IP Convergence: Beyond VoIP, Beyond Cost Savings

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.

The Politics of VoIP in Developing Nations

Recently I had an opportunity to meet with a native of Malawi.  The meeting came about due to a group of visiting “ambassadors” from Africa.  One of the participants was a gentleman by the name of Frank Mvalo. Per his bio:

Frank Mvalo from Malawiworks in the private sector in management and IT systems as a management consultant. During the exchange, Franks wants to learn more on strategic management and business planning, monitoring tools for the field of development, and the management of IT development projects. Frank speaks 3 languages and is married with one child. (http://www.rotary7120.org/GSETeams.cfm)

He requested a series of meetings with folks while in the US that are in the IT and Telecommunications field.  The visit was organized by the Group Study Exchange (GSE) program of the Rotary Foundation.  While I am not a Rotarian, I know a number of people that are.  They reached out to me, and earlier this week I sat down with Frank for lunch to discuss telecommunications technologies like VoIP, and it’s potential applicability in developing nations like Malawi.   The conversation quickly moved away from the technology to regulations.  I learned in areas of the world where the impacts of technological advances could have the greatest impact, prohibitive regulations by corrupt governments in these developing nations prove to be the biggest stumbling block. 

Later that evening, as a result of this eye-opening discussion, I decided to learn more.  I performed a simple google search with the key-words “voip in third world countries” – and of the 1million plus hits, result number 1 and 3 are titled:

From the first article:

“Namibia is the latest nation to go absolutely convulsive over the prospect of some of its citizens bypassing the local phone monopoly by selling and using VoIP. Five people have been busted.”

At a time when the digital divide widens between the haves and have nots, it’s sad to see that technical innovation is stifled at times when bridge building across the divide needs to take place.  Should you read more, you will see that it’s not just policies of the third world nations, but also restrictions of financial backers.  Frankly, the whole thing reeks of corruption.

Adam "voiploser" Uzelac 

For those not in the know, CALEA is the Communications Assistance for Law Enforcement Agencies – meaning it’s all about getting the bad guys.  There are many facets to the law and one can learn more at Ask CALEA.  A big part of helping the cops is “tapping” or “snooping” on the evil-doers’ phone calls.  Here’s the thing – VoIP and the entire “Converged” model of communications makes it more difficult to tap these calls.  I don’t believe that I am going out on a limb here, or telling anyone what they don’t already know.  It’s more that I am reinforcing some preconceived notions.

Tapping VoIP calls is more difficult than TDM calls for one simple reason: VoIP is a connection-oriented application (voice) using a connection-LESS medium (IP) as transport.  As a result of using a connection-less medium, the transport path can’t be safely assumed.  There’s no deterministic route that everything to or from an “evil-doer” traverses. Without that knowledge, where do you “tap”?  One option would be to “tap” every possible path that communications could take, but the cost involved with that is astronomical.  The other option is to ensure deterministic routing, or force routing in a way that makes thing “interceptable”. This problem starts lessening the closer to the intercept target the tap is placed, but there are still use cases where communications are "load-balanced" across multiple broad-band communications, say both cable and DSL broadband access to a home.  One could easily setup routing to use both networks simultaneously.  For me, this would mean that Time Warner would get half of my conversation, and my DSL provider (Frontier) would get the other half. 

So now for some outstanding questions that linger in my mind on CALEA:

- What about SKYPE or other peer-to-peer communications?  How is that addressed by the govt and LEAs?
- Is it beyond comprehension that sRTP (encrypted media) might be outlawed by our govt because it’s not “interceptable”?
- To what extent are equipment and software vendors held accountable to create “interceptable” flows?  If it’s mandated by our govt, then what’s preventing them from moving and setting up shop in a country that doesn’t have such regulations?
- Do the rules apply to “on-net” call flows where the PSTN is not involved at all?  

The bad-guys and evil-doers, especially the more sophisticated ones, are going to use cryptography, encrypted tunnels and encrypted peer to peer communications as well – so this begs the question – is all the trouble, expense and hassle worth it? Is it even plausible?

Adam “voiploser” Uzelac

In a Washington Post editorial, FCC Commissioner Michael J. Copps once again decries the state of broadband deployment in the United States.  Unfortunately, Commissioner Copps is long on criticism and short on answers.  And he is not alone.  Numerous pundits cite the U.S.’s 15th place in the ITU rankings as evidence that we are somehow “behind”.  Putting aside the various arguments that the geography of the U.S. is the prime explanation for the ranking and that if you compare like geographies (e.g., Chairman Martin’s comparison of Massachusetts to France) we are on part with other countries, I still am not sure what significance the rankings have.

As an initial matter, one must consider the need for broadband.  Commissioner Copps says “universal broadband adoption would add $500 billion to the U.S. economy and create 1.2 million jobs”.  That may very well be, but you have a classic http://en.wikipedia.org/wiki/Chicken-and-egg_problem }“chicken or egg” problem.  Do consumers really need 25 Mbps for email or VoIP, the two “killer apps” on the Internet?  And is the quest for 100 Mbps worth it to watch some guy in a lab coat put golf balls in a blender?  I recognize that more sophisticated and useful applications may develop for the Internet, but from where I am sitting it looks like the Internet currently has about the right speed for what is currently available on the Internet.

The question is how you grow the speeds along with the applications.  AT&T and Verizon are proposing a pay-as-you go scheme with their premium pricing proposals.  I am not clear what Commissioner Copps or others are proposing.  If the suggestion is that the Internet should be operated as a utility, I can’t accept that.  First, the Internet is a network of networks so are you regulating all network operators as a utility and “neutralizing” them?  Second, anyone who remembers more than 10 years ago remembers what lousy service utilities provide and the perverse incentives inherent in utility regulation.  Finally, where does the innovation come from in this model, solely the application providers?

After all, you just don’t know how the Internet is going to evolve and what the future killer apps are going to be.  Moreover, there are a host of issues to be worked out before society can make good use of 100 Mbps.  Thankfully, Commissioner Copps talks about introducing competition as opposed to regulation, but if we really want to introduce competition for broadband services, we need to:

1. Eliminate barriers to infrastructure deployment.  The most expensive and time consuming part of network deployment involves accessing public and private rights of way.   If this country is serious about broadband deployment, it is going to have to dramatically change the way private companies access rights of way.  An interesting paradigm (although not necessarily the right paradigm) is the Wi-Fi deal in Philadelphia.  Although touted as a Wi-Fi deal, it really is a rights-of-way deal.  Earthlink basically negotiated the right to access the thousands of traffic lights in Philadelphia in exchange for a variety of service commitments and fees.  Without such a city-wide rights-of-way deal, the effort to bring Wi-Fi to the entire city would have taken far longer.

But carriers need to access private rights-of-way as well.  Landlords and building owners use their monopoly to extort concessions from carriers which increases the cost of network deployment both in terms of time and money.  This is a tough issue because of the legitimate property rights involved, but at a minimum Congress should require landlord and building owners to treat all carriers in a non-discriminatory fashion.  This way, if they granted the incumbent telephone company free access to the building, they need to do the same for all carriers. 

2. Reform inter-carrier compensation.  Because the Internet is a “network of networks”, traffic must be exchanged between networks in order for the whole system to work.  Currently, the incumbent telephone companies (and particularly the rural companies) are clinging to the old Calling Party Network pays paradigm.  Indeed, BT is trying to advance the model for its Next Generation Network efforts in the U.K.  This is patently absurd.  The Internet is an interactive experience with no clear cost-causer or even calling party.  When a consumer clicks on an Internet ad, who is the caller?  By placing the ad, is the company effectively “ringing” the consumer, or by clicking the ad is the consumer ringing the company?  If it is determined that the sender of content (be it a simple search query or a video clip) is deemed the Calling Party, then don’t carriers have an incentive to pursue eyeballs over content since more money is to be made receiving content than delivering it?

The Internet itself offers the clearest example of how inter-carrier compensation evolves in a truly competitive environment and incumbent telephone companies should not be allowed to distort the model by leveraging their last-mile monopoly over eyeballs.  Instead, policy-makers need to reform inter-carrier compensation for the PSTN and resist efforts to interfere with existing Internet peering and transit arrangements.

3. Establish a swift and efficient dispute resolution forum for inter-carrier disputes.  As part of the network-of-networks, carriers seek to interconnect for the exchange of traffic.  Inevitably, disputes arise over the terms of interconnection.  Unfortunately, the only forum for resolution of those disputes is a political forum (either the state PUCs, the FCC or Congress).  Carriers must have available to them a neutral, third-party arbitration forum.  The incumbents will never voluntarily agree to it because delay works to their advantage and they have more political influence than competitors.  Congress and the FCC need to make it clear they will no longer allow their process to hold up infrastructure deployment. 
4. Provide comfort to copyright holders and holders of other rights that their works will not be subject to rampant pirating.  Parties continue to struggle with the right business model that strikes the proper balance between copyright holders and distribution partners.  Until that balance is found, content on the Internet is going to be limited or amateur.  

Until these steps are taken, we will be resigned to, as Commissioner Copps puts it, a "cable and telephone broadband duopoly."

When President Bush signed the Unlawful Internet Gambling Enforcement Act of 2006 into law on October 13, 2006, not only did he wipe out untold billions of dollars of shareholder value in U.K. betting companies, he blew a real opportunity for the United States to demonstrate to the world the benefits of our so-called free market capitalism and likely encouraged other nations to adopt similarly protectionist and paternalistic regulations. 

Rather than get into the pros and cons of legalized gambling or the particulars of this new law, I want to focus on what this action means for future web development in the U.S.  Time and again it has been shown that vice operators (sex, drugs, gambling) are the earliest adopters of new technology and often times are the most financially successful entrepreneurs.  When “976” numbers made a big splash in the late 1980s, it was the sex lines and the sports betting lines that were the most profitable.  And we all know how porn is doing on the Internet.  But more than just being money makers, these industries have been innovators in verification and validation techniques and often times are on the cutting edge of technology.  Main stream companies have been big beneficiaries of the trail blazing efforts of on-line pioneers in the sex and gambling industries.  Despite everything else, these operators are all about getting cash in the door and have become very efficient at it.    Because the U.S. has been the biggest market for on-line gambling, it is only a matter of time before on-line gambling operators figure out how to collect money from U.S. customers without violating the Gambling Enforcement Act of 2006.  And that’s the shame of it because all of the innovations around gambling sites are largely applicable to other forms of gaming sites.  But investment follows money and as all of that money flows overseas so will the investment.  And for those who think that cracking down on “hard-core” gambling sites won’t impact “legitimate” gaming sites, think about all the local charities and other civic organizations that have to contort their fund raisers so as not to run afoul of various gambling laws.  

Bill Moyers’ program “Is the Net at Risk?” got me thinking again about investment “incentives” and Teletruth’s campaign to expose the Bell Companies’ unfulfilled investment promises of the past.
Verizon is particularly fond of saying they need the right regulatory incentives to deploy advanced infrastructure. And of course Ed Whitacre is infamous for his threat (promise?) to put an end to the “free ride” content providers allegedly enjoy on today’s Internet. Now I can understand why these guys are making these self-serving statements, but the bigger question is why policy makers continue to entertain them.

I don’t disagree with Ed Whitacre when he says Internet traffic is growing. I don’t disagree that consumer broadband penetration is growing. I recognize the need to invest in the Internet infrastructure and I agree the investment needs to be recouped in order to foster continued investment. Where I disagree with Verizon and AT&T is that they have to be the ones to invest – or else! After all, since 1996, the cable television industry has invested over $100 billion in their broadband platform without any “regulatory incentives”. Now of course Verizon and AT&T will say that is exactly the point – the cable industry was deregulated during this time and was not subject to unbundling requirements and other onerous regulations. This is not exactly true since cable companies have been subject to the ever-so-dreadful franchise process that Verizon and AT&T are spending tens of millions of dollars to bypass. Moreover, the cable industry has always been supported by risk capital not captive ratepayers.

Where I really disagree with Verizon and AT&T is with their notion that they are somehow the Chosen Ones who will build the Internet infrastructure and then charge everyone who comes within 10 feet of it. The Internet is a network of networks and there is no reason to assume Verizon and AT&T have to build out a complete end-to-end Internet infrastructure. (In fact, I would argue, that the public is better served when no one entity controls the end-to-end infrastructure.) So if Ed Whitacre does not believe he is recouping his investment in consumer Internet access services, let him raise his prices. After all, no one is forcing him to offer DSL (albeit a low-grade version of DSL) at $14.99 per month. Similarly, if Ed feels backbone services are too cheap, raise rates or exit the market. That’s what competitive enterprises do.

But instead of behaving like ordinary competitors (which they swear they are), Verizon and AT&T instead behave like monopolists. They harass their weaker competitors with regulatory proceedings and law suits. They buy up their strongest competitors. They lobby government for favorable regulatory and legislative decisions. And launch PR campaigns to portray themselves as the victim. Talk about Wag the Dog. And Congress is all too willing to indulge this behavior because it generates enormous lobbying activity which in turn fuels their never-ending fund raising operations (which as I noted in my previous entry has not been money well spent. Who is scamming whom here?)

And the irony of all of this is that what Verizon and AT&T are complaining about is consumer demand. Consumers want high-speed Internet and are willing to pay cable companies $50-$60 per month for it. Content providers want improved throughput and have paid a host of infrastructure providers (http://www.globalcrossing.com/|Global Crossing]], Akamai, etc.) to achieve it. So next time public policy makers consider providing Verizon or AT&T “investment incentives,” ask them why Verizon and AT&T can’t do what every other competitive enterprise does when faced with consumer demand – satisfy it without the help of government. Talk about a bunch of welfare queens! Why do they need special treatment or incentives to do what competitive enterprises do every day? And what are Verizon and AT&T going to do if they don’t get their incentives? Are they really going to take their marbles and go home? I am not sure their shareholders would agree with that strategy. I just wish policy makers would have the courage to call their bluff.

PBS is running Bill Moyers’ Moyers on America story “Is the Net at Risk?” It’s refreshing to see someone take such a harsh view of the Bell Companies and it’s a pleasant surprise to see the folks at Teletruth get such a prominent platform for their cause.

But the program is a throwback to activist journalism that was so popular in the 1970s and it could have used some balance. It should also have spent more time on the economics of the industry and more time exploring telecommunications policy overseas to back up their claims that other countries are doing a better job of broadband deployment. They may well be, but their telecommunications markets have their own problems as well such as foreign ownership restrictions, burdensome regulations, etc.

Another area they should have explored further is industry lobbying. They said that cable and phone companies spend $1.5 million per week in Washington, with the majority coming from a handful of companies (the usual suspects). But considering how infrequently Congress passes meaningful legislation (every 60 years), has that money been well spent? Talk about lousy returns. As much as the industry lobbying tests my faith in our representative form of government, the fact that the industry has received so little in return for its money actually allows me to believe (albeit slightly) that money doesn’t really buy very much in Washington. As Teletruth has been trying to reveal, the real action is at the state level where the Bell Companies have enjoyed far better returns.

The other week, the ITAA held a seminar on data retention issues. I did not attend, but the write-ups I have seen sure make me wish I did. Readers of this blog will know that I have serious reservations and innumerable questions about the Department of Justice’s efforts to expand CALEA and otherwise impose themselves in communications media. Their new push to impose data retention requirements on ISPs and communications companies is just as disconcerting.

You would think the regular reports of leaked data, stolen data, and otherwise mishandled data over the past several years would have raised some red flags about the amount of data government and companies already store and the apparent lack of adequate safeguards. It certainly has caught the eye of state legislatures of which at least 22 have passed data protection laws.

Panelists at the ITAA event all recognized the pitfalls inherent in data retention schemes. These range from the breaches of data we have read so much about to the negative effect on competitiveness and innovation that will result as more companies locate their operations off-shore in order to avoid the burden of an overly-regulated Internet. Of course the irony of this all is that at the same time Congress and the FCC claim to want a "regulation-free" Internet, they are imposing incredibly burdensome regulations in the name of “security” and law enforcement.

This country could dramatically improve law enforcement and security if every citizen kept a daily log of their personal activities available for inspection. In a broadband environment, citizens could even upload it every night so law enforcement could correlate it to daily crime statistics. And the sad thing is, there are a significant number of people who probably think it is a good idea. But communications companies have a different stake in this game than consumers. Consumers have a “privacy” interest, but communications companies have a very real bottom line interest. The more invasive government is in communications media, the less it will be trusted and used by consumers.

I recognize that government has always enjoyed the cooperation of “the phone company.” The Church Committee provided a glimpse into Operation Shamrock and the EFF is shedding new light on its apparent resurrection. But when the telephone was a monopoly what could you do? Now with a vast array of communications media available, consumers have a choice and you can be sure that over time they will choose the media they trust most. And if that media is networked overseas or is not network based at all, who loses?

It is time for communications companies to stand up in defense of their own self-interest. Massive data collection and retention initiatives, sweeping surveillance requests, and other measures that effectively deputize communications companies in the “war on ____” (drugs, crime, terror, whatever the war du jour happens to be) may appear the patriotic thing to do, but it comes at a price and for communications media that price is steep.

Finally, some of the right people are starting to ask some of the right questions about the AT&T acquisition of BellSouth. The Chairman and ranking member of the House Judiciary Committee sent a letter to Attorney General Alberto Gonzales asking the Department of Justice to delay issuing a final decision in the merger until the Tunney Act review by U.S. District Judge Sullivan is completed.

Over in the Senate, Mike DeWine and Herb Kohl, both members of the Subcommittee on Antitrust Competition Policy and Consumer Rights, wrote Gonzales and FCC Chairman Kevin Martin raising concerns regarding AT&T’s control of wireless spectrum and local loop facilities. Senator Kohl signed onto a second letter along with Senator Patrick Leahy asking Gonzales how the Department of Justice could have allowed SBC and Verizon to close their acquisitions of AT&T and MCI before a Tunney Act review was completed.

Finally people are starting to question why these mammoth mergers are accepted as a fait accompli by those charged with reviewing them. I suspect Chairman Martin’s circulation of a draft order approving the transaction without condition woke people up to the fact that there is nothing standing in the way of these mergers – public interest be damned!

Beyond questions of process though, there exist very real questions as to why these mergers (SBC-AT&T-BellSouth and Verizon-MCI) are so readily accepted. Of course the usual suspects have raised concerns and asked the tough questions for all of these mergers. But I have a few others.

Does AT&T’s acquisition of BellSouth trigger the onset of diseconomies of scale? When technology is enabling individuals to perform functions that formerly could only be handled by entire departments, when maintenance, real estate, and operational costs are declining, is bigger really better? What is the added value that AT&T’s bureaucracy brings to BellSouth, the industry as a whole, or consumers? What will AT&T do if it experiences diseconomies of scale? Will there by massive layoffs? Will they take anti-competitive action to stem their losses?

Are policy makers allowing the assembly of this national behemoth in order to have a U.S. national champion in the global telecommunications market to take on the likes of NTT, BT, DT and all the other “Ts” out there? Is this really a protectionist measure designed to keep the telecommunications industry firmly in American hands?

Is approval of Ed Whitacre’s buying spree a quid pro quo for his company’s support of the Administration’s domestic surveillance activities or is the government actually encouraging these mergers in order to reassert control over an industry that was moving too fast and fracturing too much for government to keep up?

In a statement today, the National Cable Telecommunications Association (“NCTA”) said that competition offered by their members could save consumers $60 billion over the next five years. Aside from tooting their own horn, the point of this tantalizing message is that these savings are endangered by incumbent local telephone companies who “have challenged the statutory right of cable voice providers to interconnect directly or indirectly to the public switched network.”

Since Congress is back in session and the Republicans are determined to demonstrate their security credentials in the weeks leading up to the mid-term election, let them prove their bona fides and pass legislation that mandates interconnection for all network operators. Nothing is more crucial to the security of the nation’s telecommunications infrastructure than robust interconnection. In the event of a catastrophic event, there is no substitute for the route diversity, redundancy, and survivability that is only made possible with interconnection. Policy makers should have learned this lesson in the 1988 Hinsdale fire that took out one of Ameritech’s primary tandems on Mother’s Day (historically the busiest calling day of the year) and again after the 1993 World Trade Center bombing, and again after September 11th.

Incumbent telephone companies cannot be permitted to jeopardize the security and integrity of the nation’s telecommunications infrastructure because of their petty greed and parochial issues. It is poor public policy to force network operators to pay artificially high costs for interconnection in the form of access charges in order to secure the nation’s telecommunications infrastructure. For this reason, Congress should also address inter-carrier compensation.

So if $60 billion in consumer benefit and the security of the nation’s telecommunications infrastructure isn’t enough of a reason to mandate interconnection, then maybe we have the wrong people in Congress.