What is ‘Light Touch’ Regulation?

The new FCC Commissioner Ajit Pai has made several speeches in the last month talking about returning to ‘light-touch regulation’ of the big ISPs. He is opposed to using Title II regulation to regulate ISPs and wants to return to what we had in place before that.

His argument is that the Internet has grown and thrived under the prior way that it was regulated. And he has a point – the Internet has largely been unregulated since its inception. And in many ways the industry has even received preferential regulatory treatment such as the way that Congress has repeatedly exempted broadband services from taxes.

It’s certainly hard to argue with the fact that the Internet has thrived. It’s a little harder to draw the conclusion that light regulation was the cause for this, as the Internet has primarily grown because people love the online content they find there.

But we are now at a different point in the broadband industry than we were when it was in its infancy. Consider the following:

  • The vast majority of homes now have broadband. While the industry is still adding customers there aren’t that many more households that can get broadband that don’t have it.
  • Look back just ten years ago and there was a lot more competition for broadband. In 2007 cable modems and DSL served roughly the same number of customers with similar products in terms of speed. But today cable broadband has become a near-monopoly in most markets.
  • One of the drivers towards implementing net neutrality was the explosive growth of video. Just a few years ago there were many reports of the big ISPs slowing down Netflix and other video traffic. The ISPs were trying to force video providers to pay a premium price to gain access to their networks.
  • While broadband prices have held reasonably stable for a decade, both the cable TV and voice products of the large ISPs are under fire and it’s widely expected that the ISPs will have to start raising broadband rates every year to meet earnings expectations.
  • The ISPs have changed a lot over the last decade and all of the big ones now own content and are no longer just ISPs. This gives them competitive leverage over other competitors.
  • The Internet has become a far more dangerous place for consumers. Hacking and viruses run rampant. And the ISPs and web services like Google and Facebook routinely gather data on consumers for marketing purposes.

I would be the first to agree that hands-off regulation probably contributed to the growth of the Internet. But this is no longer the same industry and it’s hard to think that any of the big ISPs or transport providers need any further protection. These are huge companies with big profits.

It seems to me that the Chairman’s use of the term ‘light-touch regulation’ is code for basically having no regulations at all. And since that was the state of the industry just a few years ago we don’t have to stretch the imagination very far to know what that means.

Before Title II regulation the FCC had almost no power over the big ISPs. The most they could do was to encourage them to do the right thing. Interestingly, in the two or three years leading up to the Title II order it was the threat of coming regulation that kept the ISPs in line more than anything else. The FCC tried to intercede in disputes between the ISPs and video providers and found that they had no leverage on the ISPs. The FCC also didn’t like data caps but they had no power to do anything about them. However, since the ISPs feared price regulation under Title II most of them raised data cap limits to defuse the public outcry over the issue.

So my recollection of the past five years is that it was the threat of coming regulation that kept the big ISPs in line. Because at the end of the day a big ISP could challenge the FCC on broadband issues in court and win every time. So the FCC’s best way to influence the ISPs was to hold the threat of regulation over their heads.

If we go back to that same regulatory place (which is what would happen if Title II is reversed) then there will no longer be any leverage at the FCC. ISPs will be free to do almost anything they want in the broadband arena. The FCC has already let them off the hook for consumer privacy, and that is just the beginning.

You can expect without regulation that the ISPs will do all of those things that net neutrality was supposed to protect against. They all say today that will never happen, and that they believe in the core tenets of net neutrality. But I think we all know that is public relations talk and that the big ISPs will pursue anything that will make them money. That means discriminating against traffic and demanding payments from video providers to get unimpeded broadcasts. It means the ISPs favoring their own content over content of others. And it means a return of price caps and broadband price increases with no fear of FCC intervention. I have a hard time thinking that ‘light-touch’ means anything other than ‘no-touch.’

Another Reversal of the FilmOn X Decision

In the continuing saga of looking for alternate ways to get programming to the home, the U.S. Court of Appeals for the Ninth Circuit reversed an earlier ruling that said that FilmOn X had a right to retransmit over-the-air television signals.

FilmOn is a global provider of internet-based programming. They carry over 600 channels of broadcast TV from around the world. They also carry a big library of movies and offer a few of their own theme-based channels (such as Shockmasters that specialize in Alfred Hitchcock movies and television shows).

I won’t go through the history of the company and its attempts to carry the major US networks like ABC, NBC, CBS and Fox. The company was granted the right to carry this content several times in various courts and then had those decisions reversed by other courts. This case marks the third time that the company has been told it doesn’t have the right to retransmit these networks.

The company has tried several ways of delivering these networks to customers. They originally just grabbed the signals out of the air and put them on the internet. When told this wasn’t allowed by the courts they then set up satellite farms to wirelessly send individual signals to customers in a manner similar to Aereo.

This latest ruling said specifically that FilmOn is not eligible to call itself a cable company and to demand that local stations sell them content. That ruling hinged upon testimony provided by the US Patent office that said that such authority for internet-based retransmission was not clear. This differed from an earlier US Supreme Court ruling in the Aereo case that said that internet retransmission was equivalent to cable retransmission.

What’s really at the heart of this case is the definition of who is eligible to retransmit signals from the major over-the-air networks. Congress, through various laws, has given the right (and usually also the obligation) for landline-based cable companies to carry the major networks. Cable companies are obligated to carry those stations that are within certain distances from their customer base.

But over the years those that have been allowed to carry local programming has grown. Within the last decade the satellite cable companies began carrying local stations in many markets. I lived in the Caribbean for many years and some of the cable providers in Puerto Rico and the Virgin Islands somehow obtained the rights to carry some New York City local stations. Today there are a number of OTT providers like Sling TV and Playstation Vue that are carrying local network stations.

But the current rules draw a firm distinction between those that must carry local programming and everybody else. And this gives the flexibility to local stations to decide if they will sell their signal to those without the automatic rights. The big networks have decided to provide programming to Sling TV, but not to FilmOn or Aereo.

Originally both FilmOn and Aereo captured the broadcast signals from the air and put them onto their own networks. That obviously angered the big networks and they got that ruling reversed. But then these providers refused to sell their signal to these two companies. One has to think that was partly done to punish these companies for challenging them, and perhaps partly due to the cable companies who lobbied against competition.

This ruling could really stifle new OTT providers. It seems one part of the OTT appeal is the ability to deliver local network programming as part of their packages. This ruling gives local stations the ability to choose who can or cannot buy their signal, and to thus pick winners and losers in the competitive OTT battlefield.

It’s hard to think that this makes any sense. But Congress or the FCC could clarify this issue if they cared to tackle it. Just over two years ago the FCC put out a Notice for Proposed Rulemaking asking about this exact topic. The FCC wanted to clarify the rights for internet-based programmers to buy content, and in that docket the FCC had suggested that anybody ought to be allowed to buy programming if they agree to pay the market rates for it. But the FCC has never acted in that docket which has led to today’s situation where some providers are given programming and others not. The have-nots aren’t just companies like FilmOn and Aereo, and it’s been reported for years that Apple has been unable to get programming rights.

At some point this needs to be clarified. The last companies we want deciding who can or cannot offer programming services are the major networks, especially since some of them are owned by cable companies. I have no idea if the FCC will address this, but they need to.

Municipal Broadband

One of the fights that I expect to see resurface this year is on the topic of whether local governments should be allowed to build fiber networks and become ISPs. The last FCC tackled this issue in a small way when they granted petitions by Chattanooga, TN and Wilson, NC to expand their broadband networks beyond their electric service territories and municipal boundaries. That ruling got reversed by a US district court and was not appealed by the FCC. But the ruling was of limited scope anyway and only addressed those two cities and didn’t set any precedent for other communities.

There are a lot of moving parts on this topic and it’s hard to know where this might go with the current FCC. This FCC is obviously pro-big ISP and companies like Comcast and AT&T have been staunch opponents of municipal broadband. But by the same token, this administration seems to lean towards states’ rights – and up until now municipal broadband has been regulated on a state-by-state basis.

Interestingly, at the local level municipal broadband has broad bipartisan support. In most communities almost all local politicians of both major parties support local broadband efforts. In my experience in working around the country, the only local political opponents of municipal broadband I have seen are those who are strong opponents of government spending money for anything but essential services. Generally local, state and even federal politicians support local broadband efforts in the communities they serve. I think the broad bipartisan appeal is due to politicians recognizing the strong public support for broadband and that almost every household wants broadband these days.

But there are 22 states with some restrictions on municipal broadband. These range from hurdles that can be overcome, like a referendum, up through states that have a total prohibition on municipal broadband. There has been a continual effort by ALEC (American Legislative Exchange Council) – funded by large corporations – to pass new state restrictions on broadband. But most recent efforts to increase prohibition of local broadband have been rebuffed, because few politicians want to go on the record against broadband. But I would not be surprised to see the big ISPs try to press their current advantage at the FCC and try to pass new national restrictions.

Today I see the municipal world dividing into two separate constituencies – urban and rural. Very few big cities have any desire to become an ISP. But they have legitimate concerns that urban broadband isn’t benefiting everybody. For example, San Francisco and some other cities are unhappy that apartment residents don’t have the same broadband opportunities and options as single family homes. And a lot of cities are still unhappy that after all of these years there is no solution for the digital divide. The FCC said last year that there are still around six million people in pockets of urban areas that don’t have access to broadband that meets the 25 Mbps download standard. But while these issues are viewed as a major problem in urban areas, I don’t see much appetite for big city governments tackling the cost of building broadband networks, which is particularly expensive in cities.

Rural America is a totally different story. We have come to the point where communities without good broadband really suffer. Broadband is not just about Netflix but is necessary to take part in the modern world. Local governments are finding that nobody wants to buy homes without broadband if there is a nearby community with broadband. Worse, communities are seeing businesses move away or bypass them when considering new locations. Lack of broadband puts school kids at a definite disadvantage and there are still a lot of households that drive kids daily to public hotspots just to do homework. And lack of broadband takes away all the opportunities for working at home – probably the biggest area of job growth in rural America.

I see small communities – even down to really small sizes like townships with 700 residents – trying to find ways to build a broadband network. I’ve read a few hundred RFPs from rural communities over the last few years, and probably not more than 5% want to become an ISP. But they will do so if they can’t find a commercial company willing to do it. Rural communities largely favor of public-private partnerships. More and more of them are willing to kick money into a building a network if an ISP will invest in their community and operate a broadband network.

I believe that within a decade we are going to start seeing broadband ‘deserts’ where communities without broadband start withering – just as happened in the past to communities that didn’t get electricity, or that were bypassed by railroads or interstate highways. It’s hard to think that a community today can keep their kids at home without broadband – and this is starting to scare local governments.

I just hope that the FCC doesn’t wade into this battle on the side of the big ISPs. Those big companies are not spending money in rural America – or if they are, it’s only when handed to them by the federal government. And even then they are just putting band-aids on rural broadband rather than building fast new networks. I have a feeling that many of the states that have restrictions on rural broadband are going to start having second thoughts about those restrictions when they realize that broadband is at or near the top of concerns of most of rural America.

There are companies building great rural broadband networks. The small telcos are almost all expanding their service areas to build broadband networks. And many of them are working with or partnering with local governments. But all of these small companies collectively can only solve a relatively small percentage of the rural broadband gap – together they do not have the capacity to borrow anything close to the billions needed to build broadband everywhere. Many rural electric cooperatives are now looking hard at the issue, and they could satisfy another slice of the rural market. But that’s still going to leave millions of rural residents with no broadband on their horizon. And I predict these folks are going to become a vocal constituency that politicians will be unable to ignore.

How Much Does Title II Regulation Matter?

We’ve known since January that new FCC Chairman Ajit Pai has intended to somehow roll back net neutrality. And now he’s started the process and says that he wants the Commission to undo regulation of broadband using Title II rules. I’ve been thinking about this for a while, and today I ask the question if this rollback means the end of the open Internet as a lot of press would have you believe.

It’s not an easy answer. Let me start with a quick review of the history of Title II regulation. The FCC has wanted to somehow regulate some aspects of broadband for a long time. They took a stab at this back in 2010 that established six principles that became known as net neutrality. But the courts eventually said that the FCC didn’t have the authority to enforce these rules. The court order that reversed the FCC interestingly suggested that they only path they saw to accomplish the FCC’s goals was to invoke Title II regulation.

Title II regulation derives from various acts of Congress that were developed in the last century to regulate telephone companies. When these regulations started back in the 1930s, the primary nationwide telephone provider was Ma Bell (AT&T) and the FCC used the new rules to heavily regulate the company. But those old rules don’t really fit broadband and so in the net neutrality order the FCC chose to invoke only the parts of the old rules that applied to broadband – and that is what made the big ISPs the most nervous. This feared that a future FCC could unilaterally elect to invoke other of the old title II rules, including the ability to regulate rates.

So, in a second try at net neutrality the FCC elected Title II regulation and then layered on some new concepts that are referred as bright line rules, which includes no blocking of broadband traffic, no throttling of content and no paid prioritization of traffic. These are the rules that proponents of net neutrality care about, and so the key question going forward is if the FCC can find some way to enforce the bright line rules if they get rid of Title II authority.

Frankly, it will be hard. If net neutrality is reversed we’ll be back to the regulatory regime that was in place before 2015. The FCC largely regulated broadband for a number of years by pressuring ISPs to be good citizens – but the FCC didn’t have the legal authority to make most things stick. Any time a big ISP didn’t like an FCC directive they knew they could take it to court and win due to lack of FCC authority. Everything I have read suggests that without Title II regulation that we’d back to that same place – where the FCC would have no real authority over most issues affecting broadband.

There is only one path that would codify the bright line rules, and that is if Congress would pass legislation requiring the bright line rules. The whole reason that the FCC has no clear authority over broadband is that numerous Congresses have refused to grant it to them. I can remember at least half a dozen attempts by earlier Congresses to create the needed new rules, but there has never been enough support to pass the laws and to overcome any potential vetoes by presidents.

I certainly don’t have any political crystal ball and I have no idea if this Congress or some future one might tackle this issue with legislation. A faction of the current Congress has been making noise about having a new telecom act, and this could be done as part of that effort. But that doesn’t seem likely from the current Congress. Here at the beginning of their new session they appear to favor big corporations like Comcast and AT&T over the public on these issues. It’s probably worth noting that most smaller ISPs already follow the bright line rules and it’s only a handful of the largest companies that create all of the problems.

The biggest fear of ISPs of all size is that telecom issues have become a political ping-pong ball that will bounce back and forth as we change future administrations or future Congresses. That kind of uncertainly plays havoc with creating new products and policies. I think even the largest ISPs would rather keep net neutrality regulated if the alternative was to see the rules radically changed every few years.

There are market forces that could have some impact on net neutrality. One is competition. For example, if one of the large wireless carriers adopts practices that violate net neutrality and that customers don’t like, then one or more of the other carriers will likely compete by promising products that the public wants.

And the public is likely to to have a big influence on combatting bad ISP behavior. Recall that the FCC received far more comments from the public on the net neutrality docket than anything else they had ever considered. And also remember that it was public outcry that stopped companies like Comcast from imposing draconian data caps. There is not a ton of competition in many broadband markets – but there usually is some. As new wireless products eventually come onto the market there will be even more competition. In this new day of social media we’ve started to see that the public can be stirred up to react in strong ways against big companies that have practices they don’t like. So perhaps an engaged customer base and growing competition will work over time to somewhat keep the big ISPs in line. As an ISP customer I’d much rather have firm regulations in place that prohibit bad ISP behavior – but I guess we’ll have to take whatever we can get.

The FCC’s Plan for Net Neutrality

This is already stacking up to be the most disruptive year for telco regulations that I can remember in my career. While 1996 and the Telecom Act brought a lot of changes, it looks like it’s possible that many of the regulations that have been the core of our industry for a long time might be overturned, re-examined or scrapped. That’s not necessarily a bad thing – for example, I think a lot of the blame for the condition of the cable TV market for small providers can be blamed on the FCC sticking with programming rules that are clearly obsolete. 

We now know for sure that one of our newest regulations, net neutrality, is going to largely be done away with at the FCC. FCC Chairman Ajit Pai has now told us about his plans for undoing net neutrality. His plan has several components. First, he proposes to undo Title II regulation of ISPs. Without that form of regulation, net neutrality naturally dies. It took nearly a decade for the FCC to find a path for net neutrality, and Title II was the only solution that the courts would support to give the FCC any authority over broadband.

However, Pai says that he still supports the general concepts of net neutrality such as no blocking of content and no paid priority for Internet traffic. Pai proposes that those concepts be maintained by having the ISPs put them into the ISP’s terms of service. Pai also doesn’t think the FCC should be the one enforcing net neutrality and wants to pass this responsibility to the Federal Trade Commission.

It’s hard to know where to start with that suggested solution. Consider the following:

·         I’m concerned as a customer of one of the big cable companies that removing Title II regulation is going to mean ever-increasing broadband rates, in the same way we’ve seen with cable rates. While the FCC said they didn’t plan to directly regulate data rates, they’ve already put pressure on the big ISPs over the last few years to ease up on data caps. Since the big ISPs have tremendous pressure from Wall Street to always make more, they have little option other than increasing data rates as a way to increase the bottom line.

·         Unless some federal agency proscribes specific and unalterable net neutrality language, every ISP is going to come up with a different way to describe this in their terms of service. This means that the topic can never really be regulated. For example, if somebody was to sue an ISP over net neutrality, any court ruling would be specific to only that ISP since everybody else will be using different language. Regulation requires some level of consistency and if every ISP tackles this in a different way then we have a free for all.

·         Probably the most contentious issue that brought about net neutrality was the big fights between ISPs and companies like Netflix over the interconnection of networks. I recall the FCC saying during some of those cases that they were one of the most challenging technical issues they had ever tackled. It’s hard to think that the FTC is going to have the ability to intercede in disputes of this complexity.

·         The proposed solution presupposes that the FTC will have the budget and the staff to take on something as complex as net neutrality. From what I can see it’s more likely that most federal agencies are going to have to deal with smaller budgets in coming years. And we know from long experience that regulations that are not enforced might as well not exist.

Interestingly, the big ISPs all say that they are not against the general principles of no paid priority and no blocking of content. Of course, they have a different interpretation of what both of those things mean. For example, now that a lot of the big ISPs are also content providers they think they should be able to offer their own content on a zero-rating basis. But overall I believe that they were okay with the net neutrality rules. They don’t like the Title II regulation because they fear rate regulation, but I think they mostly see that an open Internet benefits everybody, including them.

The one thing that big ISPs have always said is that the thing they want most from regulation is consistency and predictability. All of the changes that the FCC are making now are largely due to a change in administration – and in the long run the ISPs know this is not to their benefit. Of course, they have always complained about whatever rules are in place, and frankly that’s part of the industry game that has been around forever. But the last the thing the big ISPs want is for the rules to swing wildly back the other way in a future administration. That creates uncertainty. It’s hard to design products or to devise a 5-year business plan if you don’t know the rules that govern the industry.

The End of Robocalls?

The FCC took action recently to block certain kinds of robocalls. These are the automated calls we are all familiar with where you hear a recording when you pick up the phone. The FCC estimates that there are over 2.4 billion robocalls per month. If you read the news articles that came out after the FCC order you would assume that this order means the end of all robocalls – but it doesn’t.

The FCC action is intended to eliminate robocalls that come from spoofed sources. Spoofing is when the caller hides their phone number or changes the originating number for caller ID. Callers have numerous reasons to spoof calls. Some spoofers are scammers and use robocalls to initiate fraud. For example, the IRS says that over $26 M in fraud is done each year from robocalls posing as tax collection calls. Other callers use spoofing to avoid the Do-Not-Call rules which is supposed to prevent solicitation calls to people who have elected to not receive them. If the number that shows up on caller ID is wrong, then there is no way for the FCC to catch or fine a caller from violating those calling rules.

The FCC accepted a proposal from a ‘strike force’ of large companies like AT&T, Google, Apple and Comcast to tackle the issue. Some spoofed calls will be relatively easy to block, like when spoofers use numbers that can’t be real such as 000-000-0000. But spoofers also use disconnected or unused numbers and these will be more challenging to find. A spoofer could use a legitimate number for a short time and abandon it before being blocked. Spoofing is similar to computer hacking in that it’s a game of cat and mouse – and you’d expect spoofers to figure ways around any schemes to catch them. It will be interesting to see how effective the strike force is at blocking spoofed calls.

But it’s important to remember that a lot of robocalls are legitimate and will continue. First, anybody is allowed to make a legitimate robocall to people who are not on the Do-Not-Call list. But even if you are on that list, all sorts of entities are allowed to call you. For example, any merchant like a bank, credit card, insurance company, cell phone provider, etc. is allowed to call their own customers. Government are allowed to call citizens and that means that political robocalls are legitimate as well as calls from other parts of the government. Certainly nobody is against localities that send out robocalls to warn of tornados, flooding or hurricane evacuations.

And some robocalls are useful. For example, the high school where our daughter goes calls once a week to tell us about things going on at the school. For the most part these are things that you would never hear about from your child.

There is no doubt that robocalls are a huge issue. The FCC says they are by far the number one type of complaint they get. I haven’t had a landline in twenty years, but the last time I spent a few days at my mother-in-law’s house, who still has a landline, I was amazed at the number of solicitation calls she got per day – both robocalls and from live callers. She’s on the Do-Not-Call list and still gets 5 – 10 calls per day.

I think a lot of people will be surprised to find that the FCC’s action won’t stop legitimate robocalls – and that has to be a huge percentage of the calls made. Your bank and other vendors that call you are doing so legitimately and do not try to hide who they are when they call. And I think that when that sinks in that the public they will be disappointed. That fault lies with the many misleading news articles declaring the end of robocalling. The FCC was clear in its own declaration that this was an action taken to try to eliminate scam calls. But if history has taught us anything it is that scammers will always find a way to do what they do. This order may slow scammers down, but they will find other ways to scam people – including figuring out how to still call using robocalls. I hope the strike force can find a way to stop this, but my guess is they will just slow it down, at best.

Who Wins with Cable Deregulation?

There has been a lot of press lately discussing what might happen if the FCC does away with Title II regulation of broadband. But broadband isn’t the only battle to be fought and we are also in for big changes in the cable industry. Since our new FCC is clearly anti-regulation I think the future of cable TV is largely going to be won by whoever best copes with a deregulated cable world.

Cable companies today are governed by arcane rules that rigidly define how to provide terrestrial cable TV. These rules, for example, define the three tiers of cable service – basic, expanded basic and premium – and it is these rules that have led us to the big channel line-ups that are quickly falling out of favor. Most households watch a dozen or so different channels regularly and even big cable users rarely watch more than 30 channels – but yet we have all been sucked into paying for 150 – 300 channel line-ups.

It’s likely that the existing rules governing cable will either be relaxed or ignored by the FCC. A lot of the cable rules were defined by Congress in bills like the Telecommunications Act of 1996, so only Congress can change those rules. But the FCC can achieve deregulation by inaction. Already today we see some of the big cable providers violating the letter of those rules. For example, Verizon has a ‘skinny’ package that does not fit into the defined FCC definition of the structure of cable tiers. The FCC has turned a blind eye to these kinds of changes, and if they are more overt about this then we can expect cable providers everywhere to start offering line-ups people want to watch – and at more affordable prices if the cable companies can avoid paying for networks they don’t want to carry.

The cable companies are now in a battle with the OTT providers like Netflix, Sling TV and others. It’s clear to the cable companies that if they don’t fight back that they are going to bleed customers faster and faster, similar to what happened to landline voice.

One way cable companies can fight back is to introduce programming packages that are similar to what the OTT providers are offering. This is going to require a change in philosophy at cable companies because the larger companies have taken to nickel and diming customer to death in the last few years. They sell a package at a low advertised price and then load on a $10 settop box fee, a number of other fees that are made to look like taxes, and the actual price ends up $20 higher than advertised. That’s not going to work when competing head-to-head with an OTT competitor that doesn’t add any fees.

The cable companies are also going to have to get nimble. I can currently connect and disconnect from a web service like Sling TV at will. Two or three clicks and I can disconnect. And if I come back they make it easy to reconnect. The cable companies have a long way to go to get to this level of customer ease.

Of course, the big ISPs can fight back in other ways. For example, I’ve seen speculation that they will try to get taxes levied on OTT services to become more price competitive. Certainly the big ISPs have a powerful lobbying influence in Washington and might be able to pull that off.

There is also speculation that the big ISPs might try to charge ‘access fees’ to OTT providers. They might try to charge somebody like Netflix to get to their customers, much in the same manner that the big telcos charge long distance carriers for using their networks. That might not be possible without Congressional action, but in today’s political world something like this is conceivable.

Another tactic the cable companies could take would be to reintroduce low data caps. If the FCC eliminates Title II regulation that is a possibility. The cable companies could make it costly for homes that want to watch a lot of OTT content.

And perhaps the best way for the cable companies to fight back against OTT is to join them. Just last week Comcast announced that it will be introducing its own OTT product. The cable companies already have the programming relationships – this is what made it relatively easy for Dish Network to launch Sling TV.

It’s impossible to predict where this might all go. But it seems likely that we are headed towards a time of more competition – which is good for consumers. But some of these tactics could harm competition and make it hard for OTT providers to be profitable. Whichever way it goes it’s going to be an interesting battle to watch.

Is Ultrafast Broadband a Novelty?

FCC Commissioner Michael O’Reilly recently said that ultrafast broadband is a novelty. He specifically said, “The outcry for things like ultrahigh-speed service in certain areas means longer waits for those who have no access or still rely on dialup service, as providers rush to serve the denser and more profitable areas that seek upgrades to this level. . . Today, ultrafast residential service is a novelty and good for marketing, but the tiny percentage of people using it cannot drive our policy decisions.

These statements are not surprising coming from Commissioner O’Reilly. He voted two years ago against setting the current 25/3 Mbps definition of broadband and thought that number was too high. In a dissent to that ruling he said the 25/3 definition was unrealistically high and said, “While the statute directs us to look at “advanced” telecommunications capability, this stretches the concept to an untenable extreme. Some people, for example, believe, probably incorrectly, that we are on the path to interplanetary teleportation. Should we include the estimated bandwidth for that as well? “

I don’t understand why Commissioner O’Reilly is still taking this position today. Most of the big ISPs have climbed on board the big bandwidth wagon. Comcast and Cox and other cable companies are upgrading their cable networks to DOCSIS 3.1 in order to provide gigabit speeds. CenturyLink built fiber past almost a million homes last year. Altice says they are tearing out their coaxial networks and replacing them with fiber. AT&T claims to have plans to build fiber to pass 12 million homes and businesses. Numerous small overbuilders around the country are offering gigabit speeds.

You don’t have to go back too many years to a time when the big ISPs all agreed with O’Reilly. The big cable companies in particular repeatedly made it clear that people didn’t need any more bandwidth than what the cable companies were delivering. The cable companies fiercely resisted increasing data speeds for many years and many cable networks kept data speeds in the 6 Mbps download range even though their networks were capable of delivering higher speeds without the need for upgrades.

Part of the old reasoning for that position was that the ISPs were afraid that if they gave people faster speeds then they would then use those speeds and swamp the networks. But Google came along and upset the whole ISP world by offering an inexpensive gigabit product. The cable companies in cities like Kansas City and Austin had little choice and increased speeds across the board. And once they increased in those markets they had little choice but to improve speeds everywhere.

The cable companies found the same thing that all of my clients have found when increasing data speeds. Generally a unilateral increase in customer data speeds does not cause a big increase in data usage unless the customers were throttled and constrained before the increase. Most customers don’t use any more data when speeds get faster – they just enjoy the experience more.

Of course, customers want to download more data every year and the amount of total download doubles about every three years. But that phenomenon is separate from data speeds. All of the things we do on the web requires more bandwidth over time. You scroll through a Facebook page today and you encounter dozens of videos, for example. But having faster speeds available does not directly lead to increased data usage. Speed just gets the things done faster and more enjoyably.

Commissioner O’Reilly thinks it would be better if ISPs would somehow invest to bring mediocre data speeds to everybody in the country rather than investing in ultrafast speeds to urban areas. No doubt that would make the FCC’s life easier if rural people all had broadband. But it’s fairly obvious that big ISPs wouldn’t be investing in their urban networks unless those investments made them more money. And it’s just as obvious that the big ISPs have figured out that they can’t make the profits they want in rural America.

I’m not sure what constituency Commissioner O’Reilly is trying to please with these statements. Certainly any urban customers that are happily buying the ultrafast speeds he is referring to. Certainly the ISPs investing in faster data speeds think it’s a good business decision.

I think Commissioner O’Reilly and others at the FCC would like to see the rural broadband issue go away. They hope that the CAF II investments being made by the big telcos will make the rural areas happy and that the issue will evaporate. They want to be able to claim that they fixed the broadband problems in America by making sure that everybody gets at least a little bit of bandwidth.

But it’s not going to work that way. Certainly many rural customers who have had no broadband will be happy to finally get speeds of 10 – 15 Mbps from the CAF II program. Those kind of speeds will finally allow rural homes to take some part in the Internet. But then those folks will look around and see that they still don’t enjoy the same Internet access as folks in the urban areas. Instead of solving the rural broadband problem I think the CAF II program is just going to whet the rural appetite for faster broadband and then rural folks will begin yelling even louder for better broadband.

A Regulatory Definition of Broadband

In one of the more bizarre filings I’ve seen at the FCC, the National Cable Television Association (NCTA) asked the FCC to abandon the two-year old definition of broadband set at 25 Mbps down and 3 Mbps up. NCTA is the lobbying and trade association of the largest cable companies like Comcast, Charter, Cox, Mediacom, Altice, etc. Smaller cable companies along with smaller telephone companies have a different trade association, the American Cable Association (ACA). This was a short filing that was a follow-up to an ex parte meeting, and rather than tell you what they said, the gist of the letter is as follows:

We urged the Commission to state clearly in the next report that “advanced telecommunications capability” simply denotes an “advanced” level of broadband, and that the previously adopted benchmark of 25 Mbps/3 Mbps is not the only valid or economically significant measure of broadband service. By the same token, we recommended that the next report should keep separate its discussion of whether “advanced telecommunications capability” is being deployed in a reasonable and timely manner, on the one hand, and any discussion of the state of the “broadband” marketplace on the other.  We noted that the next report presents an opportunity for the Commission to recognize that competition in the broadband marketplace is robust and rapidly evolving in most areas, while at the same time identifying opportunities to close the digital divide in unserved rural areas.

The reason I call it bizarre is that I can’t fathom the motivation behind this effort. Let me look at each of the different parts of this statement. First, they don’t think that the 25/3 threshold is the ‘only valid or economically significant measure of broadband service.’ I would think the 25/3 threshold would please these companies because these big cable companies almost universally already deploy networks capable of delivering speeds greater than that threshold. And in many markets their competition, mostly DSL, does not meet these speeds. So why are they complaining about a definition of broadband that they clearly meet?

They don’t offer an alternative standard and it’s hard to think there can be a standard other than broadband speed. It seems to me that eliminating the speed standard would help their competition and it would allow DSL and wireless WISPs to claim to have the same kind of broadband as a cable modem.

They then ask the FCC to not link discussions about broadband being deployed in a reasonable and timely manner with any actual state of the broadband marketplace. The FCC has been ordered by Congress to report on those two things and it’s hard to think of a way to discuss one without the other. I’m not sure how the FCC can talk about the state of the broadband industry without looking at the number of consumers buying broadband and showing the broadband speeds that are made available to them. Those FCC reports do a great job of highlighting the regional differences in broadband speeds, and more importantly the difference between urban and rural broadband speeds.

But again, why do the cable companies want to break that link in the way that the FCC reports broadband usage? The cable companies are at the top of the heap when it comes to broadband speeds. Comcast says they are going to have gigabit speeds available throughout their footprint within the next few years. Cox has announced major upgrades. Even smaller members like Altice say they are upgrading to all fiber (which might get them tossed out of NCTA). These FCC reports generally highlight the inadequacy of DSL outside of the cable company footprints and don’t show urban broadband in a bad light.

Finally, they want the FCC to recognize that there is robust competition in broadband. And maybe this is what is bothering them because more and more the cable companies are being referred to as monopolies. The fact is there is not robust competition for broadband. Verizon has FiOS in the northeast and a few other major cities have a fiber competitor in addition to the cable and telephone incumbents. But in other markets the cable companies are killing the telephone companies. Cable companies continue to add millions of new customers annually at the expense of DSL. AT&T and Verizon are currently working to tear down rural copper, and in another decade they will begin tearing down urban copper. At that point the cable companies will have won the landline broadband war completely unless there is a surprising upsurge in building urban fiber.

The only other reason the cable companies might be asking for this is that both Comcast and Charter are talking about getting into the wireless business. As such they could begin selling rural LTE broadband – a product that does not meet the FCC’s definition of broadband. I can’t think of any other reason, because for the most part the big cable companies have won the broadband wars in their markets. This filing would have been business as usual coming from the telcos, but it’s a surprising request from the cable companies.

The State of New York vs. Charter

Scale_of_justice_2_newEvery once in a while in this industry you come across a story about one of the big cable companies that just makes you shake your head. There is such a story right now where the New York State attorney general, Eric Schneiderman, has sued Charter on behalf of its 2.5 million data customers in the state.

The issue goes back to 2012 when the company was still Time Warner Cable. At that time there were a lot of complaints from customers saying that they were not getting the data speeds they were paying for. In 2013, in association with Internet speed tests conducted by the FCC, it was determined that Time Warner had widely deployed cable modems and WiFi routers that were not capable of delivering speeds of even 20 Mbps.

In July of 2013, Time Warner promised the FCC that it would replace and upgrade all customer modems in the state and would also make other system upgrades that would increase speeds, such as reducing the size of the neighborhood nodes.

Here is where the puzzling part comes in. The FCC never retested, which is normal, and instead relied on Time Warner’s promise that they would fix the problems and increase speeds. But it turns out that Time Warner didn’t make any of the promised upgrades. They didn’t replace customer modems. In fact, they routinely recycled the bad modems back into service when they were returned by customers.

Since then Time Warner (and now Charter) has advertised even faster speeds, yet none of the customer modems are able to deliver the speeds that the company is selling. The lawsuit says there are now over 250,000 customers who are paying for speeds between 200 Mbps and 300 Mbps, but who still have the old inadequate modems that get speeds under 20 Mbps.

To add insult to injury, the company has been charging $10 per month to customers to lease the old modems (at least that’s the current lease rate). Considering that these modems don’t generally cost the cable company even $100, these customers have paid enough to have replaced these modems multiple times since the problem was first caught.

Time Warner is also being accused in the lawsuit of manipulating the FCC speed tests in 2013 to show faster results. They did this by taking speed tests at times when there was not much demand on their networks, like the middle of the night.

Finally, the company has been accused of purposefully providing inadequate backbone so that Internet traffic was delayed and slowed down getting onto their network. This means they did not provide big enough data connections to the outside world for things like Netflix or for general Internet access.

Here is the lawsuit filing. It’s an interesting and easy read and is not overly technical. I know that big companies hate to spend capital dollars that they don’t think are necessary. But in this case they got caught providing old and inadequate modems five years ago and since then did nothing to fix the problems. We know from experience that even when companies are caught like this that they don’t usually undertake a crash repair program. But if Time Warner would have implemented some reasonable plan to upgrade the network and to replace the bad modems over time there probably would not be this big lawsuit today. What’s puzzling is how the whole management chain at the company decided to do nothing. They denied a direct FCC order and also continued to get piles of customer complaints.

The lawsuit does not name a specific amount of damages, but one has to think it’s going to be a big number. The lawsuit asks for ‘injunctive and equitable relief’, meaning the return of customer payments, as well as civil penalties, meaning extra damages. If Charter has the same kind of customer penetrations we see elsewhere with cable companies – 60% to 70% of the market – it’s going to be interesting to see how they find a jury for this trial.