Three Potential Black Swans for Telecom 2011

So with 2010 finished and 2011 now thoroughly under way, it’s time to play Prognosticate Me! Mind you, anyone can predict “spectrum will remain a focus” and “USF reform will loom large.” The fun lies in trying to pick the surprises. So I have selected 3 potential “black swans” for 2011. The term comes from Nassim Nicholas Taleb’s book about the high impact of low probability events.

I’ve selected three highly unlikely events that could have huge impact in 2011. First, the FCC could get serious about making online video accessible to virtual MVPDs (“MVPD”=multichannel video programming distributor, which is the fancy way to say any pay TV provider like cable or satellite) and new technologies. Normally betting on the FCC to play anything other than King Log while the incumbents play King Stork is a long-shot, unless the FCC actually has to act. Here, the need to renew the program access rules means the FCC will need to look at the state of the video market, and creates a forum for these issues.

Second, I’m betting that the FCC will continue to look at the underlying issues in the Comcast/L3 interconnection dispute long after the Comcast merger gets done, possibly rolling the issues raised here with the never ending proceeding on special access reform. Why would the FCC look into these issues when the FCC hates this sort of controversial stuff and has never wanted to look at, let alone regulate, internet backbone traffic? Because the there is (literally) too much riding on this. Comcast/L3 is much more a symptom of fundamental change in the economics of internet transport than about any two actors, and the pressure for the FCC to at least know what’s going on and figure out how it impacts the economics of Internet backbone transport — and therefore by extension the economics of all things Internet — is going to be very difficult for the agency to ignore.

Finally, I list my favorite potential black swan, LightSquared. Odds are against them for a variety of reasons, from possible financial problems to resistance from incumbent giants AT&T and Verizon. But the system, now that it has cleared a possible show-stopping satellite malfunction, has the potential to totally revolutionize the underlying economics of wireless backhaul and wireless services by providing really cheap purely wholesale LTE service. On the downside, it may also destructively interfere with GPS systems, which could be kind of a problem according to this Motorola filing with the FCC. Either way, it looks potentially pretty disruptive.

More below . . .

PROGRAM ACCESS, ONLINE VIDEO, AND THE RISE OF THE VIRTUAL MVPD

As far back as I can remember, everyone has blabbed incessantly about how broadband would totally remake the world of video. As long as this remained a distant speculation, everyone in broadcast and MVPD-land loved the idea. Every media ownership proceeding and MVPD competition report proceeding (remember when the FCC used to do those every year like the law says?) contained a heartfelt ode to the power of “the Internet” to compete with established entertainment conglomerates and MVPDs. Now, of course, this turns out to be – if not true—at least true enough to scare the pants off these same broadcasters and MVPD providers. Unsurprisingly, they are embracing this disruptive change by showing tech entrants Boxee and over the top providers like Sky Angel the enthusiasm Israelis and Palestinians usually show for each other in the lead up to another round of peace talks.

Normally, we could expect this FCC to show the decisive leadership we have come to expect in highly controversial areas like this. i.e., issuing the occasional high-minded statement urging the parties to work out their differences for the good of all, respect each other’s interests, put the good of consumers first, learn to make money together blah blah blah until Boxee and Sky Angel go belly up or Google gives up on GoogleTV or buys out Disney. But two things make it possible the FCC will step up to the plate to address these issues in 2011. First, it appears that there are proposed merger conditions in the Comcast/NBCU merger Order that address online video by name for the first time. While such conditions would only be binding on Comcast/NBCU combined content, it would establish a precedent that provision of online video is important for video competition and that using your market power in the traditional MVPD space to prevent programmers from signing up with over-the-top distributors like Netflix is not an OK business decision even if it is legal.

The other event is that the FCC’s program access rules, which ensure that traditional MVPDs get access to vertically integrated content at fair market prices, expire in 2012 unless the FCC takes action in 2011 to keep them alive. That provides a platform for everyone who wants access to programming to make their case. Nothing compels the FCC to take any action on behalf of non-traditional players, of course. Heck, the FCC may decide to let the program access rules expire in light of the strong message from the D.C. Circuit that it would not affirm another extension when it reviewed the FCC’s 2007 decision to extend program access to rules to 2012 and general pressure from the Tea Party House to avoid messing with God’s Most Perfect Free Market. But the fact that the FCC must do something on program access or let it die altogether brings this to the top of my list as most likely unexpected (at least I haven’t seen anything about it) big stakes fight in Telecom 2011.

BACKBONE TRAFFIC GETS SCRUTINIZED

Remember Comcast/Level 3? No matter how that particular issue gets resolved, the underlying factors that caused the flare up are not going away. Just like tremors are the result of huge tectonic plates grinding together, Comcast/Level 3 comes out of two massively changing forces. On the one hand, the rate of increase in Internet traffic is showing a climb similar to what we saw in 1995-2000, when more and more people and companies kept coming online, and the nature of traffic is changing to include an increasing proportion online video traffic. While it fashionable to attribute the dramatic rise in traffic to the popularity of Netflix and other forms of entertainment streaming media, the fact is it derives from a large number of things. For example, streaming media is increasingly important for business, educational uses, and all other activity. Telecommuting continues to grow in popularity, And all those downsized workers who are now “consultants” are doing with their home broadband what they used to do at their office.

Meanwhile, while traffic to and from residential subscribers continues to climb, the residential market has gotten a lot more consolidated. When the current payment arrangements about who pays whom for transmitting and receiving data got settled, we had a lot of players of different sizes and the residential market was not nearly as high volume as the business market. We also had technical constraints on deliver of data across networks that placed high value on edge-caching for high-volume content by content delivery networks (CDNs). Today all that is changed. A few broadband ISPs control a lot of residential customers that video providers want to reach. Backbone transport has improved to a point that there is less technical need to use edge caching, and high volume video traffic is increasingly dispersed among small players that cannot pay for edge caching. For example, every single Scout Master, Assistant Scout Master, and other adult volunteer with the boys scouts is required to take 20 minutes of online streaming media training on child abuse prevention. That’s small potatoes compared to Netflix or Youtube. But it is only one example of many of how streaming media traffic has gone mainstream and cannot be relegated to CDNs.

This is not the first time the market for transport of bits has faced upheaval from changing traffic patterns. But things had been pretty stable for a large number of years and the changes that did occur happened gradually with the market. Now we are seeing significant pressure for restructuring of these arrangements and, unlike in 1995-2000, the economics of internet transport impact costs for business and consumers the same way the economics around the price of energy impact everything.

This is not an area in which the FCC has traditionally acted. In fact, this is an area which the FCC would desperately like to avoid. Nor is it clear what authority the FCC would exercise in this area, since it has never classed backbone traffic as Title II telecommunications. Meanwhile, the FCC still has the pending special access proceeding, which covers a certain amount of middle mile traffic. I cannot imagine the FCC wanting even for a fraction of a second to commingle these things.

Which is why I’m betting on Something Happening and special access becoming the route to look at it. Because from a telecommunications perspective, it looks all the world like Comcast demanded a termination fee from Level 3 and got it. Yeah, yeah, Level 3 pretending to be CDN blah blah blah. It still looks like a demand for an unregulated termination fee, and you can bet that every single residential ISP looking for new revenue streams (and aren’t all ISPs looking for new revenue streams) has taken notice and is watching to see whether Comcast can make it stick. For their part, backbone providers have to be thinking about how they can recoup their new expenses from smaller ISPs who depend on them for traffic. Those of us that remember the old days of CMRS or CLEC negotiation for termination agreements may lick their chops or shudder, depending on whether or not they get paid by the billable hour, at the prospect of a free for all emerging in this space.

Maybe it will all work out. Maybe it was just Comcast or L3 being greedy rather than a tremor from the grinding together of forces beneath the surface. But I’m betting on structural issues and greed to mean more tremors and increasing demands from a variety of stakeholders for the FCC to at least start looking at the issue.

LIGHTSQUARED CHANGES THE WORLD OR DESTROYS GPS, ONE OF THOSE TWO.

One of the more interesting things that happened this past year was the FCC decision to allow Harbinger to combine a bunch of satellite spectrum to create a wholesale terrestrial network.  This network, now called Lightsquared, will act on a strictly wholesale basis for any company that wants to buy LTE capacity. Not a lot of people take Lightsquared seriously. Some of that comes from the failure of MVNO networks to operate successfully here in the U.S. But LightSquared is not just about reselling mobile 4G as an MVNO, so I don’t regard that as telling. Harbinger’s recent financial problems present more of a hurdle. In addition, the growing resistance from AT&T and Verizon (not just to the conditions making it harder for them to lease spectrum, but to Lightsquared generally) is sure to cause its own set of problems.

But I flag Lightsquared as a potential black swan (of the disruptive type, not the Natalie Portman types) because if it actually works, it has the potential to totally revolutionize the economics of wireless access in this country. Unlike Clearwire, which has had to struggle to harmonize the pieces of its 2.5 GHz spectrum network (the band has historically been a royal mess, which has made it an expensive and drawn out process for Clearwire to deploy) and which has focused on offering a broadband alternative in the residential market, Lightsquared hopes to offer a means by which any interested party can provide mobile service untethered to a traditional mobile carrier. Walmart could offer an e-reader without needing to get a wireless provider on board the way Amazon needed to team with T-Mobile. Traditional carriers like Sprint and T-Mobile would no longer need to rely on their primary competitors for data roaming. Rural WISPs could get access to good spectrum at an affordable price for wireless backhaul or direct residential service. And lots of other cool stuff could happen, assuming the network actually gets built.

On the other hand, there is growing concern that Lightsquared’s system may interfere with the proper functioning of GPS. Lightsquared claims that the concern is exaggerated and that there is a simple fix. Unsurprisingly, other folks are less sanguine about potentially bollixing up GPS, given how much tech (especially national security and public safety stuff) relies on GPS these days. And, as noted above, Verizon and AT&T are less than thrilled with Lightsquared generally, and therefore happy to tell anyone who will listen that if Lightsquared goes live GPS satellites will fall from the sky.

If the FCC refuses to decide and declines to give Lightsquared the go ahead, this probably dies with a whimper because the funding falls apart and we don’t end up talking about it much. But if it goes live, I predict we will be talking about it a lot by the end of 2011 – either as the great AT&T/Verizon killer or the great GPS killer.

So that’s my guess for three possibly disruptive issues for 2011. Again, I’m not predicting anything is going to get done on any of these. I just expect that these are going to prove to be enormous time sinks that, against expectation, end up getting a lot of ink in 2011, especially the second half of 2011. And, if any of these low probability events actually does occur, it will have incredibly broad implications for an entire sector of the economics of the Internet.

Stay tuned . . . .