When Customers Use Their Data

In a recent disturbing announcement ,Verizon Wireless will be disconnecting service to 8,500 rural customers this month for using too much data on their cellphones. The customers are scattered around 13 states and are a mix those with both unlimited and limited data plans.

Verizon justifies this because these customers are using data where Verizon has no direct cell towers, meaning that these customers are roaming on cellular data networks owned by somebody else. Since Verizon pays for roaming the company say that these customers are costing them more in roaming charges than what the company collects in monthly subscription fees.

Verizon may well have a good business case for discontinuing these particular data customers if they are losing money on each customer. But the act of disconnecting them opens up a lot of questions and ought to be a concern to cellular customers everywhere.

This immediately raises the question of ‘carrier of last resort’. This is a basic principle of utility regulation that says that utilities, such as traditional incumbent telephone companies, must reasonably connect to everybody within their service territory. Obviously cellular customers don’t fall under this umbrella since the industry is competitive and none of the cellular companies have assigned territories.

But the lines between cellular companies and telcos are blurring. As AT&T and Verizon take down rural copper they are offering customers a wireless alternative. But in doing so they are shifting these customers from being served by a regulated telco to a cellular company that doesn’t have any carrier of last resort obligations. And that means that once converted to cellular that Verizon or AT&T would be free to then cut these customers loose at any time and for any reason. That should scare anybody that loses their rural copper lines.

Secondly, this raises the whole issue of Title II regulation. In 2015 the FCC declared that broadband is a regulated service, and that includes cellular data. This ruling brought cable companies and wireless companies under the jurisdiction of the FCC as common carriers. And that means that customers in this situation might have grounds for fighting back against what Verizon is doing. The FCC has the jurisdiction to regulate and to intervene in these kinds of situations if they regulate the ISPs as common carriers. But the current FCC is working hard to reverse that ruling and it’s doubtful they would tackle this case even if it was brought before them.

Probably the most disturbing thing about this is that it’s scary for these folks being disconnected. Rural homes do not want to use cellular data as their only broadband connection because it’s some of the most expensive broadband in the world. But many rural homes have no choice since this is their only broadband alternative to do the things they need to do with broadband. While satellite data is available almost everywhere, the incredibly high latency on satellite data means that it can’t be used for things like maintaining a connection to a school server to do homework or to connect to a work server to work at home.

One only has to look at rural cellular networks to understand the dilemma many of these 8,500 households might face. The usable distance for a data connection from a cellular tower is only a few miles at best, much like the circles around a DSL hub. It is not hard to imagine that many of these customers actually live within range of a Verizon tower but still roam on other networks.

Cellular roaming is an interesting thing. Every time you pick up your cellphone to make a voice or data connection, your phone searches for the strongest signal available and grabs it. This means that the phones of rural customers that don’t live right next to a tower must choose between competing weaker signals. Customers in this situation might be connected to a non-Verizon tower without it being obvious to them. Most cellphones have a tiny symbol that warns when users are roaming, but since voice roaming stopped being an issue most of us ignore it. And it’s difficult or impossible on most phones to choose which tower to connect to. Many of these customers being disconnected might have always assumed they actually were using the Verizon network. But largely it’s not something that customers have much control over.

I just discussed yesterday how we are now in limbo when it comes to regulating the broadband practices of the big ISPs. This is a perfect example of that situation because it’s doubtful that the customers being disconnected have any regulatory recourse to what is happening to them. And that bodes poorly to rural broadband customers in general – just one more reason why being a rural broadband customer is scary.

Broadband Regulation is in Limbo

We have reached a point in the industry where it’s unclear who regulates broadband. I think a good argument can be made that nobody is regulating broadband issues related to the big ISPs.

Perhaps the best evidence of this is a case that is now in Ninth Circuit Court of Appeals in San Francisco. This case involves a 2014 complaint against AT&T by the Federal Trade Commission based on the way that AT&T throttled unlimited wireless data customers. The issue got a lot of press at the time when AT&T started restricting data usage in 2011 for customers when they hit some arbitrary (and unpublished) data threshold in a month. Customers got shuttled back to 3G and even 2G data speeds and basically lost the ability to use their data plans. The press and the FTC saw this as an attempt by AT&T to drive customers off their grandfathered unlimited data plans (which were clearly not unlimited).

AT&T had argued at the FTC that they needed to throttle customers who use too much data as a way to manage and protect the integrity of their networks. The FTC didn’t buy this argument ruled against AT&T. As they almost always do the company appealed the decision. The District Court in California affirmed the lower court ruling and AT&T appealed again, which is the current case in front of the Ninth Circuit. AT&T is making some interesting claims in the case and is arguing that the Federal Trade Commission rules don’t allow the FTC to regulate common carriers.

There are FTC rules called the ‘common carrier exemption’ that were established in Part 5 of the original FTC Act that created the agency. These exemptions are in place to recognize that telecom common carriers are regulated instead by the FCC. There are similar carve-outs in the FTC rules for other industries that are regulated in part by other federal agencies.

The common carrier exemption doesn’t relieve AT&T and other telecom carriers from all FTC regulation – it just means that the FTC can’t intercede in areas where the FCC has clear jurisdiction. But any practices of telecom carriers that are not specifically regulated by the FCC then fall under FTC regulations since the agency is tasked in general with regulating all large corporations.

AT&T is making an interesting argument in this appeals case. They argue since they are now deemed to be a common carrier for their data business under the Title II rules implemented in the net neutrality order that they should be free of all FTC oversight.

But there is an interesting twist to this case because the current FCC filed an amicus brief in the appeal saying that they think that the FTC has jurisdiction over some aspects of the broadband business such as privacy and data security issues. It is this FCC position that creates uncertainty about who actually regulates broadband.

We know this current FCC wants to reverse the net neutrality order, and so they are unwilling right now to tackle any major issues that arise from those rules. In this particular case AT&T’s throttling of customers occurred before the net neutrality decision and at that time the FCC would not have been regulating cellular broadband practices.

But now that the FCC is considered to be a common carrier it’s pretty clear that the topic is something that the FCC has jurisdiction of today. But we have an FCC that is extremely reluctant to take on this issue because it would give legitimacy to the net neutrality rules they want to eliminate.

The FCC’s position in this case leads me to the conclusion that, for all practical purposes, companies like AT&T aren’t regulated at all for broadband issues. The prior FCC made broadband a common carrier service and gave themselves the obligation to regulate broadband and to tackle issues like the one in this case. But the new FCC doesn’t want to assert that authority and even goes so far as to argue that many broadband related issues ought to be regulated by the FTC.

This particular case gets a little further muddled by the timing since AT&T’s practices predate Title II regulation – but the issue at the heart of the case is who regulates the big ISPs. The answer seems to be nobody. The FCC won’t tackle the issue and AT&T may be right that the FTC is now prohibited from doing so. This has to be a huge challenge for a court because they are now being asked who is responsible for regulating the case in front of them. That opens up all sorts of possible problems. For example, what happens if the court rules that the FCC must decide this particular case but the agency refuses to do so? And of course, while this wrangling between agencies and the courts is being settled it seems that nobody is regulating AT&T and other broadband providers.

Big ISPs Want to be Regulated

I’ve always contended that the big ISPs, regardless of their public howling, want to be regulated. It is the nature of any company that is regulated to complain about regulation. For the last decade as AT&T and Verizon made the biggest telecom profits ever they have released press release after press release decrying how regulation was breaking their backs. The big telcos and cable companies spent the last few years declaring loudly that Title II regulation was killing incentives to make investments, while spending record money on capital.

A few months ago Comcast, Charter, and Cox filed an amicus brief in a lawsuit making its way through the US. Court of Appeals for the Ninth Circuit. In that brief they asked the federal appeals court to restore the Federal Trade Commission’s jurisdiction over AT&T. The specific case being reviewed had to do with deceptive AT&T marketing practices when they originally offered unlimited cellular data plans. It turns out that AT&T throttled customer speeds once customers reached the meager threshold of 3 – 5 GB per month.

In 2014 the FTC sued AT&T for the practice and that’s the case now under appeal. It’s a bit extraordinary to see big ISPs siding with the government over another ISP, and the only reason that can be attributed to the suit is that these companies want there to be a stable regulatory environment. In the brief the cable companies expressed the desire to “reinstate a predictable, uniform, and technology-neutral regulatory framework that will best serve consumers and businesses alike.”

That one sentence sums up very well the real benefit of regulation to big companies. As much as they might hate to be regulated, they absolutely hate making huge investments in new product lines in an uncertain regulatory environment. When a big ISP knows the rules, they can plan accordingly.

One scenario that scares the big ISPs is living in an environment where regulations can easily change. That’s where we find ourselves today. It’s clear that the current FCC and Congress are planning on drastically reducing the ‘regulatory burden’ for the big ISPs. That sounds like an ideal situation for the ISPs, but it’s not. It’s clear that a lot of the regulations are being changed for political purposes and big companies well understand that the political pendulum swings back and forth. They dread having regulations that change with each new administration.

We only have to go back a few decades to see this in action. The FCC got into and then back out of the business of regulating cable TV rates several times in the late 1970s and the 1980s. This created massive havoc for the cable industry. It created uncertainty, which hurt their stock prices and made it harder for them to raise money to expand. The cable industry didn’t become stable and successful until Congress finally passed several pieces of cable legislation to stop these regulatory swings.

Big companies also are not fond of being totally deregulated. That is the basis for the amicus brief in the AT&T case. The big ISPs would rather be regulated by the FTC instead of being unregulated. The FTC might occasionally slap them with big fines, but the big companies are smart enough to know that they have more exposure without regulations. If the FTC punishes AT&T for its marketing practices that’s the end of the story. But the alternative is for AT&T to have to fend off huge class action lawsuits that will seek damages far larger than what the FTC will impose. There is an underlying safety net by being regulated and the big ISPs understand and can quantify the risk of engaging in bad business practices.

In effect, as much as they say that hate being regulated, big companies like the safety of hiding behind regulators who protect them as much as they protect the public. It’s that safety net that can allow a big ISP to invest billions of capital dollars.

I really don’t think the FCC is doing the big ISPs any favors if they eliminate Title II regulations. Almost every big ISP has said publicly that they are not particularly bothered by the general principles of net neutrality – and I largely believe them. Once those rules were put into place the big companies made plans based upon those rules. The big ISPs did fear that some future FCC might use Title II rules to impose rate regulation – much as the disaster with the cable companies in the past. But overall the regulation gives them a framework to safely invest in the future.

I have no doubt that the political pendulum will eventually swing the other way – because it always does. And when we next get a democratic administration and Congress, we are likely to see much of the regulations being killed by the current FCC put back into place by a future one. That’s the nightmare scenario for a big ISP – to find that they have invested in a business line that might be frowned upon by future regulators.

The Consequences of Killing Network Neutrality

It looks almost certain that the FCC is going to kill Title II regulation, and with it net neutrality. Just as happened the last go around the FCC has already received millions of comments asking it to not kill net neutrality. And if you read all of the press you find dire predictions of the consequences that will result from the death of net neutrality. But as somebody who has a decent understanding of the way that broadband and the associated money flows in the industry I don’t think it will be as dire as critics predict, and I think there will also be unanticipated consequences.

Impact on Start-ups – the Cost of Access. One of the dire predictions is that a new start-up company that uses a lot of broadband – the next Netflix, Vine or Snapchat – won’t be able to gain the needed access with carriers, or that their access will be too expensive. Let me examine that conjecture:

  • Let me follow the flow of money that a start-up needs to spend to be on the web. Their direct largest cost is the cost of uploading their content onto the web through an ISP. The pricing for bulk access has always favored the bigger players and it’s more expensive today for a company that wants to upload a gigabyte per day compared to somebody that uploads a terabyte.
  • The normal web service doesn’t pay anything to then deliver their content to customers. Customers buy various speeds of download and use the product at will. Interestingly, it’s only the largest content providers that might run into issues without net neutrality. The big fights a few years ago on this issue were between Netflix and the largest ISPs. The Netflix volumes had grown so gigantic that the big ISPs wanted Netflix to somehow contribute to the big cost of electronics the ISPs were expending to distribute the service. The only way that there would be some cost to start-ups to terminate content would be if the ISPs somehow created some kind of access fee to get onto their network. But that sounds largely impractical. Bytes are bytes and they don’t exactly contain the name and billing address of the party that dumped the traffic on the web.
  • Some content like live video is a complicated web product. You can’t just dump it on the web at one location in the country and hope it maintains quality everywhere it ends up. There are already companies that act as the intermediary for streaming video to carry out the caching and other functions needed to maintain video quality. Even the big content providers like SlingTV don’t tackle this alone.
  • Finally, there will arise new vendors that will assist start-ups by aggregating their traffic with others. We already see that today with Amazon which is bundling the content of over 90 content providers on its video platform. The content providers benefit by taking advantage of the delivery mechanisms that Amazon has in place. This is obviously working and it’s hard to see how the end of net neutrality would stop somebody like Amazon from being a super-bundler. I think wholesalers like Amazon would fill the market gap for start-ups.

Paid Prioritization. The other big worry voiced by fans of Title II regulation is that it stops paid prioritization, or Internet fast lanes. There are both good and bad possible consequences of that.

  • It’s silly to pretend that we don’t already have significant paid prioritization – it’s called peering. The biggest content providers like Google, Netflix and Amazon have negotiated peering arrangements where they deliver traffic directly to ISPs in specific markets. The main benefits of this for the content providers is that it reduces latency and delay, but it also saves them from buying normal uploads into the open Internet. For example, instead of dumping content aimed at Comcast in Chicago onto the open web these big companies will directly deliver the Chicago-bound traffic to Comcast. These arrangements save money for both parties. And they are very much paid prioritization since smaller content providers have to instead route through the major Internet POPs.
  • On the customer side of the network, I can envision ISPs offering paid prioritization as a product to customers. Customer A may choose to have traffic for a medical monitoring company always get a priority, customer B might choose a gaming service and customer C might choose a VoIP connection. People have never had the option of choosing what broadband connections they value the most and I could see this being popular – if it really works.
  • And that leads into the last big concern. The big fear about paid prioritization is that any service that doesn’t have priority is going to suffer in quality. But will that really happen? I have a fairly good broadband connection at 60 Mbps. That connection can already deliver a lot of different things at the same time. Let’s say that Netflix decided to pay my ISP extra to get guaranteed priority to my house. That might improve my Netflix reception, although it already seems pretty good. But on my 60 Mbps connection would any other service really suffer if Netflix has priority? From what I understand about the routing of Internet traffic, any delays caused by such prioritization would be miniscule, probably in microseconds, which would be nearly imperceptible to me. I can already crash my Internet connection today if I try to download more content than it can handle at the same time. But as long as a customer isn’t doing that, I have a hard time seeing how prioritization will cause much problem – or even why somebody like Netflix would pay an ISP extra for it. They are already making sure they have a quality connection through peering and other network arrangements and I have a hard time understanding how anything at the customer end of the transaction would make much difference. This could be important for those on slow broadband connections – but their primary problem is lack of broadband speed and they are already easily overwhelmed by too much simultaneous traffic.

I am not as fearful of the end of net neutrality as many because I think the Internet operates differently than what people imagine. I truly have a hard time seeing how the ending net neutrality will really change the way I receive broadband at my home. However, I do have big concerns about the end of Title II regulation and fear things like data caps and of my ISP using my personal information. I think most of folks real concern is about Title II regulation, but that’s too esoteric for most folks and we all seem to be using the term ‘network neutrality’ as a substitute for that.

False Advertising of Broadband Speeds

There is another new and interesting regulatory battle happening now at the FCC. The lobbying groups that represent the telcos and cable company – NCTA, USTelecom and the ACA – are asking the FCC to make it harder for states to sue ISPs for making misleading claims about broadband speeds.

This request was brought about from a lawsuit by the State of New York against Charter Spectrum. I wrote about that case in a March blog and won’t repeat all of the particulars. Probably the biggest reason for the suit was that Charter had not made the major upgrades and improvements that they had promised to the State. But among the many complaints, the one that worried the other ISPs the most was that Charter was not delivering the speeds that it was advertising.

This is an issue that affects many ISPs, except perhaps for some fiber networks that routinely deliver the speeds they advertise. Customer download speeds can vary for numerous reasons, with the primary reason being that networks bog down under heavy demand. But the New York complaint against Charter was not about data speeds that slowed down in the evenings; rather the complaint was that Charter advertised and sold data products that were not capable of ever reaching the advertised speeds.

Charter is perhaps the best poster child for this issue, not just because of the New York case. On their national website they only advertise a speed of 60 Mbps download, with the caveat that this is an ‘up to’ speed. I happen to have Charter in Asheville, NC and much of the time I am getting decent speeds at or near to the advertised speed. But I work all over the country and I am aware of a number of rural Charter markets where the delivered speeds are far below that 60 Mbps advertised speed. These markets appear to be like the situation in New York where the State accuses Charter of false advertising.

The filings to the FCC want a clarification that what Charter is doing is okay and that ISPs ought to be exempt from these kinds of suits. They argue that the ISP industry have always sold ‘up to’ speeds and that what they are doing fits under existing FCC regulations. And this is where it gets murky.

In the FCC’s first attempt to introduce net neutrality the FCC ordered ISPs to disclose a lot of information to customers about their broadband products, including telling them the real speeds they could expect for their purchased broadband product. Much of that first net neutrality decision was struck down due to a successful lawsuit by Verizon that claimed that the FCC didn’t have the authority to regulate broadband as laid forth by that order.

But not all of that first order was reversed by the lawsuit, including the provision that ISPs had to disclose information about their network performance, fees, data caps, etc. But since most of the original net neutrality order was reversed the FCC put the implementation of the remaining sections on hold. Last year the FCC finally decided to implement a watered-down version of the original rules, and in February of this year the FCC excused smaller ISPs from having to make the customer disclosures. But the large ISPs are now required to report specific kinds of information to customers. The ISPs interpret the current FCC rules to mean that selling ‘up to’ data products is acceptable.

Where this really gets interesting from a regulatory perspective is that the FCC might not long have the authority to deal with these sorts of requests from the ISPs. The bulk of the FCC’s authority to regulate broadband (and thus to potentially shield the ISPs in this case if they are complying with FCC regulations) comes from Title II regulation.

But the FCC seems likely to relinquish Title II authority and they have suggested that the authority to regulate ISP products should shift to the Federal Trade Commission. Unfortunately for the ISPs, the FTC has more often sided with consumers over big companies.

Since the FCC is in the process of eliminating Title II authority I wonder if they will even respond to the ISPs. Because to clarify that advertising ‘up to’ products is acceptable under Title II would essentially mean creating a new broadband regulation, something this FCC seems loathe to do. I’ve seen several other topics just recently that fall into this same no-man’s land – issues that seem to require Title II authority in order for the FCC to have jurisdiction. As much as the big ISPs complained about Title II, one has to wonder if they really want it to go away? They mostly feared the FCC using Title II to address pricing issues, but there are a lot of other issues, like this request, where broadband regulation by the FCC might be in the ISPs’ favor.

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.’

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.

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.

Regulation and Capital Spending

At the recent Mobile World Congress, FCC Chairman Ajit Pai said that one of his reasons he wants to reverse Title II regulation is that it has had a drastic impact on capital spending by ISPs. He says that the new regulations have been a disincentive for the ISPs to invest in broadband.

The Chairman bases that position on statistics provided by USTelecom which are based upon work done by Hal Singer, a Senior Fellow at GW Institute for Public Policy. Mr. Singer created the following table that shows the domestic capital spending for the big ISPs for 2014 through 2016. And indeed, this table shows a 5.6% drop, or $3.6 billion a year from 2014 to 2016 – which Mr. Singer attributes to Title II regulation.

2014

2015

2016

AT&T $21.1 $17.3 $17.8
Verizon $17.2 $17.8 $17.1
Comcast $6.4 $7.1 $7.7
Sprint $3.8 $3.9 $1.4
Time Warner Cable $4.1 $4.4 $3.8
T-Mobile $4.3 $4.7 $4.7
CenturyLink $3.0 $2.9 $3.0
Charter $2.2 $1.9 $3.1
Cablevision $0.9 $0.8 $0.6
Frontier $0.6 $0.7 $1.3
US Cellular $0.6 $0.5 $0.5
Suddenlink $0.3 $0.4 $0.3
   Total $64.6 $62.4 $61.0

But like with all statistics, it’s not hard to draw different conclusions from the same set of numbers. For example, all of the drop in capital spending can be attributed to AT&T and Sprint. Taking those companies out of the table shows that capital spending for the other big ISPs is up $2.1 billion or 5% from 2014 to 2016.

So what’s going on with AT&T? There are a number of reasons for their change in capital spending:

·         During these same years the company made massive capital investments in DirecTV ($3 billion over the last few years) and also on the company’s purchase and expansion of its cellular network into Mexico ($3 billion over 4 years). Those numbers are not included in the above table and it’s easy to argue that the company just set different priorities and diverted normal domestic capital to these two giant ventures. If you add those capital expenditures into the table then AT&T’s capital spending has grown – just not their ‘domestic’ spending on traditional broadband.

·         AT&T has been making a huge effort to update its cellular network using software defined networking (SDN) as described at this AT&T website. They have been decommissioning traditional hardware at cell sites and installing much less expensive, off-the-shelf routers that can now control the cell sites from centralized data centers. They have already converted over half of their cell sites and this upgrade means vastly reduced spending on traditional cell site electronics. The company has been bragging about this shift to investors for several years.

·         AT&T has also retracted from expanding traditional big tower cell sites. For a number of years AT&T has been spending money to get fiber to its more remote cell sites, and that upgrade is largely done.

Sprint can also be easily explained. This is a company in trouble and that has been well documented over the last few years. A number of attempts to find a buyer has fallen through. What’s not shown on this table is that in 2013 (the year before the table begins) Sprint spent $6.4 billion on capital in a massive system-wide upgrade to LTE. Since then the company has very publicly stated that they are cutting capital spending to conserve cash. The company is only expanding now with carefully selected small cell deployments. But the company is clearly in network maintenance mode and is spending only what is needed to keep the cell sites functioning. Also included in the drop in spending is a change in the way that Sprint treats leased cellphones – they used to capitalize the phones and they now expense them.

There are going to be further decreases in future telecom capital spending across the industry. I expect capital spending for all four big wireless companies to keep decreasing due to efficiencies from SDN. We are now seeing a burst of spending from cable companies due to upgrades to DOCSIS 3.1, but when that’s done I would expect a significant decline in their capital spending as well. We are entering a time when improvements in software will lower the need for new hardware – not just in telecom, but in many other sectors as well.

I have always been annoyed when statistics are used to falsely justify public policy. There is no evidence that the big ISPS have changed their spending habits in any drastic way due to Title II regulations. The argument that Title II has affected capital spending comes directly from constant press releases from USTelecom, and the FCC Chairman should be above repeating arguments from lobbyists. If the FCC wants to undo Title II then it should just do it – there are a number of valid reasons why this might be good policy. But it’s disingenuous to cook up false reasons for why the change is needed.