Escape from Net Neutrality

To really grok how important it is to get regulation right, you'll have to actually look at Lee Selwyn's economic analysis of the present state of telecommunications markets.  [I had trouble with the deep link, so just in case, click here scroll down to "Telecom Deregulation: All a Matter of Degree" Lee Selwyn" or try the second link first.] 

What the slides demonstrate is incredible concentration of market control and power in the hands of AT&T and Verizon. They also provide economic proof that the deregulatory policies of the past eight years have all but handed the Internet to Ma Bell.

In several recent proceedings  ("Net Neutrality NPRM" ), the FCC has begun to ask the question of whether there is a problem with how the Internet works and what it should do. These are good questions to ask. Unfortunately, in the vast majority of proceedings the FCC is starting from the wrong premise. They are assuming that they can remedy a market where the two largest players combined are nearly twice as big than the rest of the entire market using only minimal regulation. In other words, they seek to remedy what is clearly monopoly control with deregulatory tools.

The good news is that may be changing. (Doc Searls picks up on that here: Liberating the Net From Telephony), but before we get to the end of the story, let's pick up on how we got here:

A. How We Got Here:

• The Shrinking Natural Monopoly (slides 11-15): Lee Selwyn, whom I personally regard as one of the smartest telecommunications economists around traces, in un-economist-like concrete network detail shows precisely where money is and why.  

• Full Monopoly:  At slides 18-20, Dr. Selwyn shows how rapidly wealth concentrates when a retail provider is deregulated while every other competitor is forced to subsidize the dominant provider's retail services in the absence of meaningful wholesale regulation and antitrust control.

• Telecommunications Enterprise Markets are Monopolized as Well: as Dr. Selwyn points out and as GAO has told us for years,there is zero competition for network access plant.  Access is a business term that refers to dedicated capacity between points.  It is used primarily in the context of large businesses, Internet Service Providers, data centers, and other heavy duty users purchasing large amounts of capacity.  (Compare slide 17 AT&T before SBC acquired them and AT&T after the merger: slides 18 and 19).

• Everyone pays the loop owner even if the loop owner is supposedly deregulated in a "competitive" market.  Slide 20 shows the loop facilities (i.e. this refers to the actual physical line from your home or business to the first major point of network aggregation), for all intents and purposes are totally deregulated, even where they are supposedly "regulated". (From a financial perspective, there's no duopoly; there's pure monopoly.)

• No one can deploy any form of competitive network that exchanges voice traffic with any incumbent landline network without paying subsidies to the deregulated telephone company, which itself uses very low cost advanced gear, based upon cost assumptions that date back to the 1940s.  

Subsidies, therefore, continue to flow from the Internet to the since-deregulated Bell landline services and facilities.  These same deregulated Bell landline facilities, however, support Bell Long Distance, Bell mobile wireless services, Bell "Internet" services, and so on.  


We're paying regulated subsidies to deregulated massive monopoly machines and allowing them to compete in deregulated markets.  We created The Perfect Storm.

B. Net Neutrality: Gives Ma Bell Her Cake While She Eats Competition Too:

First, it cannot even begin to fix the problems it pretends to be able to solve. The reason is simple. Anything that's transmitted in Internet Protocol is deregulated. The irony is that rather than encourage the deployment of new, better, faster, cheaper, more technologically advanced loop facilities, deregulation resulted in everyone funding only one form of loop plant (copper) providing only one form of functionality (time division multiplex analog voice over 64kbps circuits).

• Worse yet, Bells now want more funding for services that have been subject to minimal or no regulation.
  
  
  
  "The infrastructure necessary to provide and optimize the delivery of such services, however, is extraordinarily costly, reflecting hundreds of billions of dollars of private carrier investment. It is these carrier investments that create the stable platforms that support new features and higher speeds, that successfully balance competing bandwidth demands, and that enable the astonishing array of innovative devices and applications that develop at the network “edges.” It is impossible to predict all of the benefits that next generation networks may provide. But one thing is certain: the Commission must maximize the incentives for carriers to make these foundational investments, because without them, none of the other, more visible innovations would be possible. (AT&T Comments in GN Dockets 09-157, 09-51 available here: http://fjallfoss.fcc.gov/prod/ecfs/retrieve.cgi?native_or_pdf=pdf&id_document=7020039959)
  
  
  

As you peruse FCC comments filed by AT&T Mobility, Verizon Wireless, AT&T, Verizon, Inc. consider their market data.  There is none.  Rather they come up with numbers on things like:

A. Handset "competition", which is nothing more than the tiny tail of vendors wagging off of the backside of the two largest landline, IXC, Internet peers, and mobile wireless carriers in the world. 

B. Size and health matter, so don't be fooled by "number of competitors" per market; that's an old landline trick as well, but counting up the players on the field is not the same thing as determining whether they are breathing or have a pulse. Wireless competition is not "vibrant" in a world where the third largest wireless competitor posted a net loss of $2.8 billion for 2008 and another $978 million for the first six months of 2009, while its credit was downgraded to junk status, and millions of its wireless subscribers are switching to "rival carriers."

Second, it is legal vaporware. Net neutrality is not law, it is not even rule. Over the long term, the FCC cannot sustain the fiction that a vast majority of the economic and technical activity associated with any wire or radio communication in the United States continues to exist in a statutory no-man's land called "ancillary jurisdiction". That was created to allow for a little regulatory flexibility, not to exclude from the ambit of the 1934 Communications Act the most ubiquitous, revolutionary, and pervasive network technology ever known to humankind.

It leaves completely in the dark and out of reach the very instruments of massive and near complete market control:

• enormously high special access costs (as noted above, these costs are critical input to every other carriers' costs because carriers use them to connect major network facilities as well as wireless towers or to reach fiber optic backbones from data centers or large enterprise locations);
• extremely high per minute subsidies paid by all carriers who exchange voice calls with incumbent landline network.

Third, the appearance of a rule may be worse than no rule at all. Net Neutrality, however, has deeper, more subtle potential harms, including but not limited to the possibility that courts, once again, refuse to apply antitrust because "it's regulated".  This was effectively the holding in Verizon Communications, Inc. v. Law Offices of Curtis Trinko, LLP.   


While facially the idea that a regulated entity should not be subject to antitrust regulation makes sense, the holding in Trinko overlooks legal, market, and network realities in ways that accelerated the monopolization of telecommunications markets.   This is primarily due to the fact that the market opening regulations embodied in the federal Telecommunications Act of 1996 were extremely difficult to enforce.  They were highly technical and split enforcement between the FCC and 52 separate public utility commission jurisdictions (50 states + Washington, D.C. + Puerto Rico).  


Unfortunately, therefore, if the FCC enacts some quasi-rulings about "Net Neutrality" imposing upon loop owners (wireline or radio or both) some common-carrier like "obligations" that aren't overturned by the DC Circuit, antitrust enforcement will suffer. Antitrust will suffer because the courts, once again, will be confronted with the question of whether antitrust remedies should apply to services that are regulated. As a result we may have stacks of Net Neutrality "rules", but no actual means of enforcing them.

Fourth, Net Neutrality pretends that the Internet can be compartmentalized. This is extraordinarily dangerous in several respects. At a high level, the FCC is going to parse out a bunch of deeply interrelated problems into several different regulatory silos, then examine the "issues" in terms dictated by the old silos pretending all the while these evaluations are actually relevant to anything that's going on in the market. For example:

• The FCC in one proceeding they might find competition in mobile wireless markets without fully addressing the fact that AT&T and Verizon own a vast majority of the wireline networks that every mobile wireless carrier relies upon to compete.

• In another proceeding on landline voice, they might find sufficient voice competition without considering consolidation in mobile wireless or cable television. In yet another they might choose to leave "broadband" unregulated despite the fact that any broadband provider will have to buy connectivity from AT&T and/or Verizon in order to supply the services they use to compete with both. Moreover, that "broadband" competitor might also be forced to pay additional fixed and recurring costs to AT&T and/or Verizon by state (or federal) regulators as a condition of using those services.

Practical application of yet another problem not remedied by Net Neutrality:

• Because the "Internet" and "IP-enabled services" are deregulated, landline incumbents, particularly Bell telephone companies (AT&T, Verizon, etc.) will refuse to permit competitive broadband networks to connect with their networks. Without such connections, however, no competitor can exist. They are refusing to interconnect networks with mobile wireless carriers unless the mobile wireless carrier agrees to pay 10x or more than they currently pay for wireless calls if those calls happen to use next generation WiFi to provide greater coverage in homes and other places. These requirements would kick in despite the fact that neither the regular wireless call nor it's WiFi equivalent touch the Bell landline network unless and until a wireless caller calls a landline number. The network architectures, call flows, and costs are the same. Yet, many of the old line telephone companies are preparing, again, to hold their networks hostage and extract more money from anyone who happens to call. Net Neutrality does not address this.

Net Neutrality may be a beginning, but it only addresses the very surface of entrenched market harms resulting from nearly a decade of bad deregulation. As such, it has the potential to create as much harm as it attempts to remedy. Without transparent, consistent and readily enforceable regulation, we're in for Groundhog Day version of the past 8 years of rampant mercantilism.

Or so it seems from where I sit.