates the internet–and therefore, implicitly, who owns it.  You can find the FCC releases and member commentary here.

background

Two pieces of background information are necessary to understand the meaning of the FCC statement.

1.  A while ago Comcast deliberately slowed down its service to BitTorrent, a file-sharing service.  Comcast said a small number of BitTorrent users were gobbling up huge amounts of bandwidth and slowing down service on its network for everyone else.  The FCC ordered Comcast to stop doing so.

Comcast successfully sued, arguing in court that the FCC didn’t have this kind of jurisdiction over it.  The case hinged on the FCC’s classification of the internet, not as a communications service, but as an “information” service.

Reading between the lines of subsequent statements by the parties and press coverage, the FCC decided to respond by saying it now realizes the internet is indeed a communications services, like plain old telephone service.  That would remove the internal contradictions in the FCC’s behavior.  But it would also potentially open the door to taxing internet access in the same way that phone service is.

Talk about driving a stake through the heart.  However, after hearing personally from over half of the members of the House of Representatives and a third of the Senate, the FCC changed its mind.

2.  In August, in the midst of the post-Comcast court victory discussion, Google and Verizon issued an internet manifesto (see my post).

what the FCC said

Last week’s FCC statement addresses the GOOG/VZN manifesto point by point.  The highlights:

–wired internet has one set of rules.  An ISP can’t block any content or services.  It also can’t deliberately slow down, or speed up, any particular content or services.  It can, however, offer different speeds of internet access to customers at different prices.

–wireless has another.  Basically, anything is ok, because the greater number of mobile internet service providers means consumers can switch ISPs if they don’t like what their current one is doing.

So far, this is more or less what GOOG/VZN suggested.  But…

–possible new services.  As I mentioned in my August GOOG/VZN post, I think GOOG wants to use its own money to build an internet service that’s more like the information superhighway that the rest of the developed world has, rather than the rutted country lane that ISPs have created in the US.  But before it invests billions doing so, it wants assurance that its service won’t be regulated as a public utility–that is, as if the network had been created with public money.  What GGOG/VZN got in this statement was just the opposite.

As I read it, the FCC says that a GOOG service would be subject to punitive regulation if it posed any threat to existing wired internet services.  But if a new service can’t be any better than today’s services, what’s the point?

jurisdiction?

The FCC asserts in its statement that it’s in charge–a reprise of Al Haig’s famous declaration, perhaps?  But the courts have been saying something else.  Congress seems to have the agency on a very short leash, as well.  And the new Congress may well have something more definitive to say.

Stay tuned.

the Google-Verizon plan unveiled yesterday

GOOG and VZN made their new internet plan public yesterday.  An explanation is available on the GOOG public policy blog, which links to the proposal’s text on Scribd.  (I searched without success to find the proposal on the VZN website.)

the plan

It has some straightforward features, followed by a couple of curve balls.  First, the plain vanilla–

fixed-line internet

The proposal has five points that deal with the fixed-line internet as it exists today.  They are:

1.  Service providers can’t prevent lawful activity, including sending and receiving content, running applications and using services, and connecting devices to the network.

By implication, service providers would be able to stop unlawful activity or actions that harm the network or users.

2.  Service providers wouldn’t be able to engage in “undue” discrimination against lawful activity in a manner that causes”meaningful” harm.

3.  Service providers would have to disclose terms of service and network management practices “in plain language” and in enough detail that users can make informed choices.

4.  Providers can do “reasonable” network management, including measures to reduce congestion, ensure security and eliminate unwanted or harmful traffic.

5. The FCC would enforce consumer protection and nondiscrimination requirements, not by general rulemaking, but by case-by-case actions against violators.

This leaves the FCC relatively toothless, but that’s basically where Congress and te courts have the agency now.

the eyebrow-raising ideas

These have generally drawn the most unfavorable comment in the blogosphere so far.

1.  Wireless would be exempted from all the fixed-line rules, except for #3, transparency in terms of service.  In other words, service providers could deny access to users if it wanted and prioritize content.  Very convenient for Android-based phones on the VZN network.

2.  “additional or differentiated services” could be offered by any service provider who also runs a broadband internet service governed by the plain-vanilla rules.  On this “differentiated” network, which could make use of internet content, the service provider would be able to prioritize traffic.  On its blog, GOOG offers the examples of online gaming/gambling, education (distance learning?), entertainment (movies, concerts?), and health care monitoring as examples of possible additional services.

my thoughts

It sounds to me like GOOG and VZN want to make very large capital investments in wireless and fixed-line internet service networks and want to setle the ownership issue before they do so.

Up until now, the cable and telephone companies that have built out multi-billion dollar internet networks have been compelled–rightly or wrongly–by their semi-monopoly status to accept the rules of “net neutrality.”  If DIS, for example, wants to offer an internet on-demand movie download service over, say, the Comcast network, in direct competition with Comcast’s own cable on-demand service, net neutrality says Comcast has no choice but to allow this to happen.  More than this, Comcast has to make every effort to ensure DIS has enough bandwidth that its service will be successful.

In some sense, then, content providers own the network just as much as the firms who built it, who are relegated to being nothing more than “dumb pipes” that deliver content to consumers.  I’m not trying to make judgments about what should or should not be the case.  I’m simply trying to describe the current state of affairs.

GOOG and VZN, it seems to me, are content (resigned?) to this being the case with capital investments made to date.  But before they commit new money to build new network infrastructure (GOOG, I think) or enhance an existing one (VZN Wireless) they want to make sure they own the network in the strongest possible sense.

Yes, if GOOG and VZN are permitted to build on their own terms, there’s a chance that the existing fixed-line internet–already a laggard in world terms–will develop more slowly than it would otherwise.  On the other hand, without some assurance that they will own the resulting network, I don’t think a non-utility like GOOG will build anything.  Also, there may be more competition in private networks than one might initially think.  Where GOOG treads can AAPL be far behind?


net neutrality: Google, Verizon and the FCC’s “Third Way”

FCC call for comments

In mid-July, the FCC called for comments on its latest ideas on how it would oversee the internet and deal with net neutrality.  Formulated in May, the agency calls the proposal the “Third Way.”

What made the Third Way necessary was a Federal court decision in April, one I’ve commented on in an earlier post.  In 2008 Comcast had slowed the speed of customers’ access to BitTorrent, a peer-to-peer file-sharing service that Comcast said was hogging too much bandwidth.  The FCC ordered Comcast to stop doing this.  Comcast complied, but sued.  In the April decision, the court said that Congress had not given the FCC the power to issue the kind of order it did.

The first two “ways” the FCC thought it might proceed, but rejected, after the court ruling were:

–continue to issue orders to ISPs concerning their internet service, and run the risk it would lose in court again and again, or

–declare that it no longer considered ISPs to be “information services” but were actually public utility communication services like fixed-line telephone companies, thereby putting the commissions legal authority over ISPs on a firmer legal footing.

The first would be an exercise in futility.  Congress appears to have told the FCC in no uncertain terms that the second alternative was unacceptable.

Hence, the “third” way.

The Third Way

To my mind, the key clause in the wordy Way is:

” Protecting consumers and promoting healthy competition by, for example, providing greater transparency regarding the speeds, services, and prices consumers receive, and ensuring that consumers—individuals as well as small businesses—are treated honestly and fairly;”

In other words, the FCC’s job is to make sure the ISPs make it clear how much they are charging for what service, and that these rate and speed differences aren’t crazy.  This seems to me to be putting the best face possible on the court finding that the FCC doesn’t have the authority to regulate how ISPs control their traffic.  That’s because Congress hasn’t given it to them.  That situation could be changed in an instant,  but by Congess granting the FCC authority. But congress hasn’t done so.

rumored Google-Verizon deal

The story surfaced in the New York Times last week, and is amplified in a Wall Street Journal blog.  I think it’s likely to happen.  The purported agreement would have GOOG paying VZN a fee so that Android-based phones would have priority access to the VZN wireless system.

How is this consistent with net neutrality.  The explanation will turn in what, in my mind, is a semantic trick.  In the Comcast-BitTorrent instance, Comcast was implicitly offering two levels of service–regular and slow.  BitTorrent got the second, everyone else the first.  Although it’s understandable why Comcast would act the way it did, and the court said the company was within its legal rights to do so, advocates of net neutrality worry that this is the thin end of a wedge that would allow IPSs to slow down anyone’s access.  That would be a bad thing.

GOOG-VZN seem to want to define a third tier of service, call it “premium” or “extra-fast” or something like that, that’s faster than regular.  They will presumably argue that for GOOG to pay for this for Android phones is not a violation of net neutrality because no one in particular is being singled out for getting slower service.

The FCC Third Way manifesto suggests this argument will fly with it.  Newspaper reports suggest Congress will give a thumbs-up as well.

investment implications

First, let’s see if this actually happens.

It seems to me that a development like this is bad for AAPL’s iPhone, by giving the already attractive Android platform another positive attribute.  One might even imagine circumstances where GOOG would be willing to pay ATT for premium service on that network, forcing AAPL to either follow suit or maybe try to preempt with a larger payment.

In my earlier post on the court decision, I said that as a growth investor, my preferred way to try to benefit would be to buy makers of internet access devices.  If a GOOG-VZN deal emerges, an equally good (or maybe better) path will likely be through cash-rich content providers or through healthy ISPs.