Tales of the Sausage Factory:
The Wireless Market Is Seriously Messed Up When Every Incentive Is Anti-Consumer.

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AT&T reported their second quarter results today. According to this analysis, AT&T achieved better profitability by (a) dramatically limiting their broadband service; (b) discouraging consumers from upgrading their devices; and (c) figuring out new charges for consumers to enhance overall profit per customer.

I get that firms are supposed to maximize profit. But when every single incentive to profit maximization relies on providing less service for more money and discouraging people from using your service, something is seriously messed up. This is doubly true when usual trend in information technology is to drive prices down. And, more tellingly, it creates a real concern if we are relying on market incentives to ensure that providers do things like build out networks and provide us with better service and lower prices.

I’m not claiming AT&T is being nefarious. I’m just saying something appears seriously messed up about the whole industry structure. Given the critical importance of this particular industry to our national economy, it would be particularly useful if we had a better understanding of why this is so messed up and — jus maybe — what policies would fix it. For example, if the enormous subsidies paid for iPhones and other smart phones is an issue, wouldn’t it make sense to sever the handset market from the network? If the problem is that network upgrades are expensive to meet demand for wireless capacity, then how are we going to get networks built out?

I’d be happy to concede the issue on metred pricing, except that there doesn’t seem to be any actual relationship between the price metering and the cost of provisioning. The idea of metering is that I want to provide you with more capacity because that way I make more profit. If this were bananas, I would have a fairly direct incentive to grow more bananas so I can sell more bananas. But AT&T doesn’t want to charge me for more bandwidth, which would arguably give it incentive to build better systems and sell me ever more capacity. It wants to sell me limited capacity and then stop, presumably so it can capture some imaginary and unspecified revenue on the the other side of the platform. That creates a fairly unfriendly incentive to create scarcity and avoid investment in the network.

Which brings me back to my original point. There is something seriously wrong in a market when every single incentive is anticonsumer, and when providers can act on these anticonsumer incentives with no consequences. If nothing else, can we at least stop pretending that “the market” is going to somehow look out for consumers, despite every provider incentive to the contrary?

Stay tuned . . . .

Tales of the Sausage Factory:
VZ/SpectrumCo Update: Actually Pretty Good, Except For That ‘Cartel’ Thing.

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I have been doing some analysis of Verizon’s latest move in the VZ/SpectrumCo transaction, the announcement VZ will engage in a series of AWS spectrum swaps with T-Mobile. Between this and Verizon’s commitment to sell off its Lower 700 MHz A&B block licenses, I am almost happy — except for that whole cartel thing with the major cable companies. But if we ignored the cartel thing, this deal now becomes the rare bird that actually enhances both Verizon’s position in the market and that of a prospective competitor. This is not quite a triumph for Coasian market efficiency, since it took the threat of agency action to nudge Verizon in the ‘right’ direction. I also need to point out that when we start out with a fairly dismal market structure, it does not take much to improve things. Giving spectrum to T-Mo is good, but it does not address all the competition problems created by our unfortunate means of distributing spectrum, which still ends up concentrating it in the hands of a very small number (i.e. 2) of companies. So ‘happy’ is a relative term.

As a result, the transaction needs a few minor conditions to make it complete: a data roaming condition to keep competition afloat (and in case the data roaming rule does not hold up in court) and accelerated build out/use or share to ensure rural communities see a 4G network before the end of the decade, but otherwise this looks pretty good (even with AT&T likely to snarf all the Lower 700 MHz B block licenses). Mind you, it reenforces the need to get interoperability and special access reform done if we want to see real competition — but we have rulemaking proceedings on those.

Unfortunately, there is that whole “cartel” thing with the major cable operators. And despite all the positive aspects of this transaction as now configured, they cannot outweigh the negative of creating an anti-competitive cartel at the center of our communications infrastructure.  But let me set that aside for the moment to focus on the spectrum side of things.

 

More below . . . .

 

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Tales of the Sausage Factory:
Time Warner Cable’s New Pricing Plan And The Dr. Strangelove Rule Of Price Signaling

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“The whole point of the Doomsday Machine is lost if you keep it a secret! Why didn’t you tell the world, eh?” — Dr. Strangelove, from Dr. Strangelove, or How I Stopped Worrying And Learned To Love The Bomb

Time Warner Cable (TWC) has announced it will expand its existing “Internet Essentials” program to more cities in Texas. Users that elect this pricing plan are limited to 5 GB per month. Go over, and you pay $1/GB until you hit a maximum of $25 extra on your monthly tab. Time Warner also provides  you with meters so you can keep track of your usage. TWC also allows you to switch back and forth between unlimited and “essentials” easily and without any lock-in. If I find I keep going over, I can switch back to unlimited. As an added effort to make sure users know what they are getting in to when they opt for the more restricted plan, TWC gives you a 2 month grace period if you switch to Essentials where they track your overages and don’t charge you for them. This is a good thing, because, as I discuss below, one of the issues for these usage based billing/bandwidth cap things is that many people do not have any clue how much capacity they use.

As I’ve written before, I like the way TWC is experimenting with pricing here.  I don’t know if customers will see this as a good deal, but that is the point of experimenting with different price plans. In fact, I wish other providers would experiment this way, rather than simply impose bandwidth caps or usage based billing (there is a difference between them, although most reports treat bandwidth caps as a form of UBB). Oddly, Time Warner Cable’s experiment may tell us a lot not only about whether customers like a low-bandwidth option (and whether five dollars is the right discount for it), but about whether other operators who are forcing their customers to take more constrained options are able to do so by exercising market power rather than because customers want it.

Which brings me to the Dr. Strangelove Rule of Price Signaling, which I describe below . . . .

 

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Tales of the Sausage Factory:
EU Parliament Rejects ACTA; USTR Starts To Get Clue, MPAA/RIAA Still In Denial.

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Well, it’s been a fun week on the international trade agreement front. Monday began yet another negotiating round for the Trans-Pacific Partnership (TPP) trade agreement, this time in San Diego. To the amazement of everyone, the U.S. Trade Representative (USTR) announced on July 3 it would now include a provision in the intellectual property (IP) chapter recognizing the importance of “limitations and exceptions” to copyright and embracing the international 3-part test for what constitutes suitable limitations and exceptions. (For those not familiar with this term of art, “limitations and exceptions” are things like Fair Use and and First Sale Doctrine in the United States. As the name implies, limitations and exceptions to copyright limit the rights of the copyright holder and create exceptions to the general rule against copying without permission.)

It is difficult to convey to people who don’t routinely deal with USTR and the copyright maximalists that dominate trade negotiations just how stunning a turn around this is, given the fairly well-established limitations and exceptions in U.S. law and the fact that — as USTR acknowledged in its announcement — the three-part test for what constitutes suitable limitations and exceptions is already well-established and incorporated into international law. Indeed, given all this, the incredible thing is that this is, as USTR acknowledges, the first time USTR has included any explicit reference to limitations and exceptions. In addition, as my colleague Rashmi Rangnath points out over at the Public Knowledge blog, while this is a positive step for USTR, we have not seen the new draft TPP text, so the actual implementation of these principles in the TPP draft could still be a major step backward from existing U.S. law.

More . . . .

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Tales of the Sausage Factory:
The Supreme Court Does Not Want To Revisit Constitutionality of Broadcast or Cable Regulation, Get Over It And Get On With Life.

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Remember how conservatives just could not get over the fact that neither Chris Christie or Mitch Daniels — or anyone else they liked better than Mitt Romney — would run for President? Remember how this collective fantasy actually acquired a factesque quality, so no matter how often and emphatically they said “I’m not running,”, hardcore true believers kept saying it would totally happen? As a result, this collective fantasy actually kept impacting reality, with Mitt Romney forced to spend real time and real money persuading potential supporters that their choices really were Mitt Romney, Rick Santorum, Newt Gingrich, or Ron Paul. Really.

I bring this up because we have our own version of this in telecom policyland. Here, a hardcore group of people in telecom policyland believe that the Supreme Court is positively lusting to overturn the two cases that form the mainstay of the FCC’s authority to regulate broadcasters and cable operators: Red Lion and Turner Broadcasting. The rock solid belief that the Supreme Court cannot wait to get its collective hands on these cases cases to overturn them is an article of faith among so many in the telecom world that it influences behavior. Those who favor regulation of things like media ownership and program access live in mortal terror of any change to the rules that might give rise to a cause of action. By contrast, broadcasters, cable operators, and other opponents of any regulation of Big Media keep trying to generate lawsuits so they can strike down what they see as a vile restraint on the First Amendment.

This past term, the Supreme Court had the opportunity to review both Red Lion and Turner. It opted not to do so.  In May, the Supreme Court quietly declined to hear an appeal by Cablevision that would have allowed the Court to revisit the Turner case. In June, the Court not only refused to reconsider Red Lion in the context of the Fox Broadcasting indecency case, they refused to hear the broadcaster appeal of the FCC’s media ownership decision. These cases presented the cleanest, most clear-cut opportunities for the Court to re-examine the constitutionality of either cable or broadcast regulation in years, and the most obvious opportunities for years to come. If the Court were lusting to take on either Red Lion or Turner, surely this presented the perfect chance for them to do so.

But they didn’t. And, just as even the most avid Romney-haters needed to wake up to the fact that Chris Christie wasn’t playing hard to get, folks in Policyland need to deal with the fact that regulation of media ownership and cable remains constitutional for the foreseeable future.

More below . . . .

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Tales of the Sausage Factory:
USTR Manages To Make The ITU Look Good — Which Will Bite Our Rear Ends In Dubai

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Pointing out that the United States Trade Representative (USTR) does not understand the concept of “transparency” hardly qualifies as news. It’s kinda like “Jerusalem Chief Rabbi Places Last In Pulled Pork Cook Off.” But every now and then, USTR’s generalized failure to understand why increasing public participation, sharing more information with the public, and generally bringing the standard of transparency up to what we would actually consider vaguely transparent actually threatens U.S. interests in other areas.

 

Case in point, the International Telecom Union] (ITU) meeting in Dubai for the World Conference on International Telecommunications (WCIT) this December.  I’ve written before on why I worry a number of the proposals at made by various repressive regimes at WCIT may have long-term consequences for freedom of expression online.  Many global civil society organizations, as well as many countries committed to freedom of expression and fundamental human rights, oppose these efforts to leverage WCIT for such ends. At the same time, however, many of these countries and organizations have long standing serious concerns around Internet governance. In particular, they resent what they see as the dominance of U.S. government and U.S. corporate interests in supposedly neutral “multistakeholder” forums like the Internet Corporation for Assigned Names and Numbers (ICANN). ICANN is the current home for much of what people mean by “internet governance.” This makes expanding ITU jurisdiction to include Internet issues attractive to some of these countries and organizations, despite the danger to free expression, as one of the few possible counterweights to the U.S.

Persuading enough of these countries and other stakeholders that the downside of expanding ITU authority outweighs the potential benefit is therefore the chief challenge for the U.S. delegation. Unfortunately, the continued conduct of USTR in reenforcing the view that the U.S. Government is the tool of industry by doing things like pushing ACTA (which continues to be held up in Europe and elsewhere as a symbol of the U.S. shilling for Hollywood at the expense of free expression), and maintaining a cloud of secrecy around the Trans-Pacific Partnership (TPP) negotiations, makes this much harder. While we are kind of stuck with ACTA, the USTR can do a heck of a lot more around transparency in TPP. Given that the ITU has made a number of conciliatory gestures to civil society on the transparency front in the last few weeks, It would be really helpful if USTR would at least stop pissing on its critics and generally making ITU look good.

More below . . . .

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Inventing the Future:
Olivia’s Balls

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Olivia, the Worlds Cutest DogHow often have I felt that I had to create Z, but before doing that I had to build Y. And of course before doing either, I really needed to find out how X affected either. This evil has many forms: feature creep, analysis paralysis, and so forth. I know it’s crap when other people do this, but every single time it comes up for me, I’m absolutely certain that this time it really is Important And Necessary to do all this other stuff first before the task at hand.

I’m as dumb as my dog.

That is, I’m every bit as steadfastly earnest in my insistence that it really does all have to be done, and I’m just as wrong.

Olivia is, by all accounts the world’s coolest and cutest English Cocker Spaniel. I’m confident about this because the title used to be held by our previous English Cocker Spaniel, Oliver.

It was hot this week. My daughter selected a few dozen of the balls that Olivia had carefully secreted under and within the couches, chairs, and china cabinet. My daughter then threw them into the pool, all at once. Olivia jumped in and got the first ball. She nestled it in her ample lips, looked with her Cocker’s eyes at the edge of the pool, and then swam with the first ball earnestly to the second. On reaching the second, she carefully spit out the first — leaving it where she could find it, right there in the pool — and took the second one in her mouth. A sound plan. She swam with the second to the third, and with consideration offered the second ball to that spot in the water before depriving that space of the third ball. Then she went to the fourth ball…

I think Olivia has shown me the single most common and important danger in all creative enterprises.

Tales of the Sausage Factory:
AT&T and XM/Sirius to Get More Spectrum Online? And What Does It Mean for LTE In The U.S.

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Every now and then, spectrum licensees do something so sensible it actually seems possible that Coase was right about all that rational actor stuff.   So it is with AT&T’s recent joint submission with XM Sirius on how to resolve the long-standing interference fight between the Satellite Radio licensees (“SDARS,” for reasons we won’t get into now), and the “wireless communications Service” (WCS) licensees. You can read a general summary over here and the AT&T/XMSirius letter here.

Briefly, the deal protects XM Sirius from possible interference by sacrificing some spectrum right next to it. This will mostly shaft a company called Nextwave. But AT&T is taking enough of a haircut on its theoretical spectrum rights to deflect the argument that it is trying to benefit itself solely at the expense of others. And while Comcast (also a licensee here) might try to slow things up as a favor to its new BFF VZ Wireless, that seems unlikely. Since this plan appears the only path forward for getting this spectrum into productive use, I expect the FCC will approve it. Hopefully the FCC will approve it quickly, because it will take a lot of work to develop equipment for the band.

AT&T deserves credit for working with XMSirius on this and coming up with something positive and pragmatic rather than continuing the endless cycle of blame between satellite radio and WCS licenses. On the other hand, like the current AT&T effort to refarm its 2G spectrum for 4G, AT&T had to be pushed into it kicking and screaming by denying it the right to buy out T-Mo. This should also emphasize the next direction for the wireless industry: more efficient multiband radios. The Future of LTE is a multiband future (with the exception of Verizon Wireless). Robust technologies like the TV White Spaces will, as predicted by TVWS advocates, play an increasingly important role in licensed technologies as well.

More below . . . .

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Tales of the Sausage Factory:
The ITU, WCIT and Internet Freedom

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Very few people ever heard of the International Telecommunications Union (ITU) until recently – and with good reason. For more than 100 years, the ITU managed quite nicely serving as the forum for countries and telecom carriers to coordinate insanely-technical-mind-numbingly-boring-but-really-really-important stuff related to making the phone network work internationally, distributing satellite slots, and trying to harmonize what frequencies countries allocate to what services. But now the ITU has suddenly become very interesting. Why? Because the ITU members will hold a rare meeting — the World Conference on International Communications (WCIT) – where the 193 member countries will vote on whether to amend the current ITU rules (“ITRs”) that set the framework for all this extremely important boringness.

Unclear for now – especially in the pre-game – is whether and how the WCIT represents a potential threat to freedom of expression online. I recently had an argument with Professor Milton Mueller (see the comments section of this post on the IGP blog) about this. Milton’s central thesis is that the recent hysteria about the ITU “taking over the Internet” is overblown and that this is just about how carriers negotiate payments. This has been interpreted by some to mean that civil society organizations concerned with free expression online ought to stop fretting about fleets of UN black helicopters seizing the DNS rootservers and relocating them to ITU Headquarters in Geneva.

For a number of reasons, I strongly disagree with this assessment.  Even without the concern that the ITU will somehow “take over the Internet,” certain WCIT proposals advanced by a number of regimes that engage in Internet censorship threaten the future of free expression online. These proposals, from the Russian Federation and several Arab states, would for the first time explicitly embrace the concept that governments have a right to control online communications and disrupt Internet access services. This would reverse the trend of the last few years increasingly finding that such actions violate fundamental human rights – a valuable tool in trying to pressure repressive regimes to stop using such tactics.

More below . . . .

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Tales of the Sausage Factory:
FCC Special Access Reboot — And AT&T’s Somewhat Disingenuous Response

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Good news, the FCC has decides to one again reboot its seven year old proceeding on “special access.” Given that I have been flogging the FCC since 2006 to do something about this, with occasional reminders since then, I am obviously pleased. AT&T, one of the chief beneficiaries of the current deregulated monopoly regime, is less pleased.  AT&T’s chief argument against the FCC denying it yet another rate hike and demanding AT&T and the other telcos fork over data critical to determining if they are charging monopoly rents is: “Why you bringing up old stuff?”

This is not exactly the pinnacle of legal reasoning or persuasive policy. But in AT&T’s defense, when it’s all you got you make the best of it. Bob Quinn does a masterful job of portraying this as being about legacy copper phone bits that don’t matter anymore and that somehow the FCC taking action here is distracting us all collectively from building the super cool uber fast Gigabit networks we need and would build if only the FCC would let us buy T-Mobile. Or something.

As I explain, however, this isn’t some musty old copper no one gives a crap about, but a rather critical bit of infrastructure generating between $18-20 billion annually and impacting pretty much every aspect of mobile communications and broadband access. And with the cable operators about to become total BFFs with Verizon, what little competition that exists in the special access market appears ready to disappear altogether.

I explain below . . . .

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