Wednesday, January 29, 2014

Market failure – not market competition – spurs community Internet infrastructure projects

A major misconception -- largely advanced by legacy incumbent telephone and cable companies – is local governments build Internet infrastructure because they want to compete with the incumbents. Competitive markets are those characterized as having many sellers and many buyers. That’s not possible with Internet infrastructure due to high barriers to entry and high ongoing operating costs.

Local governments build Internet infrastructure not to engage in market competition with incumbent legacy cablecos and telcos. They do so in response to market failure where the incumbents cannot profitably serve local needs. Lacking sufficient potential profits, the incumbents naturally aren’t going to be inclined to upgrade and build out fiber networks. 

In terms of those left off the Internet “grid,” the scale of this market failure in the United States is substantial. The U.S. Federal Communications Commission (FCC) estimates about 19 million Americans live in homes where Internet service isn’t available.

Friday, January 24, 2014

Net neutrality debate underlies strategic tensions between legacy telcos, cablecos and content providers

Underlying the public policy issue of whether the U.S. Federal Communications Commission (FCC) has legal authority to bar Internet service providers from treating the Internet as a private toll road and charging higher fees for digital express lanes – a policy known as “net neutrality” – are deep tensions between legacy telephone and cable companies and content providers. The courts are now addressing the legality of this policy, with the question to potentially come before the U.S. Supreme Court. But how the tensions between big telephone and cable companies and Internet content and social media services are resolved in the marketplace could ultimately have a much bigger impact than the courts.

The telephone and cable companies maintain they need revenue from content providers to offset CAPex and OPex costs of the infrastructure to deliver the services and as such are entitled to payment for access to their networks. In short, their position is they can charge for access on both ends of the Internet: where services like Netflix enter their “pipes” as then-AT&T Chairman Ed Whitacre famously described them in 2007 and also at consumer premises where they are delivered. From the perspective of the content and service providers, given end users pay for access, they too shouldn’t have to pay to get content on network. And to boot, a network they view as technologically deficient and unable to provide sufficient current and future bandwidth as evidenced by Google’s limited venture into fiber the premise (FTTP) infrastructure via its Google Fiber unit. The incumbent inferiority gap has been recognized by former FCC official Blair Levin, who observes that big telco and cable companies have no plans to meaningfully upgrade and build out their networks.

While the courts will ultimately provide a tactical win to one side or the other on the issue of net neutrality, the strategic market tension between the sides over who owns and operates Internet infrastructure and who pays for it will nevertheless remain. How might it be resolved?

A possible scenario is the formation of an alliance among the big content providers and the Internet backbone transport players with the mission of dislodging the telco/cable cartel and its moribund, slow-moving pre-Internet business model. Call it the nuclear FTTP overbuild option. Given the hundreds of billions of dollars required to build out FTTP in the United States, a strategic initiative on such a massive scale would likely have to be a public-private partnership with private members such as like Level 3, Cogent Communications, Google, Amazon, Netflix, Ebay,Yahoo!, LinkedIn, Twitter as well as entities involved in the telehealth, distance education and the emerging markets of smart homes and the device-driven “Internet of things.” The federal government would be the public partner, providing capital through long term bonds to finance a strategic national Internet initiative to replace lethargic, highly contentious subsidy efforts such as the Connect America Fund that could take decades –if ever – to construct adequate Internet infrastructure serving all Americans.

Wednesday, January 15, 2014

Fiber to the premise obsoleting net neutrality debate

A ruling this week by a federal appellate court blocking U.S. Federal Communications Commission rules barring Internet service providers from effectively erecting toll gates and speed bumps as revenue enhancement mechanisms is likely to fuel the policy debate on the proper role of the Internet: whether it should be regulated like a public thoroughfare -- the infrastructure of an increasingly digital economy -- or as a private, profit producing asset.

Investor owned, rent seeking providers such as telcos and cable companies will naturally gravitate toward business models that treat digital Internet traffic as a limited commodity that must be broken down, packaged and sold in discrete bundles and flow rates. The more data and the faster the flow rate, the higher the price.

The big problem for this business model is it's being obsoleted by technology. Fiber to the premise (FTTP) infrastructure is the emerging standard for delivering Internet to homes and business customers. It does not have the inherent limitations of metal wire and cable infrastructure, where a rational, technology-based argument can be made for treating bandwidth as a limited commodity. Once FTTP infrastructure is in place, adding more capacity can be accomplished at relatively negligible cost.

Monday, January 13, 2014

Strong parallels between individual health insurance and Internet service markets

Telecommunications providers, consumers and policymakers should be aware of the strong parallels between wireline residential Internet service and the individual health insurance marketplace as it existed prior to the market reforms of the Patient Protection and Affordable Care Act.
Both residential Internet providers – and formerly individual health insurers -- shared a business model whose success is ironically predicated on not selling to all potential customers in their market areas. The underlying principle is risk aversion: vendors believe they cannot adequately manage the risk of loss associated with an expanded market. A smaller, more certainly profitable customer base is better than a larger one notwithstanding the potential for greater revenues.

Before the Affordable Care Act outlawed the practice starting this month, individual health insurers employed underwriters charged with selecting relatively healthy individuals less likely to incur high medical costs, refusing to offer coverage those who didn’t meet specified underwriting standards. Similarly, wireline residential Internet service providers offer service to one address while declining to serve another nearby – even as close as quarter of a mile away or less. As individual health insurers did, these providers reject the latter residences (as well as some small business sites) as more costly to serve and thus less potentially profitable. Their infrastructures are engineered and built to accommodate preferred addresses and redline the rest.

The problem with this business model for individual health insurers is that medical underwriting limited the size of the pool of individuals and families who could pay premiums to cover claims costs. Consequently, the pool and the number of healthy people staying in it shrank to the point it was on the verge of collapse when the Affordable Care Act was enacted in 2010. The federal law intervened to head off market failure by requiring health plan issuers to sell to anyone applying for coverage regardless of medical history or health condition.

The restrictive marketing practices of Internet service providers bring about a similar problem. Just as insurance pools are more viable with more people in them, telecommunications networks are more valuable when more people are on them or able to get on – both for providers and subscribers. This principle is known as Metcalfe’s Law. Those who argue for broader deployment of fiber to the premise (FTTP) Internet infrastructure carry over the Metcalfe principle to economic activity and education. Greater numbers of premises with modern Internet access can lead to more online commerce and business formation. Increased access to information and educational curricula, similarly, lead to a more informed and better educated society.

As time goes on and these broader benefits – and conversely costs of not having affordable premises Internet access – become more evident, it could lead to large scale market reforms such as are now reshaping the individual health insurance market.

FCC Internet metric outdated

The U.S. Federal Communications has issued its annual report on how Americans access the Internet and the speed of their connections. What's striking is the report still defines and measures Internet connectivity using outdated metrics better suited to a decade or more ago starting as greater than 200 kbps as a baseline and in tranches of 768 kbps, 3 mbps, 6 mbps, and 10 mbps.  Nowadays, many would regard only the latter number as defining basic Internet connectivity given increasing household bandwidth demand from multiple devices and streaming video content.

The FCC is measuring straws when it should be measuring water pipes.

Internet Access Services: Status as of December 31, 2012 (FCC, Dec. 2013)
FCC releases new data on internet access services (FCC news release, Dec. 24, 2013)

Friday, January 10, 2014

Protectionist policies called greatest regulatory threat to fiber to premise Internet infrastructure expansion

Over the past decade, much of the United States has experienced market failure because incumbent telco and cable companies are unable to serve all premises in their service territories with legacy metal wire infrastructure. They have also been unable to modernize and build out their aging infrastructures with modern fiber to the premise (FTTP) infrastructure able to accommodate expected exponential increases in future bandwidth demand.

At the same time, however, they have sought protectionist policies barring public sector providers from doing so with lower cost business models financed by more patient capital that doesn't require a high, short term return on investment. From their perspective, their service territories whether they fully serve them or not are their proprietary franchises. Hence, the need for protectionism to keep others out.
"They will do nothing, Mr. President. Building out FTTP is an option the incumbents cannot choose."
Writing in the November/December 2013 issue of Broadband Communities magazine, Steven S. Ross terms the incumbent agenda for protectionist policies that institutionalize Internet infrastructure market failure "perhaps the biggest regulatory threat to new FTTH (fiber to the home) deployments."
In fact, looking toward 2014, perhaps the biggest regulatory threat to new FTTH deployments is a push by politicians in many states to restrict municipalities and other public entities or public/private partnerships that want to build their own networks where incumbent providers (typically milking old, obsolete systems) refuse to do so.
Click here for the full article (.pdf)

The New America Foundation issued a critical report on U.S. Internet service on January 15, 2014. It urges the U.S. Federal Communications Commission work with Congress and other stakeholders to implement the 2010 U.S. National Broadband Plan’s recommendation that state-level barriers to municipally-built Internet infrastructure be eliminated.

Sunday, January 05, 2014

Colorado legislation would redirect high cost telephone subsidies to Internet infrastructure

Two Colorado legislators are developing legislation to repurpose surcharges on voice landline and cell phone service to subsidize landline telephone service in high cost, less densely populated areas of the state to instead defray the cost of building out Internet infrastructure. "By funding land lines and copper-line phones, we're funding buggy whips,” Senator Gail Schwartz, D-Snowmass Village, told the Denver Post.

Rocky Mountain State lawmakers will however face resistance from incumbent telcos who want to preserve the status quo and continue to provide Internet service over their existing copper cable plants to a subset of wireline customers while deeming the rest unprofitable to serve. Throughout much of the United States, the latter cohort are in innumerable small pockets beyond the short range of DSL signals and/or where the existing copper cable is too old and deteriorated to deliver Internet service. First formed around 2000 and still around more than a decade later, they are like thousands of little holes in a big Swiss cheese, comprised of discrete premises, roads, streets and neighborhoods. Rather than “unserved areas,” they are more accurately described as redlined addresses and neighborhoods, typically avoided by both telcos and cable companies. The unfortunate residents are forced to rely on obsolete dialup offered by telcos or satellite Internet more properly suited to remote areas of the planet while the more fortunate may have access to fixed terrestrial wireless service from a local provider.

Incumbent telcos insist rules for government subsidy programs direct funds only to “unserved areas.” But building new wireline premises infrastructure is a costly, large scale endeavor that can make filling in these numerous voids one at a time impractical even with subsidies. In California, for example, incumbent telcos have largely shunned subsidies for premises Internet infrastructure offered through a six-year-old subsidy fund, the California Advanced Services Fund (CASF), similar to that being contemplated for Colorado. They have also challenged proposed CASF wireline projects by arguing the projects would serve premises adequately served by mobile broadband services.

Only a large scale overbuild of the outmoded copper cable plant with fiber to the premise infrastructure makes sense over the long term from both a technological and economic standpoint. State and federal Internet infrastructure subsidy funds should be structured accordingly.

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