Regulations

FCC broadband analysis uncovers seven critical gaps

The FCC has jumped decisively into the broadband deployment issue with a number of new initiatives. In the “concrete” area, it issued a declaratory ruling to expedite the decisions on cell tower installation, removing what some operators characterized as selected local logjams.

Perhaps the most far-reaching thing in the laundry list of broadband commentary yesterday was a task force report from the national broadband plan activity that listed no fewer than seven critical gaps that impact broadband availability. In summary, they were USF limitations, demographic inequality, consumer education problems, spectrum limitations, infrastructure cost barriers, STB innovation stagnation and privacy issues. While there has been publicity to suggest that open access is now a strong contender, those views are linked only to past studies and not to any current comment by the FCC. We indicated our view on the Berkman study in a past blog; we disagree almost totally with its findings.

FCC net neutrality proposal confuses the issue

Reviewing FCC Chairman Genachowski’s comments on the net neutrality process, we find that there are a number of interesting points.

• First, the FCC is indeed proposing to apply net neutrality to wireless, which is something that’s already caused concerns among wireless providers. Wireless is the last bastion of profitability for the operators, after all.
• Second, the FCC is making it very clear that net neutrality rights will apply only to lawful content, and in fact Genachowski specifically said it would not apply to P2P that infringes on copyright. That means that the ISPs would be free to interfere with “non-lawful” traffic.
• Third, and perhaps most significantly, the FCC is saying that while it is important to offer managed services, which we assume means services with managed QoS, in parallel with the Internet, these can’t be allowed to compromise Internet service capacity and quality growth. This could pose the risk that the FCC might reverse its long-standing position on IPTV.

We don’t know exactly what the FCC has in mind (nor does anyone else (which likely includes the FCC!), but this announcement could create more uncertainty than clarity, which could influence U.S. providers’ investment in broadband. A Senate bill to block the order has been introduced, but it has no chance of passing. The House net neutrality bill will, according to sponsors, move forward.

FCC wireless market inquiries overdue, could affect spending

The FCC’s agenda for its August 27 meeting shows a commitment to a broad review of the wireless market, from its role in the national broadband policy to the state of competition and some wireless practices.

Both these activities are being considered for a Notice of Inquiry, which would launch a formal FCC process here. The interest in wireless is overdue. The FCC has far better data on and oversight of the wireline communications services, and yet wireless is becoming the prime mechanism for communications for a large segment of the population.

Operators hate this sort of thing; it raises the risk that the wireless cash cow will be shut off by the FCC in the form of new rules. The problem is that most U.S. operators are profitable because of wireless, and it’s not clear what would happen if the FCC were to curtail revenue/profit growth there through new regulation. The process will take time, and it’s not likely to impact 2010 budget planning, but it may keep wireless infrastructure spending plans tilted to the conservative side.

EU telecom profits and spending trends

France Telecom missed consensus but had decent results, particularly in contrast to Deutsche Telekom’s miss earlier in the week. Mobile and TV services within France were the strong points; emerging market numbers and Eastern Europe were off.

Two interesting points: The company reiterated its full-year guidance and it indicated its capex-to-sales ratio was about 12%. This is well below the average of the industry in normal times. We’ve noticed that EU providers are being more sanguine regarding capex than those in many other markets, including the U.S.. We believe this to be in part because recovery there is not likely to come as quickly as in the U.S., and because of the threat of regulatory intervention on things like roaming rates and even access sharing that would likely lower profits.

The pan-EU regulatory program that creates this risk reached a compromise solution on file sharing and will now be sent to the member countries for ratification.

FCC’s national broadband plan: Inquiry process begins

The FCC has issued a Notice of Inquirymon developing a national broadband plan as required by Congress.

The NOI seeks comment on how to achieve universal access, how to achieve affordable and efficient infrastructure, how to use broadband to enhance consumers’ lives, health and education, and what the current state of broadband is nationally.

This is the first required step in the process of developing an FCC order. The next step, which is not likely to come in 2009, is a Notice of Proposed Rulemaking (NPRM), which is followed by an FCC Order. We believe an Order might come late in 2010 at the earliest, but there will be considerable jockeying in the intervening period.

Government-sponsored broadband: Hard track record to overcome

You’d think that municipal and state governments in the U.S. were drinking too much Fosters. Many of them are looking actively at applying for some of the broadband stimulus dollars to create government networks for their citizens, following the same model as Australia but on a smaller scale.

There is obviously a lot of opportunism and manipulation going on here. Big OTT players like Google have long supported any municipal or governmental network alternatives to the big cable and telco providers because they fear that for-profit access will eventually stop investing in capacity unless access ROI is improved.

The question (here or in Australia) is whether it’s prudent to spend tax dollars of any sort to create a government program for broadband. Most of these plans, based on WiFi for example, have failed completely. We’re skeptical, but programs that would use tax dollars (including stimulus dollars) to fund FTTH, which would then be “lit” by companies, might be a way of advancing broadband without creating a catastrophic collision with commercial providers.

Wireless Internet: Should “net neutrality” apply?

The FCC is being asked for a ruling on whether its net neutrality principles apply to wireless Internet. This step comes after AT&T limited the use of Skype on smartphones.

There will be a lot of interest in the FCC’s response. On the surface, the issue seems clear to us. The FCC has said before that the service matters, not the technology. On that basis, it would appear that the four net neutrality principles articulated by the FCC would apply to the Internet, period.

On the other hand, is wireless broadband the same “service,” and the question is, do the rules (promulgated in the context of a wireline access order) really apply here? The risk for operators is that OTT players can use Internet access to bypass core services like voice, yet the market is moving to a one-price-for-all mode anyway. We think AT&T will lose this one and probably should not have fought in the first place.

25 years after the Bell breakup….price stability needed

We’re 25 years out from the Modification of Final Judgment that broke up the Bell System, and there’s been a lot of recapitulation of that time. Not surprisingly, most of it’s not particularly insightful. The truth is just too complicated and not very exciting, apparently.

The process began with realization that competitive long-distance providers were never going to be fully competitive as long as AT&T had local exchange control, and so the MFJ broke that monopoly, which was OK in a policy sense. It did reduce long-distance pricing steadily. It also created an undesirable stratification of the industry that separated access cost from interexchange revenue and so stalled broadband deployment.

The Telecom Act of 1996 was designed to again reorient the industry to create vertical competitors and to keep from restarting the old Bell monopoly. Lawmakers imposed a wholesale requirement on the RBOCs that shared their access with the IXCs. But long-distance pricing was doomed and so only increased subsidies could have kept the IXCs alive, and that was not the goal of the Act. Neither was the CLEC craze that venture capitalists started.

The IXCs got bought, the CLECs died, and the federal courts finally clarified things—by which time it was all moot. In this decade, the Powell policy of cross-modal competition between cable and RBOC was the only sensible play all along, and it’s actually working pretty well. Those who lament the death of the small CLEC or the lack of hundreds of healthy competitors should just take a look at the ROI on access investment; it’s poisonous for any new entrant.

Consolidation is already going on in telecom worldwide, and that’s a sure indicator that the problem isn’t a lack of competition, it’s a lack of price stability. The past should be a lesson for us: Regulatory policy can’t easily cope with fast, fundamental changes.

FCC could enter cable bandwidth management fray

Comcast has, as we had predicted, asserted to the FCC that its voice service is not carried over the Internet or Internet access infrastructure, and is therefore neither subject to their traffic management policies nor to the FCC’s four principles of net neutrality.

They’re right, of course. Cable, or PacketCable specifically, divides the data path, and broadband Internet and Comcast VoIP do not share capacity. The question now is whether the FCC will decide that it doesn’t matter whether the stuff is separate or not. We think such a decision would be the regulatory equivalent of junk science: It would imply that common carriage on any facility imposed the regulatory burdens of the most regulated service on all services.

These are not logical times, however, and regulations are never logical. The biggest risk here is that the FCC would do something that would overturn the original 2005 decision that broadband was not a “telecommunications service” and thus was not subject to unbundling provisions of the Telecom Act. That was a highly speculative ruling that stood largely because the RBOCs bought AT&T and MCI, who were bankrolling opposition.

Vuze, the online video company, has also asked the FCC to look into the Cox plan for bandwidth management. This shows that cable company needs to control bandwidth use, primarily uplink bandwidth for P2P, but also streaming bandwidth will be increasingly colliding with the over-the-top (OTT) players’ desires to pump content at no incremental cost. The shared-media nature of the cable plant is the industry’s biggest risk, as DOCSIS 3.0 is the biggest asset, and moving to DOCSIS 3.0 is useful only if content doesn’t just expand to fill the new pipe too.

Obama broadband stimulus plan: Reality vs. industry dreams

The broadband stimulus plan, part of Obama’s broader economic stimulus, appears to be all but a done deal, but the value of the package falls far short of what some had hoped.

As currently proposed, the initiative would be focused on rural and underserved areas and would likely come largely in the form of low-interest loans and grants. There is no talk now of tax credits or accelerated depreciation.

Keep in mind, though, that this is only the beginning of the road for the stimulus bill and that there are already some differences between House and Senate approaches. However, the total amount involved now is between $6 and $8 billion, which falls far short of the $44 billion to $100 billion some had advocated.

As we indicated previously, our model was unable to validate benefits for a stimulus more than about $20 billion. The most significant factor about the new form of the program is that it would offer nothing to incumbents for their normal service expansion, a sticking point for some critics of former proposals. Apart from this, though, we are still hearing that the FCC would change its definition of “broadband” to somewhere between 4 and 8 Mbps, something that would spur competition between telcos and cable.

The UK is also rolling out a universal broadband program. The speeds are low (2 Mbps) but the goal of touching every household is probably more ambitious than those here.