On Reading Orders by Telecommunications Regulators

Going by this site's web statistics, the most popular of my posts are those regarding CRTC rulings and orders. I suspect this is because of the relatively scarcity of in-depth discussion (from what I've found) on the web of actions of the Canadian telecommunications regulator. This is in contrast to the FCC in the US where every slightest movement on their part is analyzed -- whether rigourously or superficially -- by hordes of bloggers and more-mainstream media outlets. I wish there were more attention paid to the CRTC.

For the public, or at least those that pay more than the most casual and passive attention to regulator actions, there is a dilemma: to get beyond superficial, and sometimes misleading, reporting it is necessary to go the source and read the orders and rules that they publish. It seems that not many do this, other than the companies directly subject to those orders and rules. These companies -- typically telecommunications carriers and service providers, but sometimes their major suppliers and customers -- not only read what the regulators publish but are deeply involved in the process and have many specialists and contracters that understand the process and the network of people to influence to achieve their business objectives.

One big reason that few among the public get involved or even just read the material is that it is time-consuming. It is somewhat surprising that there is more of this avoidance in Canada since, in comparison to FCC orders, those by the CRTC are not difficult to digest. The reason is that the CRTC has more latitude than the FCC to both set policy and establish regulations. The US telecommunications regulation process is more politicized and by dint of the governing statutes there are many avenues to take the FCC to court to dispute the legality of their regulations; Congress writes telecom laws that go into an unusual level of technical detail regarding what the FCC is required and permitted to do. This is why the FCC is replete with staff lawyers and far more lawyers are employed by the industry.

A good case in point is the recent FCC Report and Order on network neutrality: FCC 10-201. This is a big document weighing in at 194 pages. It is far easier for the public to wait and read the summaries and analyses in the media and on the web. Unfortunately a number of these analyses are less than ideal since the writer may have an agenda, whether to influence the public or to stir up controversy in an effort to gain readers (aka link bait) and without some knowledge it can be difficult to know whom to trust. (Whether I am trustworthy on that score is moot since, because I see little in the Report and Order I want to comment on, I will not be providing any analysis of it.)

Beyond the mere page count, the core content of the FCC document where staff analyzes the issues and assessing the balance between their objectives, the law and the positions of intervening parties, is full of detailed legal references and written in a manner that is meant to withstand the gauntlet of the justice system. On the positive side, the core content of the document is far less than those 194 pages. That is fairly typical of FCC Reports and Orders. Here's my page count of the various parts of the network neutrality document:

• Table of contents: 1 page
• Discussion and determinations (the core of the document): 83 pages
• Procedural matters: 2 pages
• Rules: 9 pages
• List of commenting parties: 16 pages
• More discussion: 22 pages
• Statements of Commissioners: 60 pages

So there you have it: 9 pages out of 194, or less than 5%, contain rules. This is dwarfed by the 60 pages of Commissioner statements, which are mostly from the Republican dissenters. Unless you are enthralled by the political angle of telecom regulations you will most likely not miss much by skipping these 60 pages. Even less enthralling are the 16 pages of lists of people and companies that participated in the process (such as it was in this instance).

In fact the really interesting stuff isn't actually the rules themselves but the main body of discussion regarding how the FCC reached its determinations. While this is still 83 pages, a very rough guess on my part is that close to 40% of that is footnotes. For the casual (!) reader it is fairly safe to skip those, which leaves about 50 pages of text. This is a less-daunting chore since we have managed to exclude almost 3/4 of the document. A deeper reading of the document, unfortunately, will require reading some of those footnotes, but only the ones that provide background and not those that are legalese that are intended to buttress the FCC's legal position. That isn't so bad.

Although it is possible clear the clutter to reduce the quantity of reading one must do, it does help to understand the unwritten rules of the regulatory and political games underlying the proceeding, and a bit of history regarding how these things tend to unfold. That is one advantage I have since, although years ago, I once participated in these types of US regulatory proceedings. Even so, my guess is that a careful and intelligent reader who is not prone to irrationally clinging to preconceived notions will get a lot more out of the network neutrality debate, or any other contentious regulatory issue, by going to the source and reading the material published by the regulator rather than relying on others; these others may have biases or filters of convenience that distort their reporting or analysis.

The downside is the modest time and effort required to read these documents. My experience tells me that the learning curve isn't steep, so after the first one or two it gets much easier -- there is even a sort of primer in the case of the network neutrality order in the form of a 5 page press release. If you care deeply about network neutrality, usage-based billing or one of the many other current issues being considered by US and Canadian telecom regulators, reading the core content of these publications can be time well spent.

Plausible Deniability in Telemarketing

By now I'm sure that everyone has heard about the fines levied by the CRTC for do-not-call registry violations by Bell Canada, Telus and various firms that they contracted. The only real surprise to me in this matter is that the CRTC took enforcement action of any significant degree.

Although the CRTC claims that these fines -- $1.3M in the case of Bell Canada -- will hurt these firms, it really does not. Not only are these amounts very small relative to their overall business, considering the degree and duration of these violations it is also quite possible they made a net revenue gain after paying the fines. The only company that may have been hurt badly is Xentel, which was fined $500,000 since it is a far smaller company.

The style of enforcement is interesting since it resembles the actions taken in the US by the FCC when they began enforcement of their DNC regulations. First, they targetted large companies, including carriers like AT&T, and also DBS (direct broadcast satellite) providers, and they timed and bundled enforcement actions to maximum media impact. This is an effective tactic to combat public unhappiness with ongoing DNC violations. Going after the biggest companies, especially those that are dominant in their sectors, also works well since there is always an undercurrent of distrust and dislike of these companies that we are often unable to avoiding giving our business. The CRTC might therefore have adopted their own tactics in hopes of achieving the same positive public relations impact.

There is also the simple fact that large companies, if only because of the size of their businesses, are going to show up in the list of top offenders.

...the wireless sector had the distinction of taking the top three spots with Rogers and Telus ranking second and third respectively. There were also hundreds of complaints against Canada's top financial institutions and retailers including RBC, CIBC, Scotiabank, TD Canada Trust, and Sears.

Regarding the companies themselves, it is not unusual for companies like Bell Canada and Telus to outsource what they would consider non-core functions. It allows them to maintain business flexibility by contracting services as needed without building up an in-house telemarketing operation -- including the bad optics of then laying them off.

It also has a further advantage of giving them plausible deniability when the CRTC comes knocking. This allows them to claim that the contracted companies were renegades that (plausibly) violated the DNC regulations without explicit direction from themselves.

On Monday, Bell said it had terminated contracts with two telemarketing companies and suspended “several others” as a result of the investigation. Like Telus, Bell pledged to stiffen guidelines for telemarketing practices.

The deniability is plausible, but I simply do not believe that they did not know of or contribute to the violations by the contracted companies. I am not implying that they gave their contractors explicit directions to ignore the DNC registry, only that I can easily imagine there was a bit of "nudge, nudge, wink, wink" going on in parallel with the more formal instructions. Consider these points:

• The duration of the violations.
• The reputation of some of these firms is not always the best. They are often known to be aggressive in their methods for their other customers, such as charities. They would also have known which numbers were most likely to get a positive response from their historical database, although I of course don't know if they used that data in their contracts with the telcos. I can only suspect the possibility.
• Many of the numbers from which the telemarketers won business for the telcos must have been on the DNC list, and telcos should have known it. I'll bet they were careful not to cross-check the two lists.
• Worse, many of those numbers must have also been on the companies' own opt-out lists of people that explicitly requested that they not be contacted. The CRTC mentioned this point, though not quite in the same context.

Although plausible deniability does not excuse Bell Canada and Telus from paying fines and making other restitution -- and I doubt that they would have ever thought it would -- it does help them smooth over the inevitable public outrage by (as shown above) promising to do better in their contracting practices in future. In other words, they take responsibility while also shifting the ultimate blame to others. I think it is more likely that they knew exactly what they were doing and set things up so they could offer the plausible deniability excuse when trouble struck. The script they're following looks too perfect to support their innocence. However this is only my speculation, not an accusation.

Lunar Eclipse and Overwrought Coincidences

Lunar eclipses are delightful to watch. I've witnessed the more awesome spectacle of a solar eclipse, but lunar eclipses win in the long run because they're more frequent, are visible to half the planet, last a long time and are pretty and safe for viewing.

This one is being aggressively promoted in the media as special because it coincides almost exactly with the solstice.  Since the advance of the lunar nodes (the azimuth of where the Moon crosses the ecliptic) is not in resonance with Earth's orbit around the sun, this particular coincidence is no more or less probable, or interesting, than an eclipse falling on any chosen calendar date. All this coincidence really tells us is that we can finally look forward to increasing hours of daylight and solar insolation (although the weather doesn't start warming up until February).

One coincidence that isn't a coincidence is that this eclipse occurs at a full moon. This "insight" comes from an interview with some new-agey sort of person that I heard on the radio. Well, duh! I suppose we can also add the, um, coincidence that we see the eclipse occuring at night. These facts are about as coincidental as a flipped coin that lands head's-up showing an impression of Her Royal Highness. It is also why this eclipse will not be visible from anywhere in Antarctica -- the explanation of which I'll leave as an easily-solved puzzle for the geometrically inclined.

Apart from the obvious things about lunar eclipses, there are a couple of items that are less widely considered. The first is that when we see a lunar eclipse, if someone is on the moon (anywhere on the hemisphere facing Earth) they will be simultaneously viewing a solar eclipse.

...the view from the moon during the eclipse, with the Earth in front of the sun, would be a spectacular red ring in the black sky.

It should be no surprise that the colour of the scattered sunlight from the Earth's atmosphere (from its visible circumference) is brownish-red (or copper) since that is the tint the moon takes on during the lunar eclipse. In similar fashion, the frequency of solar eclipses for Moon dwellers is the same as lunar eclipses for Earth dwellers. From the Moon, the apparent diameter of the Earth is quite a bit larger than the Moon appears from Earth and so is more likely to cover the sun.

However, there are no "terran" eclipses when the Earth is full (Moon between the Earth and sun) since the Moon's shadow never covers more than a small area on Earth's surface. That occurs when we on Earth see a solar eclipse.

The second interesting thing about lunar eclipses I want to mention refers back to an earlier post of mine that talked about why the full moon always passes high overhead during the winter months at higher latitudes, like here in Ottawa (also at high southern altitudes such as southern Chile); however that, too, is no coincidence. What this means is that the best lunar eclipses are those that occur around the winter solstice, just like the one this week, because the Moon will pass high overhead for optimal viewing.

Unfortunately this is also what I have always hated about lunar eclipses, because the best ones occur when you have to endure cold winter nights if you want to watch them properly. They're never quite so nice when seen through a window, which in any case will be difficult since in many houses the Moon will be so high as to be blocked by the eaves of the roof. In other words, to stay warm while watching this eclipse you'll probably have to deal with window-glass distortion and an uncomfortable viewing angle.

Despite having said all this, my plan (I am actually writing this the night before) is to stay warm and in bed and pass on the joy and the cold. Anticipation for this event by people here in Ottawa may be for naught in any case since it now looks as if clouds are going to spoil the event. Well, there's always the internet so I'm sure there will be lots of photos making the rounds on astronomy blogs Tuesday morning.

Central Banks vs. Public Debt

Imagine that there is a car in front of you that is suffering from a range of mechanical ills: wheels out of alignment; needs an oil change; transmission won't reliably shift into reverse; and so on. Someone then places a tool in your hand and tells you to get to work. You look down and what you see is that you're holding an impact wrench. It's a very powerful tool but wholly inappropriate for most of the work ahead of you. However, it's all you have so, good luck, and give it your best shot.

Central banks are often in a similar dilemma: the economy can suffer from a variety of ills due to many and complex causes and inter-relationships, yet they must attempt to get the economy back on track with pretty much one tool, that of monetary policy. They are often smart enough to do the best they can with the tools they have but without access to a wrench and other useful tools there is a limit to what they can realistically accomplish. Often they must resort to leveraging the grand stature of their institution by giving speeches and influencing those holding the proper tools -- industry, consumers and government -- to effect desired outcomes.

Consider this quote from Peter Foster's opinion piece in the Financial Post:

“Cheap money is not a long-term growth strategy,” warned Mr. Carney during a speech in Toronto on Monday. But where did this cheap money originate? Also, from what I can remember of economics 101, cheapness is a signal to purchasers to buy, and that includes buying money. People are acting entirely rationally. The only problem is that they are likely not aware that they may have been lured into a cul-de-sac by delusions of macro management.

And this one by Maxime Bernier, also in the Financial Post:

Mr. Carney offers us three “lines of defence” that are clearly an admission of impotence.

Here we have Bernier, a government MP and former cabinet minister, complaining about the BOC's impotence when it is the government which sets the BOC's powers. It is amusing that he then goes on to complain as follows, in effect the pot calling the kettle black. For his part, Foster blames Mark Carney for only having, and then using, the limited toolkit he's been provided with by the government (elsewhere in the piece, he also seems to be confused about the respective roles and powers of the BOC and the federal government).

It is the government, not the central bank, that has the better toolkit for repairing the economy. This starts with building confidence among the true economic players: citizens, both as consumers and business owners. They could also use their powers over taxation which can be used to more accurately target problem areas than is possible with the central bank's interest rate policies. For example, the government could lower corporate tax rates, which would have the affect of encouraging private sector investment and hiring similar to lower interest rates, but without simultaneously encouraging borrowing. That is, leave more capital in the hands of those entities that can give the economy the push it needs.

There have been attempts by the BOC and the government to blame the banks since they are the ones we go to for our borrowing needs. This is unfair: the banks lend money as a business proposition and make loan decisions based on risks associated with both the broader economy and the individual borrower. Ed Clark, CEO of TD Bank has quite rightly deflected the criticism right back at the government. The points he raises in this article are spot on in my opinion. If the government, for example, wants to rein in low-quality mortgage risk -- most commonly associated with the longest-terms with their lower monthly payments but high interest costs -- they should prohibit them.

Speaking of blame, we should also beware playing the blame game when it comes to the US Federal Reserve or the Bank of Canada. It is easy to point fingers and they are tempting targets. Yet they would have an impossible task if they are the only institution expected to right what everyone else has set wrong. They can ease interest rates lower to make it less expensive for consumers and businesses to spend and invest, but that policy can spark investment bubbles and inflation. Go the other way and, as happened so famously following the 1929 crash, and we can be pushed into a deep depression. Finding an optimal middle ground, if it even exists, is more than a little challenging for a central bank.

Even so, Mark Carney is not being entirely forthright regarding debt and, as I will come to, neither is the government. The Governor's warning goes something like this:

When rates do begin to rise again, Carney said, the repercussions may be fierce and have the potential to catch many with debt loads they can no longer afford.

This is true and, although there are words of agreement from Flaherty, there is no mention of the government's own debt problem. They tell us, as individuals and as business owners, to be careful not to take on debt that we cannot easily repay when interest rates rise once more, while at the same time the federal government is taking on over $50B of debt in the current fiscal year. That is not really government debt; that is public debt. On our behalf the government is borrowing money against the wealth and wealth-production capacity of the Canadian public. That debt, too, could easily become difficult to repay when interest rates rise.

There is a measure of hypocrisy when they fail to discuss government-incurred debt, debt which is also our debt and subject to the same risks. I do not mean to criticize the government having used this debt to smooth over the worst impacts of the economic air pocket we've just been through, just that they should not avoid lecturing themselves at the same time they lecture us. The lecture is a good one for both the private and the public sectors.

The thing is that Flaherty does intend to rein in spending, eventually, and so he has missed an excellent opportunity to lead by example and explain how both types of debt are due to public borrowing. Perhaps he is being cynical in an attempt to retain some flexibility to keep spending, and taking on more public debt, for a while longer.

The question is even more pertinent in the United States where Federal Reserve Chairman Bernanke is thinking of the extreme government debt policies he has been pushing, including financial sector bail-outs, which very much depend on keeping interest rates low at least until some of that debt can be extinguished. We had all better hope that he does a good job of juggling interest rates and debt policies since if he or the US government stumbles the Canadian economy will also suffer.

Cord Cutters: Small Numbers Matter

One of the more-recent terms being tossed about in the telecom trade press is that of cord cutters. It is being applied in particular to cable customers that terminate their cable service, including TV and broadband, in preference for some alternative. There are not many alternatives. For TV it is OTA (over the air) broadcast, satellite and, in a minority of cases, telco fibre such as Verizon FiOS.

The questions are whether the phenomenon is real and, if it is real, is it significant? To date the number of these cord cutters is deemed to be small since the quarter-to-quarter downward move is vanishingly small. Yet it is not this small drop that is the question, since it could be a statistical blip or a temporary impact of the recession, but rather that the growth has vanished. Growth matters since that is what investors want, generally preferring that (if the choice must be made) over flat but reliable dividends.

Cable TV has certainly reached market saturation years ago, so that it can only move higher as the population grows; it can also rise if service were to be extended to more rural areas, but this is unlikely to ever occur. In other words, it is the cable companies' business to lose, just as telephony has played the same role for the telephone companies. With growth in raw subscriber numbers stalled, cable growth must come from increased ARPU (average revenue per user). The required growth has at different times in the past been satisfied with incremental channel tiers, PPV (pay per view), broadband and telephony. PPV is under threat from the likes of Netflix streaming entertainment, telephony continues to grow a slow place, while fibre, DSL and especially wireless are increasingly meeting the needs of bandwidth-hungry consumers. It appears that this is one of Comcast's motivations in their current dispute with Level 3, even as it pushing to consummate the deal to purchase NBC Universal to gain control over the content their competitors need.

Unfortunately for them, simply raising rates, either directly or by usage-based billing, only makes competitive alternatives look more attractive. Although the alternatives are not many and not particularly cheaper, every upward tick in the price does drive a small percentage of subscribers to defect. This is an important signal for a couple of reasons. First, every dollar of revenue lost falls almost immediately to the bottom line -- profit -- since many of their costs are not elastic, or at least cannot be reduced quickly.

Second, and perhaps more importantly, demand can fall far more precipitously than it rises. That is, like an avalanche, one modest snowfall or a quick thaw can trigger a sudden dislocation of the snow cover. The cable companies are treating their customers like the proverbial frog in a pot of heating water, except that people are (usually) smarter than frogs and will jump out when the heat becomes uncomfortable. This is more likely to occur when the market, like theirs, is saturated. For a comparable situation you should read this nicely done analysis of RIM's woes.

To conclude, it is not the small number of cord cutters that matter but the trend and the increasing motivation of their customers to defect en masse. We can only know that this is truly occurring after the fact in a retrospective analysis. Nevertheless, whether we are cable company investors or customers it is a situation that could reward close attention over the coming year.

Influencing Network Neutrality Outcomes

One thing you will likely notice when you pay close attention to any public policy discussion is that every party to the discussion will attempt to steer the outcome in a direction that serves their own interests. This is especially evident when there are different and divergent views. A common technique is to frame (or spin) the very definitions of the foundational ideas and catch-phrases to align with their preferred mode of thinking about the issues. This is equally true when it comes to network neutrality.

I my previous article I drew attention to this definitional issue. The issue exists because there is no broadly-accepted or legal definition of the term network neutrality; the legal definition is the more important of the two since it will persist and be enforcable even when discussion becomes confused. In the article before that one I listed a few major alternative, but not necessarily mutually-exclusive meanings of network neutrality. Every party to the discussion tends to list of wants in their particular definition of the term, and this is true whether it is consumers, carriers, content providers, the FCC and politicians. Even academics and industry analysts need to watched carefully since many are not neutral on neutrality; many have identifiable interests or ideological perspectives that can bias what they say, and the media tends to highlight those with the more extreme views.

Interested parties are therefore angling for influence and see the public relations battle as one where they want the prevailing understanding of network neutrality to align with their interests. It is also important to note that in addition to defining network neutrality, they also wish to define what it is not. For example, a network owner with media interests (such as Comcast or Bell Canada) might like to exclude equal traffic priority for other content providers from the network neutrality debate.

When these companies wish to create public support for their ideas they will target their messages accordingly. For the peoples' representatives in political office they will talk of (and exaggerate) the number of jobs and economic activity, including taxes, for which their industry is directly and indirectly responsible. However they will often choose to not mention the future potential for economic growth if other industries and business models are enabled by forms of network neutrality that are less friendly to their business interests. Being well-established with deep pockets they also have the capacity to contribute to politician and party campaign funds, and that gets them a degree of access and influence that may not be available to others.

They will also stoop lower to get the public support they need. For example, they might announce that if they can't throttle, otherwise manage or charge extra for heavy-duty downloaders -- which network neutrality, they say, will make impossible -- the pipes will get blocked up and you, dear user, will have trouble downloading dancing baby videos from YouTube. "Oh noes!" You might say to yourself, that's unthinkable, so of course network neutrality shouldn't allow that from happening:

Fourth: Network management. ISPs need incentives to run their networks, and we want those networks to be the “freest and fastest in the world.” Therefore, “reasonable network management" will be allowed in order to deal with harmful traffic, congestion, and other network problems. Again, we'll need to wait for the rules to see what might count as reasonable and what might not, and who decides.

The regulator itself is a party which has its own self-interest to protect. It is said that the first priority of any bureaucracy is to continue its existence. Therefore in the coming meeting we should expect the FCC to promote a view of network neutrality that requires FCC oversight, ensuring their continued relevance for years to come. Their task isn't easy since they must navigate the obstacle course of unfriendly politicians and industry power to develop policies and regulations that also maximize consumer interest and the national interest. All you have to do is read through last week's statement by FCC Chairman Genachowski. Consider, for example, the following sentence:

Informed by the staff’s additional legal analysis and the extensive comments on this issue over the past year, the proposal is grounded in a variety of provisions of the communications laws, but would not reclassify broadband as a Title II telecommunications service.

Notice how they've backtracked on reclassifying broadband as a telecommunications service, and therefore the non-discrimination aspects of common carrier law, to appease voices in Congress that want to assert their own power to determine policy. Statements like these are a good way to keep score regarding how successfully the various interests are wielding influence.

It isn't just the FCC that has to navigate the minefield: the same applies to the industry players themselves. Think back a couple of months to when Verizon and Google published a joint position on network neutrality. The predominating reaction that I noticed was one of outrage from the public, and even some of the companies that compete with one or both of these behemoths. The FCC itself was more circumspect. At the time I mentioned that this was one was to promote progress on a contentious public policy debate since the regulator and the government are potentially freed from having to (unavoidably) upsetting the status quo, creating both winners and losers; if the contenders agree up-front, that can create the conditions for an acceptable compromise.

The reality of joint-company proposals such as that by Verizon and Google are unfortunately less than they may seem. It is most enlightening to actually read the statement. I recommend doing so although it's a painful document to peruse. The reason that it is painful is not because the joint proposal is so terrible, but because it is so vague. Ultimately it is almost useless since it gives little of concrete value for the FCC to deal with. Let me pick one pseudo-random passage to highlight this point:

Additional Online Services: A provider that offers a broadband Internet access service complying with the above principles could offer any other additional or differentiated services. Such other services would have to be distinguishable in scope and purpose from broadband Internet access service, but could make use of or access Internet content, applications or services and could include traffic prioritization. The FCC would publish an annual report on the effect of 2 these additional services, and immediately report if it finds at any time that these services threaten the meaningful availability of broadband Internet access services or have been devised or promoted in a manner designed to evade these consumer protections.

Take a moment and try to parse that text. This is vague beyond reason and is wholly unsuitable as guidance on effective regulatory enforcement. It wouldn't, for example, stop Comcast from favouring its (coming soon) NBC Universal content by applying "traffic management" if it were to make the sort of charges it recently made against Level 3, and therefore Netflix, a competing content provider. Even their recommendations on FCC enforcement provisions are weak by making them conditional and fines which are (for the companies involved) inexpensive. A lesson here is that companies that compete to some degree are often not much better than a third party, including regulators, to find a middle ground that most would at least grudgingly accept; disparate and competing interests are inherently unresolvable if the objective is winner-take-all. I don't believe anyone should worry overmuch about how much impact the joint Verizon-Google will have.

When there is a joint proposal, or at least some grudging agreement among competitors, sometimes it does matter. Although it is fair game for companies to attempt to directly influence the regulator through the formal process -- you can't oppose this speech just because you don't like their message -- there is (at least) one way in which it can be judged as less than fair. To show this I have to backtrack a bit on something I said last month:

...the cable companies had to support the telcos so that the CRTC would be encouraged to choose the option that most benefited them...

Joint company proposals to the regulator (the CRTC in the above case) when they come from competitors can, in one sense, be seen as promoting progress on a controversial topic such as network neutrality. However, sometimes when competitors agree they do so to give the impression that the issue is resolvable since the regulator should not have to deal with the tricky issue of balancing the interests of competitors, large and small, new and incumbent. This is normally the minefield where the regulator often makes the mistake of choosing favourites among technologies and business models in an attempt to promote competition without unduly giving anyone an advantage.

The potential trouble is when the joint company position, if adopted by the regulator, has the effect of further entrenching those companies in a way that disadvantages consumers, other competitors or the greater public good. For example, if Bell Mobility and Rogers Wireless were to propose a (hypothetical) CRTC-mandated "network improvement fee" of $100/month on every subscriber's bill, they would achieve network parity, massively increase their revenue and make fruitless the lower prices of new wireless carriers. While this is of course a pretty extreme example that would never happen, it helps to illustrate the possible threat represented by the more-nuanced one to the FCC by Google and Verizon on network neutrality.

The machinations and vague threats that are now coming more and more frequently will not abate during the coming FCC meeting and subsequent rule-making process. It's terribly irritating but also important. Unfortunately the voices of the large companies and their interests are likely to drown out the quieter, more dispersed voices of the public, at least those in the public who can afford to pay attention and see past the spin.

The effect will be to manufacture what will be called the public good rather than focusing on what is good for the public. Of course the debate itself would be superfluous if there were more competitive choices since the companies would have to serve the public interest to avoid losing customers. Failing that, regulation is the second choice, poor though as it so often is.

Comcast vs. Level 3 vs. Network Neutrality

My preceding article on the bafflegab that follows the network neutrality debate like a malevolent black cloud only briefly touched on the brewing dispute between Comcast and Level 3. Within hours it has blown up into a widely-covered issue that, in the spirit of the bafflegab I talked about, is being used by many to trumpet their own entrenched position in the internet food chain. I had intended today to build upon the theme I introduced in yesterday's post, but this dispute simply provides too good opportunity to highlight a few key items in these companies' war of words that fit well with the theme I introduced.

First off, I do not intend to do what others are already doing; there are a few (maybe more) excellent articles that dig deeper into what the dispute is really about, but that may get drowned out in the flood of media coverage. There is one in particular I want to recommend, which was published by Ars Technica, that is short, lucid and does a good job of covering off the deeper nuances of the dispute and also provides references to some more comprehensive background material. If you want to learn more rather than merely pick sides in the fight, go read it.

There is only one sentence that I want to mention here since it goes to the heart of just what network neutrality is all about:

The DC group Public Knowledge blasted Comcast's stance as a net neutrality violation.

I like this since it is such pure nonsense. The thing is, there is no commonly-accepted definition of network neutrality when it comes to the internet -- which includes access, transport and services -- and there is certainly no law on the books that anyone is violating. That statement is mere misdirection with the apparent intent to sway others towards Public Knowledge's position.

To understand this more deeply we need to look at just how the internet is assembled -- the Ars Technica article provides better references so look there if you want more than the following brief and somewhat superficial description. The internet was originally constructed of autonomous systems that interconnected by mutual agreement for the mutual benefit of their users, irrespective of each system's size, public or private or government, using data connections whose cost was either shared in some fashion or covered by one of the two parties. The telco monopolies, which were common carriers, that provided those long-haul and short-haul transport facilities had no interest whatsoever in what was being carried; they billed for the transport and never even saw what was inside those pipes. This is peering in its simplest form.

As the internet opened to the public, the structure had to evolve. First, ISPs came on the scene with their racks full of modem banks and oodles of telco business lines that users dialed to access the internet and local ISP services like email. Those phone lines were subscribed by public tariff and were subject to the telco's common carrier responsibilities; that is, the telco had no choice but to offer those business lines as long as their network equipment wasn't harmed. At first this was good business since it brought a lot of new revenue, both from the ISP lines and all the second lines that residential customers installed for their computers.

The ISPs negotiated peering agreements with other ISPs to mutually terminate traffic to their customers, which included both users and services, and to route traffic to other ISPs further removed, even across the globe. The industry moved toward more stratification between access ISPs that served users, backbone providers that only provided transport and routing between access ISPs and other backbone providers, and service providers that provided the content that users wanted to access.

Backbone providers found it easy to peer among themselves since their traffic flows tended to be similar in both directions, and not charging for that traffic made sense since the burden of accounting could be dispensed with and the monthly net tended towards zero. The traffic differential between access ISP and backbone providers increasingly became unbalanced since as users accessed services that utilized the increasing access bandwidth they did not transmit much data upstream. Besides, since the backbone providers could not cover their business costs by peering, they charged the access ISPs for their services; but not for the raw transport, which the ISP alone was responsible for by contracting with a telecommunication provider, which was usually a telco or a raw transport provider such as MCI.

Notice that in none of this did I mention regulation once. That's because there was none. The data transport facilities that everyone used came from common carriers of one sort or another, but while the common carriers were tightly regulated the users of their transport services were not. It's the same whenever you pick up the phone and call someone; the telco provides a tariffed service as a common carrier but you are not regulated. The common carrier does not and, importantly, must not concern itself with how you are using that tariffed service. If they do get involved then they are almost certainly breaking one or more conditions of their licenses or even the law.

Because unlike network neutrality, common carrier has a definition in law and is enforced through government licensing and oversight, complete with penalties for non-compliance. However there is a benefit to the common carriers because even if you use a common carrier service to commit a crime (such as making a drug deal or arranging a murder) the carrier is protected by law from any liability; you can't sue Bell Canada because someone used their services to commit a criminal or civil offense that causes you harm. Similar legal protections have been extended to  ISPs and related services in the US for nearly 15 years by means of Section 230 of the Communications Act, although they are not common carriers.

Getting back to the evolution of the internet, as the business potential grew large and broadband replaced dial-up, through a multi-year frenzy of mergers, acquisitions and emergence of new business models, we now have the carriers in an enviable dominant position where they have the power to dictate terms to others. They have a pretty solid lock on access and transport, wireline and wireless, where they are (as Broadband Reports puts it) the "troll-under-the-bridge. They almost always stand between end users and web-based services, and they are unencumbered by common carrier regulations: the regulations are not applied to corporate entities, but selectively to each line of business that provides those particular services. For example, Verizon is a common carrier but also an ISP. The same applies to Level 3 with their transport and telephony services distinct from their routing and CDN services.

This last point is where an important nuance comes up in the dispute between Comcast and Level 3. Level 3 has a financial advantage over pure CDNs like Akamai since they can "sell" transport and routing between business units at a discount to what they offer to other companies. This may have helped them win Netflix business from Akamai. From Comcast's perspective, they do have a legitimate issue with regard to peering with Level 3 since, due to their CDN business, we would expect the traffic imbalance to be greater than with other backbone providers and ISPs.

Now, Level 3 proposes to send traffic to Comcast at a 5:1 ratio over what Comcast sends to Level 3, so Comcast is proposing the same type of commercial solution endorsed by Level 3. Comcast is meeting with Level 3 later this week for that purpose. We are happy to maintain a balanced, no-cost traffic exchange with Level 3. However, when one provider exploits this type of relationship by pushing the burden of massive traffic growth onto the other provider and its customers, we believe this is not fair.

Of course there is already an imbalance that any pure access ISP like Comcast will see since the bulk of their customers are end users that primarily download from content served by other ISPs. There is nothing to stop Comcast from getting into the content hosting business, it just isn't what they've chosen to do. The traffic imbalance is not due to any nefarious action on Level 3's part, just a natural consequence of Comcast's and Level 3's respective business priorities. Recall that none of this is regulated; while each company does have some FCC regulated business (Comcast's cable TV business and Level 3's transport business) their internet and broadband businesses are pretty much unanswerable to government regulators. Each company chooses its business activities as it sees fit with regard to internet.

To be more blunt, this dispute, which has nothing to do with network neutrality and where peering is optional not mandated by law, is almost entirely a private commercial contract negotiation between two companies. Neither is above slinging around terms like network neutrality, monopoly and fairness if doing so wins them political and public allies to buttress their side of the negotiations. Here's part of what Level 3 has to say:

John Ryan, Assistant Chief Legal Officer of Level 3 Communications, Inc.: "...the fundamental issue is whether Comcast, as the largest cable company in the country with absolute control over access to its cable TV and broadband access subscribers, has the right to unilaterally set a 'price' for that access that effectively discriminates against competitors of Comcast’s cable and Xfinity content..."

Notice how Level 3 tries to drag in Comcast's regulated business activities by insinuating that there is "leakage" between their regulated and unregulated business units which, if true, would justifiably draw government investigation.

The stakes for Comcast are quite high in this game of brinkmanship. While they do have a dominant position as gatekeeper to a huge body of internet access customers, just as they do for TV content distribution, and they are making inroads against the telcos by winning away telephony business, they are in fact surprisingly vulnerable. First, there is the talk about "cord cutters", which are customers, especially 20- and 30-somethings, that are showing signs of abandoning cable services -- TV, broadband and telephony -- since prices keep rising, customer service is awful, and their services are increasingly redundant with wireless voice and data. In other words, why pay for both if you favour internet media over TV and one device, the smart phone, gives you everything you need everywhere you go? Comcast doesn't have a wireless business. Further, even at the high prices charged for tethering, it can be the superior and cheaper choice to connect a PC or netbook to the internet (when a larger screen makes sense) in comparison to paying two broadband bills.

Even worse for Comcast is if the FCC and Congress feels that companies like Comcast are becoming overly aggressive their broadband billing and content practices for a service that is now seen as a pretty essential utility. Political influence goes only so far, and that is when the voters start shouting for Comcast's blood and want the government to take action.

Once they complete the acquisition of NBC Universal, if they continue to jack up cable and broadband rates, offer poor service and use their growing control over content, both TV and internet-based, to their own advantage, they might find they've painted themselves into a corner they can't their way out of. Not only is it more likely that the FCC will pursue turning broadband into a common carrier service, they may get the Congressional support that they need and currently lack. Worse, it is even conceivable, if still very unlikely, that the FCC could invoke Title VI of the Communications Act  and mandate "must carry" for internet media content (Hulu, YouTube, Netflix, etc.) in a manner similar to cable channels if Comcast is too aggressive in prioritizing content of those willing to pay them a premium. Companies with a dominant or monopoly position providing an essential service do have to take care to not cross that invisible and shifting line in the sand that will signal an end to government indifference.

Ultimately it is the consumer that will pay for all of this since all business costs are passed along in one way or another to end user, and governments know this:

This is a problem the Congress and regulators cannot ignore. Just as in the recent retransmission fights in the pay TV world, these rumblings between giant companies leaves consumers in the lurch, even though they’ve actually paid for access to the Internet — that is, the whole Internet, not one approved by Comcast or some other company. The problem, of course, is lack of competition in the broadband markets.

Network neutrality is just a word (or two), and no matter how much it is used to misdirect and obfuscate and attack a company's competitors, the real metric is when the howls of the public become audible in Washington. This is about politics and voter dissatisfaction; network neutrality is a definitional sideshow that should not distract our attention from the real issues at stake in disputes such as that between Comcast and Level 3.