Paul Kouroupas's blog

Harvard visit

Fri, 02 May 2008 00:46:26 +0000

Monday I had the pleasure of re-connecting with a former professor of mine, Nolan Bowie. He was gracious enough to allow me to guest lecture his class which focuses on the future of communications media and the intersection with public policy. I was honored to be asked to share my experiences and insights with such a diverse and eclectic group of truly gifted students.

It was extremely refreshing to engage with Professor Bowie whose ideas are both provocative and conventional at the same time. His ideas are provocative because they challenge the established interests in fundamental ways. But his ideas are conventional because they simply take established policy in one area and apply it in another. For example, just putting the label “national security” on something can dramatically change the way people address a concern. If economic competitiveness is a matter of national security and broadband deployment is a critical component of economic competitiveness, then massive government investment in broadband infrastructure doesn’t seem all that radical, and in fact seems down right conventional.

One of the reasons I was eager to guest lecture was to put forth the idea that the regulatory decision-making process is an obstacle to competition and that these future policy makers at the JFK School of Government need to consider how the decision making process impacts competitors and their service offerings. I have authored a paper on this topic which I will present at the 17th Biennial Conference of the International Telecommunications Society in Montreal on June 25th. (The paper should be on their website after May 5th for those of you interested in reading it.)

An Information Gap in the Digital Universe

Wed, 19 Mar 2008 20:38:54 +0000

The release of ”The Diverse and Exploding Digital Universe”, a report produced by IDC and sponsored by EMC, is fascinating on several levels. First, the fact that someone is trying to quantify the digital universe is an interesting and welcome exercise. Second, the extent to which the size of the digital universe is consumer generated is gratifying. Third, the extent to which enterprises exercise control over digital content is disconcerting. Fourth, the growth of your “digital shadow” as IDC calls it is more than disconcerting. And fifth, you realize after reading the report that we have not developed any coherent public policy to govern the digital universe.

To the first point, putting aside the obvious self interest EMC has in publicizing the extent of digital storage, it is a very useful exercise to capture the growth of the digital universe. Information is the key to successful management and studies such as these add to our understanding of the broader trends and dynamics taking place in the digital universe.

The second point and third points are in reaction to this statement in particular –

"While 70% or more of the digital universe is created,
captured, or replicated by individuals — consumers and
desk and information workers toiling far away from the
datacenter — enterprises, at some point in time, have
responsibility or liability for 85%."

It is great to see that individuals are the primary generators of digital content and that the production of digital content is not concentrated in the hands of the few. This makes sense since the tools required to generate digital content are much more democratic than the tools of the last century. Today someone with a computer, web camera and an iPod can create halfway decent content. Add in an actual video camera and some editing and mixing software and you can pretty much create high-quality content that used to require full-blown production studios. Now you can simply upload that content to the Internet whereas in the past you had to either be a broadcaster, publisher or movie distributor.

The scary part is that 85% of that content falls under the control of enterprises at some point. While for the most part these enterprises have refrained from exerting control over the content there have been cases where they have tried. The good news is those attempts largely failed. The bad news is they only failed because they became public and public opinion was quickly marshaled against the efforts. That is not a sustainable process in the long term and soon enough the public is going to grow tired of these spontaneous crusades.

Where things start to get scary is the notion of a “digital shadow”. As defined in the IDC report, your digital shadow consists of “digital images of you on a surveillance camera and records in banking, brokerage, retail, airline, telephone, and medical databases. It is information about Web searches and general backup data. It is copies of hospital scans. In other words, it is information about you in cyberspace. Your digital shadow, if you will.”

IDC estimates that your digital shadow comprises roughly half of your digital footprint. In other words, half of your digital footprint consists of content you created and half consists of information about you that is collected from a multitude of sources. It is this latter aspect, and particularly the ability to aggregate that information, that really scares me whether such aggregation is performed by enterprises or government.

Which brings me to my last point. There is no coherent public policy governing the generation, transfer, use, and disposal of digital information. European regulators have made some attempts in this area, most notably with the Directive 95/46/EC on the protection of personal data as well as Directive 2006/24/EC on the “retention of data generated or processed in connection with the provision of publicly available electronic communications services or of public communications networks and amending Directive 2002/58/EC.” Nothing comparable exists in the U.S. unless you count the disclosure statutes of numerous states.

What concerns me is that the approach of the U.S. government is to encourage enterprises to establish their own policies that they will enforce through the control they exert over 85% of the consumer-generated content. These policies will serve the enterprises well and give them access to a treasure-trove of personal information that they can do with largely as they please especially if they share it with law enforcement. This Administration’s efforts to collect calling data and credit card data attest to that.

But what about consumers? Don’t they have a right to this information? Indeed, don’t they have a property right in their information? In the United States we allow citizens to kill an intruder in our home. Shouldn’t we have some equivalent right (albeit less severe) for intruders into our digital “home”? What we are seeing develop is an information gap between what enterprises know about their customers versus what customers know about enterprises. A similar gap is widening between what the government knows about you and you about your government. That gap has to be closed and the quickest and most complete way to do that is to acknowledge the property interest that individuals have in their digital information. Once acknowledged, we can then begin to apply traditional property law and policies and close the information gap that is widening all too fast.

Taking Credit Where None is Due

Fri, 15 Feb 2008 15:49:12 +0000

With the release of ”Networked Nation: Broadband in America 2007”, the National Telecommunications and Information Administration (“NTIA”) takes credit for largely achieving President Bush’s 2004 goal of “universal, affordable broadband access for all Americans.” Not to be too cynical, but NTIA’s claim is akin to Hank Morgan’s claim that he caused the solar eclipse in Mark Twain’s A Connecticut Yankee in King Arthur’s Court.

First, the methodology by which NTIA reaches its conclusion is spurious at best. But I shouldn’t be too harsh on NTIA since they are simply following the FCC’s methods. You see, NTIA makes it claim because “broadband service was available in 99 percent of the nation’s zip codes, encompassing 99 percent of the nation’s population.” If one person in a zip code has broadband service, the FCC counts the entire zip code as having broadband access. So by this methodology it isn’t too hard to claim success.

Second, increased broadband penetration was inevitable and would have occurred regardless of public policy. Broadband penetration occurred at a rate that surpassed all previous consumer electronics. In a September 2007 survey, Pew Internet found that broadband was adopted by a majority of consumers faster than other technologies. Broadband took 10 years to break 50% adoption, followed by the CD Player at 10.5 years, the VCR at 14 years, cell phones took 15 years, color TVs took 18 years, as did the personal computer.

So was this adoption due to Administration policy or because consumers know a good thing when they see one?

Third, this Administration considers bandwidth speeds of 200 kbs to constitute “broadband.” 200 kbs may be “Rubenesque” among narrowband speeds, but it hardly counts as broadband, especially when you consider the speeds available around the world. And when you look at actual speeds that U.S. consumers enjoy, the picture is even grimmer. The Communications Workers of America (an obviously self-interested source) produced a report last year showing the median download speed in the United States is 1.9 Mbps, compared with 61 Mbps in Japan, 45 Mbps in South Korea, 21 Mbps in Finland, 18 Mbps in Sweden, and 7.6 Mbps in Canada. And of course U.S. consumers pay far more per megabit than residents in these other countries. According to the OECD, the average price per advertised Mbit/s of connectivity in the OECD is USD $18. Japan, France, Sweden, Korea and Finland have the least expensive offers per Mbit/s
o Japan: USD $0.13
o France : USD $0.33
o Sweden: USD $0.35
o Korea: USD $0.38
o Finland: USD $0.42

So what exactly is there for this Administration to take credit for? Did their policies stimulate broadband penetration, increase broadband speeds, and reduce broadband prices or like Hank Morgan are they simply taking credit for a phenomenon that was already happening over which they had no influence?

Interconnection and National Security

Mon, 04 Feb 2008 14:35:48 +0000

The former company I worked for had a saying: “Don’t put all of your telecom eggs in one basket.” It was brilliant in its simplicity, but it captured a very complex and very real problem that businesses at the time faced. Fresh off the fallout of the fire in Illinois Bell’s Hinsdale switching center, companies realized that they were incredibly dependent on their telecommunications networks and that disruption to “the” network would have a catastrophic impact on their business. So companies like Teleport Communications Group (“TCG”) quickly capitalized on needs of large businesses for diversity and became “the other local phone company.” Smart businesses purchased services from both the incumbent Bell Company and TCG so that in the event either network experienced a service interruption, the other was available. This was known as “operational security.”

You would think that in the twenty years since Hinsdale operational security would be a fact of life. But as the reports of the interruption of major undersea cables serving Egypt, India and Gulf Arab countries shows, governments may not have fully grasped this. Many governments are content to continue to rely on their incumbent monopoly for their critical telecommunications needs, oblivious to the consequences of placing all of their telecom eggs in one basket until that basket gets knocked over as it did the other day.

To be fair, some of the carriers impacted by the cable cuts did have diverse routes available so service was not cut off completely. But the incidents highlight the need for governments to examine their interconnection policies from a national security and economic security perspective as much as from a telecommunications policy perspective. Security 101 teaches you that you should always have a backup. In the telecommunications world, multiple networks are most valuable the more they are interconnected. An interconnected “network of networks” is highly robust and able to withstand all but the most catastrophic events that impact a wide geography (e.g., tsunami, nuclear attack, etc.). The more interconnected networks are, the greater their robustness.

So when policy makers hear the arguments from incumbent carriers that they shouldn’t be forced to interconnect, or they should be able to charge “market” rates for interconnection, policy makers need to remind them that they are operating critical infrastructure and that interconnection is critical to national and economic security. When viewed in this light, interconnection is more than just a negotiation point between two large commercial enterprises.

A Full Agenda

Fri, 18 Jan 2008 21:36:35 +0000

2008 holds the potential to be a landmark year for telecommunications regulation – if the FCC is willing to take action on the issues before it. A quick look shows the FCC has a lot on its plate. There are the long-standing issues of inter-carrier compensation (yes this docket was initiated in April 2001 and there is still no resolution to it) and special access reform (yes this docket was initiated in October 2002 and there is still no resolution to it either). Both of these issues take on a new urgency with the competing Petitions for Forbearance filed by Feature Group IP and Embarq regarding the application of access to charges to IP services and the coming expiration of Verizon’s merger commitments on special access. Then there are the dual petitions from Vuze and Free Press on traffic management and peer-to-peer traffic that the FCC just put out on public notice. Finally, there is the Joint Board proposal on universal service reform (an issue that has been around since the 1913 Kingsbury Commitment and was supposed to be addressed immediately following passage of the Telecommunications Act of 1996).

If the FCC wanted to, it could address all of these issues in 2008 and redefine the telecommunications landscape for the next several decades. I realize that is wishful thinking and unrealistic under the best of circumstances, but at some point someone needs to recognize that the FCC regulates an industry that generates a trillion dollars in economic activity, directly employs one million people, and is responsible for deploying and operating the infrastructure that will support so much of the future global economy. Is it too much to ask for the government to address critical policy issues impacting this industry in less than ten years? Think of the costs of inaction to the economy.

At a time when so many politicians are calling for “change”, a welcome change would be for the FCC to take the action this industry so urgently needs to move forward.

Alternative dispute resolution in Canada

Tue, 08 Jan 2008 19:44:47 +0000

I have long believed that the regulatory process itself has become a barrier to entry into the telecommunications market and have been a strong advocate of alternative dispute resolution processes. So I was pleased to see the news that the Canadian Radio-Television and Telecommunications Commission (“CRTC”, the Canadian equivalent of the U.S. FCC) approved an industry-sponsored telecommunications consumer complaints agency. The new agency is supposed to resolve disputes between customers and service providers involving unregulated services. Critics claim the new agency is toothless and a pawn of industry, but I think it is too early to conclude that. Let’s see how the agency performs before rushing to judgment.

The reason I mention this at all is because dispute resolution is the key to any successful policy and policy makers everywhere should consider alternative dispute resolution processes whenever they consider regulation or deregulation. Policy makers in Europe required incumbent operators to include in their standard interconnection offers arbitration clauses so that carriers would not have to bring their interconnection disputes to the regulator. Policy makers should experiment more with these tools to reduce their own backlog of case work, improve efficiency, and reduce the ability of incumbents to use the regulatory process to frustrate competitive entry.

Don't grease the squeaky wheel just yet

Wed, 21 Nov 2007 23:29:35 +0000

The fallout from Comcast’s alleged traffic management practices continues with the filing of a petition by Vuze, Inc., an Internet distributor of high definition content. This petition follows on the heels of the complaint filed by a coalition of consumer groups.

The Vuze petition asks the FCC to “adopt reasonable rules that would prevent the network operators from engaging in practices that discriminate against particular Internet applications, content or technologies.” Vuze says that it does not object to “traffic management” practices, but asks the FCC to ensure that such practices meet the following conditions –

1. The network operators’ network management practices should be based on actual impact on the network, rather than targeting or disproportionately impacting specific services or technologies;

2. Network management practices should be transparent and publicly disclosed, providing consumers, content providers, applications developers, and service
providers greater certainty that their preferred technology and services are acceptable and not subject to interference on broadband networks; and

3. Network management practices should not used as a pretext for discriminating against particular types of content or services that the network operators may view as unacceptable or potential sources of competition.

While I certainly can appreciate Vuze’s interest in establishing such rules, I again have to ask, as I have throughout this entire “net neutrality” debate, why otherwise entrepreneurial people would run to the government for help with what is essentially a problem in their distribution chain? Who is advising these companies to seek redress before the FCC and why are they being listened to? Even a cursory review of the FCC’s record would show that they are a terrible forum for these types of disputes.

More broadly, why is everyone trying to invite the FCC to regulate the Internet? Has the FCC done such a great job regulating telecommunications, cable, and broadcasting that we want them now to regulate the Internet? Think through what jurisdiction over the Internet could encompass. Network operators, ISPs, content providers, equipment manufacturers, software developers, hardware manufacturers, service providers, the list is endless. By the time all is said and done, the FCC would have jurisdiction over an enormous segment of the economy. Is this what we want? If ever there was a sure way to retard our technological progress and innovation, this is it. I said it before and I will say it again, the cure (FCC regulation) in this case is likely far worse than the disease (alleged discrimination).

Parties should try working these issues out amongst themselves before asking the FCC to get involved. No where in Vuze’s petition do they say that they tried to work it out directly with Comcast. Perhaps if they did, they would find a mutually beneficial solution. Perhaps not. But that doesn’t mean “there ought to be a rule.” As I said the other day, there are a host of relationships that need to reach equilibrium before the Internet matures. It would be a shame to freeze some of these relationships in place just to grease the squeaky wheel.

European Proposals Show Continued Leadership Even if They Aren’t the Best Ideas

Fri, 16 Nov 2007 17:02:27 +0000

The release of the proposals by the European Commission for reform of the European regulatory framework for telecom firms is surely just the beginning of what is to be a major political battle within Europe. The proposals garnering the greatest attention at the moment are the ones aimed at the forming a European-wide regulatory authority and allowing national regulators to “functionally separate” the incumbent carriers if other measures fail to introduce competition.

On the subject of the European-wide regulatory authority, I must say I think it is a bad idea and I think the U.S. experience should serve as a vivid example of the problems with such an approach. There was a time, back in the late 1980s and early 1990s when individual states in the United States began experimenting with liberalization of the telecommunications market. New York and Illinois were the early pioneers in this effort. Other states, including Maryland, Massachusetts, Florida, Michigan, California, Washington, and Connecticut, recognized that market liberalization was good for investment and local business and moved quickly to initiate rulemakings or modify their telecommunications laws to open the local telephony market to competition. By the time the Telecommunications Act of 1996 was passed by Congress, more than a dozen states had ended the local telephone monopoly and implemented measures to promote local exchange competition. At least a dozen more states (including Tennessee, Georgia, Pennsylvania, North Carolina, Texas, and Colorado) were in the process of initiating changes to their laws and regulations as well so that basically half of the states were in the process of liberalization.

But once the Telecommunications Act of 1996 passed and the experiment in local competition was nationalized, what started as an orderly progression towards effective market liberalization quickly disintegrated into an orgy of regulatory gamesmanship and litigation. That the Telecommunications Act of 1996 was a mistake was made clear when the FCC issued its first “local competition order” – a nearly 800 page order that attempted establish comprehensive local competition rules, most of which were eventually overturned after years of litigation.

How the FCC could get it so wrong when nearly half the states were getting it right is a lesson on the dangers of centralization that the Europeans would do well to heed. But putting aside the substantive policy problems that a central authority would have, the situation in Europe is a bad idea for the simple reason that it is going to have the effect of freezing progress, not accelerating progress towards liberalization, as parties litigate the contours of the authority of this new pan-European regulator. National regulatory authorities hostile to the idea of a pan-European regulator will simply shut down, forcing interested parties to pursue their cause at the pan-European regulatory authority, ultimately triggering litigation by the losing party. This process could take years to sort out during which time critical issues will remain unresolved. Moreover, this process involves substantial legal and political cost and resources for the parties involved, which lends a decisive advantage to incumbent operators. Most nascent competitors lack the legal and political resources necessary to effectively pursue a legal claim over the course of several years from the national regulator, up to the pan-European authority, and eventually back to the national regulator where the matter will be resolved on some form of remand. So not only will progress be frozen pending the outcome of litigation, but the outcome is more likely to be favorable to incumbent interests since they are the only parties with the resources to see the process through to its conclusion.

My feelings about the proposal to allow national regulatory authorities to impose functional separation on incumbent operators are much more favorable from a substantive perspective, but I still have questions about the procedure. The proposal says national regulatory authorities can impose functional separation as a measure of “last resort” and only after receiving approval from the European Commission. I am not sure European Commission approval is a necessary component to this and it would probably be better if the European Commission simply clarifies the authority of national regulators in this regard.

For the moment, these are just proposals for reform. It remains to be seen whether the European Commission will adopt them, but it demonstrates once again that the Europeans are setting the example for the world on how to effectively liberalize telecommunications markets. Here in the U.S., policy makers seem unable to tackle the primary obstacles to more effective competition and are devoid of any creative ideas as to how to overcome them.

A net neutrality storm

Wed, 07 Nov 2007 21:21:45 +0000

Following recent reports that Comcast “actively interferes with attempts by some of its high-speed Internet subscribers to share files on line,” a coalition of consumer groups filed a complaint with the Federal Communications Commission (“FCC”) seeking an injunction against the practice. The coalition also is asking the FCC to declare that degradation of service in the manner that Comcast is alleged to have engaged violates FCC policies and principles, particularly the FCC’s Internet Policy Statement . Even before this action, the reports about Comcast’s actions sparked members of the Senate to request hearings on the matter.

I have to admit that I was surprised at the sophistication of the practice as it is alleged, and perhaps more so that it was Comcast and not Verizon or AT&T. I don’t mean that in a pejorative sense, it’s just that AT&T and Verizon are generally more experienced in this field, particularly with their Internet backbone networks. In any event, this has all led parties to once again whip up the net neutrality frenzy, even infecting the Presidential campaign.

The Progress and Freedom Foundation (“PFF”) tried to put the issue in perspective with a release pointing out that this wasn’t so much a net neutrality problem as it is a pricing problem that Comcast (and other ISPs) have. The primary reason net neutrality is even an issue is not because ISPs have nothing better to do than sit around and figure out how to mess with particular services and applications (at least not yet). It is because certain services and applications place a disproportionate burden on the Internet infrastructure. Due to the nature of Internet connectivity and routing, often times the compensation for service is not direct or entirely clear. But as the following example illustrates, all parties are being compensated.

Assume Content Provider A purchases its Internet connectivity from Carrier X. Carrier X is directly compensated by Content Provider A for the capacity it requires. If, however, Carrier X peers with Carrier Y on a settlement free basis and passes Content Provider A’s traffic through the peering point, Carrier Y may complain that it is not being compensated for the capacity required to carry Content Provider A’s traffic. And while it is true that Carrier Y is not receiving direct payment within the framework of a settlement free peering arrangement, Carrier Y does have the right to pass its own traffic to Carrier X on a settlement free basis and therefore is “compensated” in that fashion. The settlement free peering is maintained so long as Carrier X and Carrier Y continue to believe they are receiving roughly equal value from the relationship. Moreover, if Carrier Y is still not satisfied that it is being fairly compensated, Carrier Y can compete for Content Provider A’s business and obtain the direct compensation it seeks.

Now assume Carrier Y has a transit arrangement with ISP 1 whereby ISP 1 pays Carrier Y for Internet transit services. When Carrier Y passes Content Provider A’s traffic to ISP 1 for delivery to ISP 1’s end user customer, ISP 1 is actually paying Carrier Y for that traffic. Of course, ISP 1 is also compensated by its end user for Internet access. So, the traffic flow and money flow for the above example looks as follows –

If Carrier X is setting the right price to Content Provider A and Carrier Y is setting the right price to ISP 1 and ISP 1 is setting the right price to its end user, then everyone should be happy. The fact that some parties are not happy is a result of either (1) their own pricing, (2) their inability to compete effectively for certain market segments, or (3) they are greedy. In either event, it is the party’s problem and not a defect in the Internet.

Some carriers want to charge premium prices for “premium” delivery of content in the belief that this will improve their lot. Others suggest carriers simply need to add more capacity as that is a less expensive alternative to the sophisticated traffic management tools that Comcast and others are beginning to employ and would be required to support premium delivery.

At this point, I don’t think anyone knows what the right answer is. This is one reason why it would be foolish to impose a net neutrality mandate at this time. As the above example and diagram illustrates, there are a host of market factors that need to come into equilibrium in order for the market to function smoothly. Considering how early we are in the growth curve of the Internet, those who advocate legislating an equilibrium now run a very high risk of getting it wrong. It is also presumptuous to think that a “problem” even exists just because of a vocal minority. AT&T and Verizon are but two of many Internet backbone operators. Just because they are complaining doesn’t mean there is a problem. Similarly, just because some heavy users complain that their Internet experience is being disrupted doesn’t mean that the rest of us aren’t happy.

So before everyone gets their knickers in a bunch over Comcast’s alleged actions, maybe they should give some serious consideration as to what the problem really is, who is affected by the problem, and what the consequences of action at this time are.

Breaking up is looking more promising

Fri, 12 Oct 2007 17:15:17 +0000

News the other week that Telecom New Zealand is being split into three divisions – wholesale, retail, and network – is further evidence that the folks down under are far more aggressive in their efforts to introduce competition. The other day, I applauded Australian Communications Minister, Helen Coonan, for her public rebuke of Telstra’s bill insert blaming regulation for its market failures. Together with New Zealand’s action, these are the strongest examples of courageous policy makers taking the necessary steps to introduce long term, sustainable competition into the telecommunications industry despite the protests of the incumbents.

Now we also see the European Regulatory Group issuing a report saying functional separation may be appropriate in some markets. Also, it appears that Eircom Ltd., the incumbent telephone company in Ireland is voluntarily proposing a wholesale/retail split of its operations.

In the U.S., divestiture was instituted by the hand of a judge. Will history repeat itself or will U.S. incumbents learn from the past and their overseas brethren?

Investment down under

Tue, 02 Oct 2007 13:21:39 +0000

The broadband investment debate is also taking place down under in Australia. On one side is Sol Trujillo, veteran of the old U.S. West, who now is the CEO of Telstra, the Australian incumbent. Sol never misses an opportunity to blame regulators for his company’s poor performance and has tried every which way to get the Australian government to insulate his company from risk. On the other side of the debate is Communications Minister Helen Coonan who thankfully sees right through his argument as is evidenced by her latest comments on this debate.

Evidently, Telstra has written its 1.6 million shareholders accusing the Australian government of “excessive, costly regulation” and “letting Australia fall behind in broadband internet technology.” To which Ms. Coonan replies “regulation is not holding Telstra back, the only thing holding Telstra back is its own commercial decision to go on a capital strike, to not rollout broadband.”

Truer words were never spoken. It is refreshing to see someone of Ms. Coonan’s stature and position challenge Telstra in this manner. It is even funnier to see her go on to say with regards to Telstra’s gaming of the regulatory process “In my way of thinking that is not a sensible use of executive time, it is not a good use of shareholder’s funds and I really wonder at what point shareholders are going to contact the board and say ‘what are you doing with this American management structure?’”

If only the Americans and the Europeans had a similarly skeptical ear for incumbent claims about broadband investment.

The Investment Debate Crosses the Pond

Tue, 25 Sep 2007 18:37:42 +0000

The release of a white paper by ETNO (the Eurpean Telecommunications Network Operators Association, a coalition of incumbent network operators) purporting to demonstrate that network investment would increase if policy makers would just stop insisting on unbundling and allow “inter-platform” competition to flourish is of course a re-packaging of the same arguments put forth here in the U.S. by the Bell Companies (unfortunately with great success).

Thankfully, ECTA (the European Competitive Telecommunications Association, a coalition of competitive carriers) has offered a rebuttal to these arguments. Like their U.S. counterparts at Comptel, ECTA must now counter what is sure to be a huge political and public relations push by the incumbents to roll back the regulatory progress made over the last ten years.

We have seen this investment debate before and it runs a predictable course. Let’s hope that ECTA has learned from the mistakes of the past that allowed the incumbents to be successful in the U.S. These lessons include –

1.            Establish a political constituency. If the debate is about what price competitors pay for access to the incumbent’s network, the competitors have already lost. Incumbents are typically one of the largest employers in a country and those employees vote. Moreover, incumbents are typically some of the largest political donors. Competitive carriers do not match up well in this regard for the simple reason that they do not have a bloated payroll from a century of political largesse. So, competitive carriers need to establish a political constituency of their own. Ideally, competitive carriers will be able to rally the business, academic, and scientific community to their cause. After all, these are some of the most telecommunications-intensive industries in the economy who surely have benefited from the improved service and reduced pricing that competition has spurred. Competitors need to encourage the business, academic and scientific community to be active participants in the debate. Of course the incumbents have the advantage here as well since they often are large contributors to universities and scientific organizations who are naturally loathe to antagonize such generous benefactors.
2.            Simplify the debate. The incumbents have a very facile argument – if carriers want to compete, let them build their own network. Competitors shouldn’t expect to have subsidized access to the incumbents’ network to compete. Inter-platform competition between stand-alone platforms is more robust than competition “created” by forced resale and unbundling. Unfortunately, when rebutting this argument competitors fall into the trap of trying to explain how access prices are cost-based and how unbundling works. The better response is to simply say that if government wants to grant carriers free access to public and private rights of way, give them 100 years of advertising and public relations support, and commit 100% of their telecommunications business to them, then competitors will indeed build their own networks. Since that is what government did for the incumbents, it is only fair they do the same for competitors. After all, how are competitors supposed to compete with a bunch of “welfare queens?”
3.            It’s not about investment, it’s about risk. The incumbents always talk about investment incentives, but really what they are asking for is risk insurance. They don’t want to place their capital at risk. They want a guaranteed return on investment. You can’t blame them for asking. It’s the policy makers that are to blame for actually minimizing the risk. But the reality is no politician wants the largest employer to cut back on spending and initiate layoffs. Moreover, in the competition for broadband penetration rankings, there is no easier way to increase broadband penetration than to give your incumbent carte blanch. With tens of millions of subscribers, a minimal sales and installation effort can result in millions of new broadband subscribers and an uptick in the rankings. So the lesson for competitors is not to present themselves as such a threat to the incumbents. Unbundling and resale is not about taking market share from the incumbents. It is about improving service to consumers and maximizing the value of an aging asset (the old copper network) and guaranteeing sales on a new asset (next generation networks). Incumbents should embrace a business model that allows them to monetize their aging asset in the form of resale and unbundling while investing in next-generation networks that easily out-compete legacy networks. Competitors would be foolish to rely on unbundling and resale as a long-term strategy if they knew the incumbents were aggressively investing in next generation networks. So naturally they too will invest in new networks and if they don’t, shame on them. And if the incumbents are concerned that unbundling and resale of their next generation network will erode their market share, then they are admitting that competitive carriers are better at sales, marketing and customer service.
4.            It is not a zero sum game. Telecommunications traffic continues to grow at phenomenal rates. Competitive gains do not equate to incumbent losses. It is a growing pie that all parties can share.
5.            It’s a national security issue. In today’s world, telecommunications is a critical component of everyday life for individuals, for business, and for government. Major telecommunications outages have as great an impact as power outages on economic activity and the conduct of government. Moreover, control over the flow of information should be as dispersed as possible in order to ensure an informed electorate. Consolidation and control of the telecommunications infrastructure in the hands of a single incumbent is a poor strategy for protecting critical infrastructure and ensuring the free flow of information. Nations need robust telecommunications infrastructures that are only possible when you have a “network of networks” seamlessly interconnected. The more interconnection points you have, the more robust your network of networks is. And if you have interconnection at all levels of the network (which is what unbundling is all about), your network of networks is more robust still.

Finally, European policy makers should recall that during the 1980s and early 1990s the United Kingdom resisted efforts at unbundling in favor of inter-platform competition. At the same time, the U.S. was implementing unbundling. The result was enormous growth and investment in the U.S. telecommunications infrastructure and nominal activity in the U.K. This caused the U.K. to change course and pursue its current policy path. So the experiment in inter-platform competition was already tested and abandoned as a failure.

Process is Important

Mon, 17 Sep 2007 16:34:07 +0000

The Department of Justice voiced its opinion on the issue of net neutrality the other week when it filed comments with the FCC concerning the FCC’s review of broadband industry practices. It was no surprise to see the Department come out opposed to net neutrality regulations and they certainly cited all the right reasons for their position. But there was one aspect of their comments which gives pause.

In their comments, the Department states –

“Anticompetitive conduct about which the proponents of regulation are concerned will remain subject to the antitrust laws and enforcement actions by government as well as private plaintiffs, and the Department will continue to monitor developments, taking enforcement action where appropriate to ensure a competitive broadband Internet access market.”

Coming from previous Administrations, these words may have been somewhat reassuring, but from this Administration, they ring somewhat hollow. Funnily enough, the Department cites its review of recent mergers in the telecommunications industry, including SBC’s acquisition of AT&T and Verizon’s acquisition of MCI, as evidence of their “antitrust enforcement and competition advocacy efforts.” Considering the consensus view that the Department’s review of these mergers was less than adequate, it is not very reassuring to know that the Department is the only option in this arena.

And that brings me to my main point. Anti-trust actions are a terrible instrument for justice in the telecommunications industry and exclusive reliance on anti-trust enforcement will not prevent the sort of behavior with which so many parties are concerned. Indeed, anti-trust enforcement is a terrible instrument in any industry in which there are numerous new entrants and one or more dominant incumbents. Anti-trust actions take a great deal of time, evidence and resources, are extremely costly, and new entrants rarely have the financial resources to withstand a protracted anti-trust enforcement against an entrenched incumbent. Typically, by the time they have resorted to an anti-trust action their ability to attract continued capital is crippled. Even if they do “win” an anti-trust action, the damage to their business is already complete and the victory is pyrrhic indeed. Not to mention the fact that the bar to a successful anti-trust action has been raised extremely high as a result of recent Supreme Court rulings.

All of this is not to say that the Department is wrong or that we need net neutrality regulations. I continue to believe there are marketplace solutions to the net neutrality concerns that are far superior to new regulations. But it is to say that we need something other than traditional anti-trust enforcement to stop abuses as they are happening and not after the fact. I have long been a critic of the traditional regulatory, legal, and political process that currently consumes so much of this industry’s resources and serves to simply protect the status quo.

More than ever this industry needs a rapid, efficient and effective alternative dispute resolution process. Instead of bashing the Department for its substantive stand on the issue, net neutrality proponents should instead be more concerned about the process for remediation proposed by the Department. If the potential for harm is as bad as net neutrality proponents claim, anti-trust enforcement is a lousy tool indeed and offers no relief to the start-up run out of business because they were blocked from accessing consumers on the Internet.

The Sun Sets on Long Distance

Wed, 05 Sep 2007 20:14:36 +0000

On August 30, 2007, the FCC moved to sunset the requirement for AT&T, Verizon, and Qwest to provide long distance services through a separate affiliate. In issuing its decision, the FCC touted the benefits to the companies and the additional consumer protections agreed to by the companies.
Unfortunately, the FCC failed to take the necessary parallel action which would have made this a truly meaningful milestone for more than just those three carriers. Finding that AT&T, Verizon and Qwest are non-dominant in the long distance market was only half the story. The FCC should have gone further and concluded that distance is irrelevant for purposes of inter-carrier compensation and that rates for termination of traffic therefore must be uniform, regardless of the originating point of the traffic. Failing to take this step leaves a critical gap in the FCC’s policy and provides AT&T, Verizon and Qwest with a cost advantage in what remains of the long-distance market. Unaffiliated carriers still have to pay AT&T, Verizon and Qwest access charges for the termination of long distance traffic. And while AT&T, Verizon and Qwest still have to pay those charges as well, historically the majority of long distance traffic originates and terminates in-region for each of these carriers so they are simply paying themselves for the majority of the traffic. Not so with unaffiliated carriers and thus the problem. Unaffiliated carriers continue to be handicapped by artificial access charges while AT&T, Verizon and Qwest are not. Unless the FCC remedies this problem, the sun will surely set on the competitive long distance market sooner rather than later.

Forbear and Forget

Thu, 09 Aug 2007 11:00:49 +0000

Every now and again government takes some action that really brings out the skeptic in you. At the Federal Communications Commission, one example of this was its handling of Verizon’s “forbearance” petition. Filed at the end of 2004, Verizon asked the FCC to forbear from applying traditional common carrier regulations to its “broadband” services. It was such a sweeping request because “broadband” was left undefined and applied to a huge range of Verizon’s services, both residential and commercial.

So what did the FCC do with Verizon’s petition? As any good government agency would do when faced with such a critical decision, they ducked. The FCC let the statutory deadline for action pass without taking any action which meant that Verizon’s petition would be deemed granted. Rather than proactively address the conditions under which it would forbear from regulation, the FCC instead did nothing. Basically, when it came time for the FCC to put its money where it mouth is when it comes to deregulation, they didn’t have the intellectual capacity to justify their approach to regulation. I mean if ever there was an opportunity to explain their governing philosophy, this was it.

Thankfully, some CLECs are trying to force the FCC’s hand and make them issue a written order either denying the Verizon petition or explaining what it is they did approve. The FCC is accepting comments on the CLEC petition until August 13th. If for no other reason, parties should urge the FCC to issue a written order so that the FCC can explain its approach to regulation, or deregulation as the case may be. I think the industry would be well served by a clear statement of FCC policy in this regard. It certainly is preferable to the FCC’s current approach which appears to be “forbear and forget”.