IP Convergence: Beyond VoIP, Beyond Cost Savings

News last month that Verizon received its franchise from New York City to provide FiOS was greeted with much fanfare (registration may be required). Lost in the hoopla is the fact that Verizon’s plans for serving New York City were delayed and over-burdened by a city government intent on extracting all that it could from Verizon in exchange for the right to access public rights of way. On the one hand everyone complains about how the United States lags behind 15 other nations in broadband deployment, and on the other hand they applaud when a broadband service provider is mugged by the government.

I understand the need for and the logic behind a service provider compensating the tax payers for use of the public rights of way. To have it any other way would be a travesty. But when the price to access the public rights of way is constantly subject to negotiation on a case-by-case basis by a city government subject to myriad economic, budgetary, and political imperatives, the result is more expensive broadband delivered later than it otherwise should have been.

The 5% franchise fee in and of itself is an incredible construct. The costs to manage and maintain the public rights of way do not vary by the size of a company’s revenue so why should the price? If there were a fixed price per selected distance (e.g., foot, meter, mile, etc.) companies would know up front what their costs are and could plan and budget accordingly. But when the price depends on how well you negotiate with the city, then you have to invest in lawyers and consultants and watch your costs rise as the negotiations drag on.

On top of the franchise fee, Verizon has to offer 50 public, educational, and governmental (“PEG”) channels. In addition to the equipment costs required for Verizon to support 50 channels, there is also the opportunity cost of not being able to use the 50 channels for other services. If city government wants to use video channels in its operations, it should pay for it like anything else it wants to do. Paper companies don’t have to provide free paper to the city so why should television operators have to provide free channels.

Verizon also committed to provide a $10 million grant to the local public broadcasting operator and increase funding of community access organizations located in each of the city’s five boroughs. And just for good measure, Verizon agreed to provide an additional $4m to expand public access technology. When all is said and done, that looks to be about a $15 million up front payment followed by 5% of revenues annually plus the 50 channels. And many people look at that and think it’s fine considering how much money Verizon has. But what is the impact on smaller operators? They may not have to pay as much as Verizon in an absolute sense, but after seeing what Verizon was forced to pay for its franchise, it is very difficult to make the business case for a franchise in New York.

The real irony here of course is that Verizon – used to being the monopoly provider of local telecommunications services – is being given a taste of its own medicine by one of the few monopolies larger than it – city government (state and federal government are some of the other larger monopolies). And that is the problem. You have a city government pursuing its own agenda with absolute control over a critical facility – rights of way. So the federal goal of rapid deployment of high-capacity broadband services is undermined by the parochial interests of city government.

Again, I do not object to compensating municipalities for access to rights of way. But the price has to bear some relation to costs and should be predictable. Let New York City set a price of $15 million plus 5% of revenue but then don’t complain that you can’t get access to decent broadband.

In a decision released July 8, 2008, the U.S. Court of Appeals for the District of Columbia issued a Writ of Mandamus compelling the FCC to finally provide the legal justification for a decision it made 6 YEARS AGO concerning reciprocal compensation for traffic destined to ISPs.
The fact that it took the court so long to take this action is testimony to one of the biggest problems plaguing the telecommunications industry today - process paralysis. The matter at issue is actually one that dates back more than 10 years. During the 1990s, when CLECs succeeded in besting the Bell Companies at their own game of access charges and began collecting enormous sums of revenue for traffic destined to Internet Service Providers, the Bell Companies asked the FCC to eliminate compensation for ISP-bound traffic (rather than compete for the ISP business directly). On February 26, 1999 the FCC released a Declaratory Ruling, which concluded that ISP-bound traffic was "jurisdictionally mixed and largely interstate, and the reciprocal compensation obligations do not apply to this traffic." In March 2000, the District Court vacated and remanded the FCC’s decision for lack of adequate justification. In 2001, the FCC issued a further decision attempting once again to provide legal justification for its 1999 decision and establishing a new compensation regime for ISP-bound traffic.
In May 2002, the District Court remanded the FCC’s decision a second time, but this time without vacating the decision because as the District Court stated, “we thought there was a ‘non-trivial likelihood’ the Commission would be able to state a valid legal basis for its rule.” In issuing the Writ of Mandamus this week, the District Court dismissed the FCC’s continued assurances that it would act by November 5, 2008 on the issue. So basically 9 YEARS AFTER robbing CLECs of inter-carrier compensation with no apparent legal justification, the FCC’s defense was still “trust us, we’ll address the issue.”

This episode, as much as any other, highlights the criticality of reform for the regulatory decision-making process. The issue started as a contract dispute between CLECs and the Bell Companies that in normal commercial practices would have been negotiated out or put before a commercial arbitrator in a matter of weeks or months. But because the Bell Companies invoked the regulatory process they were able to use their political, legal, and regulatory resources to achieve what they would otherwise not have been able to achieve at the bargaining table and drag this process out for 9 years. Worse still, the Bell Companies achieved this victory with no apparent legal basis.

What a different industry it might have been if the FCC refused to take up the dispute and forced the Bell Companies to either live with the bargain they struck or negotiate a new one. The CLEC industry would have been flush with cash to fund their network expansion. The Bell Companies would have been forced to develop more competitive services for ISPs. Who knows what the impact would have been on mergers and acquisitions. Unfortunately, there are multiple examples like the ISP-bound traffic issue that if the FCC had handled differently would have been of enormous benefit to the broader telecommunications industry.

Well, the FCC does have one more opportunity to not only address compensation for ISP-bound traffic, but all traffic. In its May decision capping universal service support, the FCC stated it intended to address comprehensive inter-carrier compensation and in subsequent statements set a target date of November 5, 2008.

Let’s hope that after 9 years the FCC can finally figure this out because the telecommunications industry in the United States is severely handicapped relative to its overseas counterparts by an anachronistic inter-carrier compensation regime that burdens the industry with endless litigation and exorbitant costs. Hopefully come November we won’t still be scratching our heads wondering what it is the FCC has done to this industry.

A new paper from the Organization for Economic Development (”OECD”) recognizes the importance of rights of way to sustainable competition for next generation networks. Some note worthy quotes include:

“The limitations faced by new entrants are significant, especially with respect to the reach of their existing networks and their ability to obtain access to rights of way and ducts. It is thus difficult for new entrants to replicate an NGN access infrastructure.”

“In addition, a large percentage of costs in rolling out new fibre networks are construction costs related to conduits and rights of way. Construction costs could be significantly higher for operators if they do not already have access to rights of way and ducts.”

“Incumbents have a significant advantage because their historical monopoly position has given them existing rights of way and they usually own the ducts used by copper networks (which often means they do not pay for rights of way). Other utilities, such as electric power companies, also have access to rights of way and ducts. The number of administrative layers (local municipal councils, regional bodies, etc.) often creates difficulties for new entrants in obtaining access to rights of way and ducts. Where municipalities are pro-active in trying to ensure that fibre networks are developed, they often provide access to municipal rights of way and ducts on reasonable terms.”

The OECD goes on to recommend

“The high costs of civil works to construct ducts will impact on new entrants who, in contrast to incumbents, do not have historical access to rights of way and ducts. In order to try and stimulate the rollout of fibre by new entrants it is important for policy makers and communication regulators to examine steps that can be taken to reduce these costs. There are a number of steps that can facilitate new entrants including:
• Reducing barriers associated with obtaining municipal authorisation for access to and use of rights of way.
• Ensuring clarification of jurisdiction for both granting rights of way and settling disputes and coordination among the public authorities involved.
• Harmonising administrative procedures for access to rights of way and ensuring consistency in the application of these procedures across a country.
• Reducing or eliminating any fees associated with using rights of way.
• Ensuring that operators investing in ducts are subject to a minimum set of obligations for remediation and maintenance.
• Encouraging and/or obliging sharing of ducts and other rights of way both by incumbent communication companies, but also by other municipal utilities that have infrastructure.
• Examining the role of public-private partnerships in the deployment of dark fibre and/or third party infrastructure providers for duct sharing.
• Examining the possibility of regulatory measures to impose the pre-wiring of new residences for sharing of in-house wiring.
• Developing policies to construct joint ducts by new entrants.
• Adding inner ducts (duct dividers) into the ducts and canals for increasing the existing capacity.

Delays in rolling out networks can be costly for operators, and can delay the development of competitive markets, so that by preventing delays in the process of rights of way applications, a system of safeguards which ensures that deadlines for decisions concerning permits are respected. Establishing targeted time frames for various steps of the rights of way process helps in providing predictability to the applicant. In order to facilitate competing fibre local loops, reduce costs and reduce multiple excavation and other civil works in municipalities the sharing of existing ducts, both of telecommunication and cable companies, but also of other utilities, is an important policy requirement. Similarly access to buildings and sharing of wiring is important to ensure effective competition in the market.”

One can only hope that policy makers actually read this paper and take action on its recommendation.

I had the opportunity to speak Friday at a conference hosted by the law firm of Paul Hastings, Janofsky & Walker, LLP. The focus of the conference was emerging markets and the countries Brazil, Russia, India and China (“BRIC” countries). I enjoy small conferences like this because you get a freer exchange of ideas than some of the bigger conferences. The panel I was on concerned legal and regulatory entry barriers in the BRIC countries.

Because there was a representative from the U.S. State Department and the U.S. Trade Representative’s (“USTR”) offices, I felt compelled to point out how the United States’ own policies compare to those of the BRIC countries. So, I noted that the U.S. maintains foreign ownership restrictions like China and India do (Russia and Brazil do not). I noted that Brazil only charges a 1.5% tax for universal service whereas the United States charges 10%. I noted that the United States imposes unique obligations on foreign-owned and operated carriers like India does. And I noted that many of the problems that plague regulators in India, Brazil and China plague the FCC as well. The uncertainty and inconsistency of decision-making is not unique to the BRIC countries. The fact that the FCC has sat on inter-carrier compensation reform for over five years is testimony to that.

The job of the State Department and USTR is made all the harder by the fact that the United States practices much of what it preaches against overseas. Those who live in glass houses…

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.)

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.

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?

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.

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.

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.