Author: Harold

Verizon/SpectrumCo: The Spectrum Concentration Gap v. The Spectrum Crunch (Why VZ’s 700 MHz Divestiture Offer Doesn’t Help) Part I

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Verizon has clearly studied everything AT&T did wrong last year when it tried to acquire T-Mobile. That includes staying alert for early signs of trouble and taking preemptive moves to keep the course of approval running smoothly. It also includes showing grace under fire rather than trying to browbeat the FCC into submission. To head off concerns about the growing “spectrum gap” between Verizon (and AT&T) and its competitors, Verizon has offered to sell its Lower 700 MHz A&B block licenses in a private auction if the FCC grants the application to transfer the AWS-1 spectrum to it from Spectrumco.

At the same time, Verizon also insists that it is doing this of its own free will and not because the FCC is making it do so or because it has run into any trouble. As I will explain, I believe Verizon is telling the truth. The 700 MHz A&B block licenses Verizon promises to auction to competitors is not nearly as useful to it as the AWS-1 spectrum it will get from Spectrumco and Cox. Given that everyone has extolled the virtues of the 700 MHz spectrum as the most important, game changing super-duper useful for mobile broadband spectrum in the entire universe, and since the licenses in question do cover some major markets, that no doubt comes as a surprise to many. Indeed, rather like the stereotypical used car salesman offering to swap your beat up lemon for his hardly ever driven luxury cream puff, this offer looks too good to be true. Why would Verizon want to swap Magic Elixir 700 MHz spectrum for Totally Awesome But Not Magic AWS-1 spectrum?

Below, I give a run-down of my guesses as to why Verizon decided to make a preemptive offer to divest when so many experts opined this would sail through without serious problems. I also explain why, despite the real virtues of the 700 MHz spectrum, Verizon has good reason to want to ditch these licenses (and was already starting to sell them off before the Spectrumco deal). Finally, I’ll explain why, IMO, this doesn’t address the fundamental problems of the VZ/Spectrumco deal because (a) it doesn’t address the side agreements that make this look like the formation of a cartel; (b) for reasons I have explained at length before, AT&T is the most likely winner of any “private auction” Verizon will hold; and, (c) even if AT&T were excluded from getting the licenses, the Spectrum Gap will actually be worse, not better, as a result of the transaction.

In chess terms, Verizon is offering to sacrifice two pawns to gain a queen. Hopefully, the FCC will resist the invitation and avoid a Fool’s Mate for competition.

Because this ended up being rather long, I’ve divided it into three parts. Part I explains how the spectrum situation changed dramatically in just a few months, so that concern about the Spectrum Gap, the difference in spectrum between the two largest providers and all other wireless providers, came to have such increased significance in the FCC’s thinking. This prompted Verizon to make public what it already planned to do, ditch the 700 MHz A&B blocks, despite the fact that this leaves them open to accusations of spectrum warehousing during the pendency of the Spectrumco/Cox deal.

In Part II, I explain why AT&T will likely win the licenses (a conclusion others have reached as well), absent some condition by the FCC to keep AT&T out of the private auction (which I consider politically unlikely). Part III explains why, even if AT&T were excluded from the private auction for Verizon’s Lower 700 MHz A&B licenses, it still would aggravate the spectrum gap. Since the transaction would make competition worse off post-transaction (and fail to address the whole ‘cartel’ thing), the FCC should still deny the application for transfer.

More below . . . .

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The Day The Public Interest Died: Media Access Project Shuts Its Doors After 40 Years of Public Service

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Outside of our small world of telecom wonkery, few will notice that my old employer, The Media Access Project, announced that it will cease operations on May 1. After 40 years of fighting to protect the public interest, including playing a pivotal role in stoping the deregulation of media ownership rules in 2003 and training a generation of public interest advocates, MAP ran out of money. In fact, according to the email, it will need to hold a fundraiser to retire its debt.

I know I should take this opportunity to eulogize MAP as an institution and sing the praises of its leader for the past 35 or so years, Andrew Jay Schwartzman. But I need to vent first. All you Liberals and Progressives with Serious Money who piss and moan about how the Koch Brothers and other conservatives with money have transformed this country by funding all kinds of conservative advocacy groups and think tanks — shut up. I was at MAP for 9 years and it was incredibly, painfully difficult to get people to understand why having a law firm in DC to advocate for the right policy at the Federal Communications Commission or bring cases challenging these arcane policy issues like how many television stations can one company own or whether we should allow Comcast to block BitTorrent and other peer-to-peer applications mattered. Many potential funders were too pure to fund anything that looked too much like inside the Beltway advocacy.

If you don’t fund progressive advocacy, it dies. If you are too pure to fight inside the Beltway, you lose. You cede the battlefield to folks who care a lot less about being chaste and pure and above the fray and who care a lot more about persuading policymakers and the country to adopt their vision of what’s right. So either pony up with the cash or get the policy you deserve. But please do not bitch about how awful it is that people with a vison for America you find revolting are willing to spend “their lives, their fortunes, and their sacred honors” succeed while you prattle on about not wanting to “create dependencies” and how advocates need to find “sustainable models for funding” other than relying on funders — while simultaneously not compromising themselves by taking corporate money.

OK, enough ranting.  Some personal reminiscences and appreciations below . . . .

 

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My Insanely Long Field Guide To The Verizon/SpectrumCo/Cox Deal.

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The more I look, poke and prod at the VZ/SpectrumCo/Cox deal the more convinced I am that this becomes one of the defining moments in telecom for 2012 – possibly for the foreseeable future. If AT&T/T-Mo represented the last stand for traditional antitrust , VZ/SpectrumCo represents the new frontier. Where AT&T was a frontal assault on antitrust by accumulating marketshare and spectrum, this hits antitrust up its blind side with collaborative agreements and fundamental questions about when can competitors decide to abandon entire markets to one another. Just about everything single issue in telecom – spectrum aggregation, video distribution, the nature of competition in the age of convergence, the interaction of antitrust and patent technology –  all come together in one package so amazingly complicated and wonky that average Americans will fall asleep while you explain it to them.

So, with the help of some incredibly lame innuendos to spice things up a bit, I attempt to explain below . . . . .

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Spectrum Efficiency v. Competition Part II: Why Do Verizon and AT&T Keep Ending Up With All The Spectrum?

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Recently, I talked about the tension between spectrum efficiency and competition policy in auctions.  Briefly, for reasons I will elaborate below, the largest wireless providers (AT&T and Verizon) can extract more value out of a wireless license than their significantly smaller rivals (especially when we include the foreclosure value of keeping the license out of the hands of competitors). As a result, we should expect over time that the biggest wireless companies will eventually have an unbeatable edge in wireless capacity unless the FCC takes some measures to balance out the spectrum holdings.

Not surprisingly, the same problem surfaces when companies buy spectrum licenses from each other.  After all, a license transfer is essentially a private auction (only with less transparency and higher transaction cost – factors that work in favor of the largest companies). We should therefore expect to see the same tension around spectrum efficiency and concern for competition policy play out in license transfers.

Two recent transactions put these concerns in stark relief: AT&T’s recent acquisition of spectrum from Qualcomm and Verizon’s proposed  acquisition of licenses from Spectrumco. Both cases arguably represent an improvement in spectrum efficiency by moving the licenses from those who were ultimately unable (or unwilling) to use them efficiently to those able to pay the most for them (and therefore, presumably, extract the greatest value). At the same time, however, the transfers aggravate the existing spectrum imbalance between the largest wireless providers and competitors.

I explore the trade offs posed by these transactions, and discuss how they are essentially another version of the same spectrum efficiency v. competition policy I discussed in auctions, below . . .

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But Why Time Warner Cable’s Bandwidth Cap May Be A Good Thing. See How Complicated This Is?

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So no sooner do I cast a very suspicious eye over AT&T Wireless’ new scheme to allow ap developers to pay the overage charges for users who exceed their 2 GB monthly cap when I see that Time Warner Cable (TWC) is now offering an “Internet Essentials” plan in some test markets in Texas. Customers who opt into the new 5GB/month metered plan will receive a discount. TWC also includes a meter so customers can monitor their use. Finally, customers in the metered plan can easily pay more to get more access.

While this is just a first reaction based on the TWC description, I have to say this is the kind of “metered usage” program I really like. In fact, this looks like an excellent product offering (albeit not for an ‘power user’ like myself.). I salute TWC for listening to its customers and offering something different and innovative.

So what’s so good about this metered program but I remain suspicious of other “usage based billing plans? I answer below . . .

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AT&T Poised To Fulfill Ed Whitacre’s Vision? Charging Aps For Customers and The Future of Wireless.

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It has been just over 6 years since Ed Whitacre, then CEO of AT&T, kicked off the Network Neutrality movement by famously declaring that rival services would not “use my pipes for free,” neatly side stepping the fact that customers were actually paying to “use [his] pipes” already. Because why just collect money from one side of a platform when you can collect the same money again from the other side? Well, it appears that AT&T may finally be on the verge of realizing Whitacre’s vision — at least for the wireless world. While details remain sparse, the Wall St. Journal broke a story yesterday that AT&T may “allow” application providers to pay the overage charges for customers who exceed AT&T’s arbitrary “bandwidth cap.” As my colleague John Bergmeyer pointed out over at Public Knowledge there is not much functional difference between simply charging both sides of the platform directly and  giving you the first 2 GB/month and then charging you for access.

I first wrote about the problem of “Whitacre Tiering” (having a “slow lane” for the “public internet” and a “fast lane/Quality of Service (QoS)” for favored content) in the wireline context almost 6 years ago today, back when AT&T (and other supporters of such schemes) used “the exaflood” as the reason why we absolutely positively must charge service providers to reach broadband subscribers. Remember the “exaflood,” the prediction that our broadband systems would crash under the ever-rising flood of data as users, unconstrained by metered pricing, outstripped the capacity of broadband systems? Except, of course, it didn’t happen. Cable operators developed DOCSIS 3.0, DSL providers figured out how to do better, and those stuck with ruinous backhaul charges figured out other ways to manage their networks (generally in cooperation with users).

Moving to the wireless universe, we find ourselves with similar arguments that we faced six years ago — including the wireless version of the “exaflood.” Below, I consider whether the arguments for wireless make any better sense than they did when Whitacre proposed it for wireline back in October 2005.

More below . . . .

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Why Genachowski’s Cybersecurity Initiative Is So Radical (In A Good Way)

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When people think of “cybersecurity,” they usually think about the big stuff like Iranian hackers bringing down the power grid or master criminals hacking Bank of America. We associate it with the Department of Homeland Security (DHS) and institutions generally clustered around the military. When its gets down to the individual consumer level, we usually think of it as something entirely different, like “identity theft.” To the extent we think of any federal agency involved with protecting consumers from such “cyberfraud,” we usually think of the Federal Trade Commission (FTC) going after businesses for failing to disclose that the free game you just downloaded to your smart phone will also track your location so that the folks at Target can text you when you get within 500 yards.

This has two unfortunate results. The first is that the “cybersecurity establishment” generally does not trouble itself about things like privacy or ease of use or general consumer habits. If anything, they think of users as part of the problem. Cybersecurity in this regard works like airport security. Just accept the loss of privacy and overall inconvenience as the price of security – even if it makes you much less likely to fly. After all, the mandate of the cybersecurity experts is security and protection, not promoting broadband.

The second unfortunate result is to treat consumers either as helpless victims or part of the problem. But in either case, no one thinks they have anything useful to contribute on the subject.

Which is what makes the Federal Communications Commission’s (FCC) new cybersecurity initiative so important, and Chairman Julius Genachowski’s speech last Wednesday such a radical and welcome addition to the cybersecurity discussion.  The approach outlined by Genachowski, if followed, promises to address three key security weaknesses in the Internet in a way that actually works with the underlying principles that have made the Internet such a widespread success for everyone from the most unsophisticated end user to the most sophisticated tech giant: voluntary consensus, openness, and ease of use. By leveraging the strengths of the network to help overcome the vulnerabilities of the network, the FCC can do a lot to improve cybersecurity while simultaneously fulfilling its statutory mandates to protect consumers and promote broadband adoption and use.

More below . . .

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Spectrum Auction Theory v. Competition Theory

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As I’ve previously reported, Congress is weighing spectrum legislation as part of the Payroll Tax Holiday and Everything Else extension. One critical change pushed by House Republicans (with the enthusiastic support of AT&T, surprise surprise . . .) involves whether the FCC should be able to keep companies that have a lot of spectrum (AT&T and Verizon) from bidding on some licenses in the future. This is called “eligibility restrictions” (i.e., are you eligible to bid in the auction or not). The FCC has authority to impose eligibility restrictions now, but generally doesn’t. As the spectrum gap between AT&T and Verizon and everyone else in the wireless world gets bigger, however, there is some talk of possibly bringing them back.

Needless to say, AT&T and its supporters think this is both unfair and bad policy. Others, such as the folks at T-Mobile (now no longer being absorbed into the Bell Borg) have responded to the fairness argument.  For myself, I am always deeply suspicious whenever incumbents start arguing about “fairness,” as it usually means “please consider this particular detail in a total vacuum without ever thinking about all the unfair advantages I have, and use my framing because I appeal to basic values and use sports metaphors like ‘level playing field.'”  But lets set that aside and do the cold-hearted  policy wonk think. As Paul Krugman occasionally likes to say “economics is not a morality tale.” And in any event, even if we decided this on “fairness,” we’d still want to know the right answers and outcomes, right?

Two usual policy arguments are advanced for no eligibility restrictions. The first is that “auctions put spectrum in the hands of those who will use it most efficiently.” The second is that auctions with open participation increase total revenue. Lets pretend for a moment the first statement is true. Based on this, I shall prove below that not only does open participation decrease revenue, but it creates a serious conflict with competition policy. If we maximize auction efficiency, it is inevitable that the largest players will win the majority of the licenses and that this problem will grow worse over time.

So meet below the line for a video blog explaining this and some serious policy trade off discussions . . . .

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RIAA — Take Us Back To The Days of Illegal Price Fixing.

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One final point about Recording Industry Association of America (RIAA) CEO Cary Sherman’s NYT Op Ed on “how the Internets did us wrong.” Mr. Sherman notes that:

They [Congress] knew that music sales in the United States are less than half of what they were in 1999, when the file-sharing site Napster emerged, and that direct employment in the industry had fallen by more than half since then, to less than 10,000.

There are two caveats here worth noting. The first is that when Mr. Sherman talks about sales and the “music industry” generally he means his organization’s members — specifically the four (soon to be three) “major labels” and all of their various sub-labels and subsidiaries.

This is important because in 1999, according to the Federal Trade Commission (FTC), the major labels were engaged in an illegal price fixing scheme. The major labels agreed to discontinue their price-fixing practices as part of settlement decree in May 2000. Not surprisingly, once the major labels stopped violating antitrust law, their artificially inflated profits declined and independent competitors saw a significant rise in profits.

Needless to say, as part of the general magical thinking problem of the industry, Mr. Sherman and his fellows don’t believe the loss of their stranglehold on industry distribution and the rise of competitors (online and offline) has anything to do with their fading fortune. No, it is all that evil Napster and its wicked legacy of Internet piracy. But any legislators and policymakers who expect to be taken seriously ought to seriously consider using a benchmark other than the period from 1995-2000. It would be embarrassing for those not explicitly in the pay of the music industry to believe that it is the responsibility of government to return the industry to glory days of price fixing and monopoly profits.

Stay tuned . . . .