Signing Off

All things come to an end, and now it is time for this blog to end. I surprised myself by lasting for 2-1/2 years, which was never my intent, but as long as the ideas came and I was willing to spend the time to rattle away on the keyboard, it just kept humming along. Mind you, I did not sustain the rapid rate of articles as in those first months when I had more enthusiasm for this small venture.

The reason why I am ending it is very much is resonance with why I started this blog. Like many people I saw that I had some things to say and a blog is a good outlet for that sort of thing. I had (and have) no illusions about getting a large readership, nor was that my objective. I do not promote this blog in any way and the lack of ads shows that it isn't for the money!

Which brings me to the question of why I blogged at all. It's a question I never really touched on in any article. It's a modest reason: to improve my writing skills and to practice communicating insights, even minor ones that I have on topics of the day that tweak my interest in some way. I have, for the most part, shied away from topics I know little about, which explains the predominance of articles about telecommunications and technology, which are topics I know quite well.

I made a conscious decision to not focus solely on subjects I know a lot about. This was to exercise my ability to think thoroughly on topics on which I am not an expert but that interest me in some special way. Another, subtler reason was that to focus too much on topics I know well would inevitably, over time, peel away at my anonymity. Many is the time that I've avoided interesting and timely topics since to write about them effectively would provide a glimpse under my disguise for anyone who knows me or my work. While regrettable, I always chose the path that preserved my anonymity.

But why be anonymous? No, I am not anyone particularly noteworthy with a reputation to protect, although I am known by many people in my domains of expertise here in Ottawa and elsewhere. Identifying myself would not bring undue attention or cause me any harm, and it would have freed me to write more about subjects with which I am closely connected. I also have avoided using anonymity as a shield from behind which I could rant to my heart's content or to smear any individual. I have spoken harshly of some people in the public eye from time to time, but only regarding their actions and positions, and not as an attack on the person (no ad hominems here). My true reason for staying anonymous is a dull one: I like to compartmentalize the separate roles I play in life, whether it be family, business, social, or...as a blogger. It's a quirk, though one that matters a great deal to me.

I end this blog with a long list of untouched topics for which I intended to eventually write articles. Except that I no longer particularly care to do so. With respect to the reason why I started this blog, the 80-20 rule has come into play since I have achieved the 80% of the benefit that comes from 20% of the effort. I have reached the point of rapidly diminishing returns. Taking time for this blog is not the relevant thing here since, as the truism goes, time is something you make, not something you have; that is, you always have the time if you set your priorities accordingly. This is always true except when physically impeded by some external force. The many responsibilities of any adult member of society are not a straight-jacket that fate has wrapped around us; they are ones that we choose not to abandon, although we could do so at any time.

And so I have chosen to allocate my time elsewhere. For those of you who have been reading for some or all of the past couple of years, or even just popped in here from a link or from a search, thanks for stopping by. Your numbers aren't huge but more than I at one time would have expected.

This site will stay up with its full complement of over 370 searchable articles. I imagine that over the months that the traffic will decline as the material gets increasingly stale. That's merely the way of all things, and that includes every one of us, so there is no cause for regret.

Take care and so long.

The 15% Solution

Every time the CRTC's decision on usage-based billing (UBB) comes up you see the usual talking points from the usual parties. This week's revision to the decision was no exception. What you get is a lot of faux outrage from the ISP community, consumers ranting about evil, money-grubbing corporations, and the incumbents trying to convince everyone how badly the CRTC is hurting them, and the jobs of hard-working Canadians. The media makes sure to give all of them a few lines in the inevitable follow-on articles, giving a bit of free distribution to their public relations departments.

The thing is that this 15% fee reduction by the CRTC changes not much at all. The decision still holds, as does the March 1 implementation date. There was no possibility for a reconsideration of the decision at all, and implying that there was is nothing more than a talking point by those who wish to shift blame onto the CRTC by claiming they've blown another so-called opportunity to do the right thing, where the right thing is whatever it is that most benefits whichever side is speaking.

From all the media coverage I've seen, that appears to have been successful since the CRTC is pretty much without any supporters on this matter. However, I don't see that they've failed at their task at all; they are doggedly, if somewhat clumsily, going about implementing policy, which is pushing the industry toward facilities-based competition. They are trying to make it sound attractive to those paying the price today, although that attempt seems futile.

As to the specifics of that 15% wholesale price reduction, the media generally gets it wrong, as in this Globe and Mail article:

The regulator, as it usually does, has attempted to find middle ground.

No, that's not it. Let's read what the CRTC itself has to say about that 15%:

7.      The competitors and MTS Allstream submitted that wholesale UBB rates should be discounted relative to comparable retail UBB rates. The competitors generally submitted that discounted wholesale rates would provide a margin from which competitors can recover additional costs associated with wholesale UBB, including activities related to customer inquiries and potential discrepancies between carrier usage bills and competitor records. The competitors also generally noted that, because retail UBB charges are not prepaid, there is a risk that customers will not pay them. In general, the competitors submitted that the financial risk is more significant for competitors than for carriers because unlike carriers, whose retail UBB rates are not cost-based, competitors must pay wholesale UBB rates to carriers as a direct cost.

This is interesting since you might almost expect that the GAS-dependent ISPs would pass the price straight through onto their customers' bills without any value added, much as they might with government taxes such as the hated HST. I find it funny that they'd argue that suddenly these fees would add such a burden to their cost of operations. While I'm sure there could be some tense moments when a few high-usage customers open their April bills and have an attack of sticker shock, the real impact almost certainly will be less than 15%.

8.      The competitors also generally submitted that discounted wholesale UBB rates would permit continued retail service differentiation. They argued further that allowing a discount would reduce what they characterized as an anti-competitive cross-subsidy from competitors to carriers that results from wholesale UBB rates not being cost-based. The competitors generally submitted that GAS and TPIA services are one input among others they use to provide retail Internet services, that these wholesale services are not resale versions of the carriers’ retail Internet services, and therefore that symmetrical wholesale UBB charges are not appropriate. The Canadian Network Operators Consortium (CNOC) proposed that wholesale UBB rates be discounted by a minimum of 50 percent relative to retail rates, to redress various disadvantages faced by competitors relative to carriers.

I'm not surprised that a request for this 50% reduction was rejected by the CRTC since they made it quite clear in their decision and stated policy that the CRTC is not particularly interested in forcing differentiated pricing for the ISPs use of incumbent facilities since they want to promote facilities-based competition. At the bottom of my last article on UBB I noted that the ISPs were finally accepting this point.

Now we come back again to that 15% figure and how the CRTC arrived at it. As referenced above, to some it is a compromise between the ISPs' request for 50% reduction and the incumbents' desire for 0% or, better, a price increase. Let's now look at how the CRTC arrived at 15%.

10.  However, the Commission considers that, for competitors, carriers’ wholesale UBB rates are an additional, direct, and unavoidable cost that competitors will need to recover from rates paid by their retail customers. The Commission also considers that wholesale UBB charges will result in additional customer care costs for competitors, including a review of the relevant carrier’s wholesale usage records and associated UBB charges.
...
13.  Regarding the amount of the wholesale UBB discount, the Commission considers that if it is too large, the effectiveness of UBB as an economic ITMP will be reduced, while if it is too small, competitors’ capacity to recover costs will be undermined.

14.  The Commission concludes that a discount of 15 percent for carriers’ wholesale UBB rates relative to their retail UBB rates recognizes these considerations appropriately.

Somehow I strongly suspect that no one at the CRTC sweated for weeks over detailed spreadsheet financial models in an attempt to calculate or forecast the true costs to the ISPs of passing through UBB fees or the true network costs of the incumbents. Unlike what I said up above, it may actually be that 15% really is a compromise of sorts, since it certainly isn't based on any real analysis of costs. I can just imagine them talking among themselves, concluding with something like:

[Hmm, 25% is half way between 0% and 50%, but for policy reasons we want to dissuade use of incumbents' network. So lets swing the value a little bit in the incumbents' favour.]

Although I've completely made up this conversational snippet it sure seems to be closer to the truth than anything else I've heard in the past day or two.

So get ready to pay these fees starting 5 weeks from now. According to my calculations in that last article, I calculated the overage fees for going beyond 25 GB starts at $2/GB (it declines at higher volumes). I am assuming that the retail pricing stays as is since that 15% discount will not be passed on to consumers. If the ISPs were to do so they would be seen as having been dishonest in their CRTC submissions where they claimed to need an even greater discount to break even on UBB.

Now compare this to the woes south of the border where the dispute between Level 3 and Comcast continues to rage, leading Netflix to say in a financial disclosure document:

...at $1 per gigabyte over wired networks, it would be grossly overpriced.

Keep in mind that Comcast customers pay UBB after 250 GB, not 25 GB, so that half-price deal looks particularly appealing in comparison to the situation here.

In the US the carriers and service providers also have, and frequently make use of, the ability to take the FCC to court. This is now beginning with Verizon and at least one other company on the closely-related topic of the new network neutrality rules. In Canada the options are more limited.

Tuesday’s ruling is being considered the regulator’s final say on the matter. So any service providers who remain unsatisfied with the new pricing model will likely now have to take their concerns directly to Parliament.

Well, Parliament might care, but the government most certainly will not. They, too, have taken actions in the past to promote facilities-based competition, and despite having little love for the CRTC no one should expect that Stephen Harper is about to jump into this shark tank. This is too minor an issue for them to take the risk in what may be an election year. Besides, I suspect they would far rather be silent to ensure that all of the criticism falls on the Commissioners' heads.

It Takes a Lawyer to Shop at Canadian Tire

If the title of this post makes you think that you're about to read a rant against Canadian Tire, right up front I'll say that this isn't the case. Actually this is about something that happened that caused me to laugh and wonder about the marketing smarts of this retail giant and, for that matter, some of their competitors. Let's begin with a bit of make-believe.

Imagine that your favourite retailer tells you that it has opened a new store. This one is closer, offers a wider selection and promises a convenient shopping experience. Enthusiastic about this welcome development, you make your way over to this new store to check it out.

When you arrive at the store you see a confused mass of people near the entrance which is blocked by a line of burly security guards. You move closer, curious about what's is going on. On the wall above the guards is a large billboard display with a lot of text in small typeface. Most of the faces are looking up at it with looks that range from bewilderment and boredom to anger. You sensibly pay no attention to all of this and move through the small crowd. A guard blocks your path and hands you a slip of paper.

He tells you that you must sign the piece of paper before entering the store. His demeanour brooks no argument. You soon see that the paper contains the same text that is up on the billboard, and it contains a lengthy legal agreement. Skimming the text you see a lot of legalistic language about what you are and are not allowed to do in the store, various privileges that you grant to the store over you and your private information, and so forth.

It's all a bit much to read and to understand, and especially not now that you are here at the store and ready to spend your money. You are a long-standing customer of this retailer so you have some loyalty but you also are annoyed at this encumbrance. So what do you do: toss the paper on the ground and leave or sign it without really reading it and go about exploring the store? You notice that most people in the crowd make their decisions quite quickly, by signing the paper and walking through the entrance.

This story is just a bit bizarre, yet it is exactly what happens when you attempt to use the Canadian Tire app on the Android Market. If you don't accept the enormous legal agreement and all of its terms and conditions, the app exits and denies you the opportunity to shop at Canadian Tire. This is a peculiar way of doing business for a retailer, especially since the market is very competitive, and is about to become even more competitive now that Target, the US retail giant, is moving into Canada. It's astounding to me just how oddly many companies behave on the web or in the newer mobile app world; they either have a terribly low opinion of their customers or they value internal corporate processes more than reaching out to their customers.

Speaking of Target, I decided to check out their app and that of a few other large retailers to see if they were any better. Target does not force you to agree to terms and conditions when you enter the app; they are available to view at your convenience. Well, almost but not quite. When I attempted to do so the app froze during the download. It did this every time I tried. So much for quality.

Best Buy did better, being more welcoming and not misbehaving, but they scored poorly on geographical awareness. It was funny how they successfully used my location to correctly determine my postal code, but when it tried to find the nearest store it choked because it only understood US zip codes. This is clearly only intended for the US market. That's fine if that's their intention, although they should have considered putting a geographical restriction of the app in the Android Market -- which is supported -- to avoid consumers a substantial number of potential customers.

I don't use mobile phone apps for shopping so all of these inconveniences don't impact me. I downloaded the Canadian Tire app to do some research on smart phone apps for my own business reason. That reason was enough to get me to finally agree to their conditions; the research requirement was of greater importance than worrying about the terms and conditions. Although I got what I came for, I am still left shaking my head at Canadian Tire's clumsy entrance into the mobile app world.

Usage-Based Billing as Distribution Fee

The internet has been a-buzz this week with the news that the CRTC-approved usage-based billing tariff has been approved and is slated for introduction on February 1. I won't repeat what was said (and re-said again and again) elsewhere so that I can focus on a perspective that is being incompletely reported elsewhere. This is the idea that UBB is going to be used as a content distribution fee by the ISP. This is not unlike the stratification that we are seeing in other household utilities (electricity and natural gas) where the delivery fee is scaled to, but separate from, the content (kWh and m3, respectively).

In the case of natural gas, Enbridge has exclusive rights to delivery while competing with others on the content (and on gas-powered appliances). In a similar fashion, Bell Canada has rights, but not exclusive rights, to deliver internet broadband service, competes with other ISPs on a range of connectivity services layered on that basic service (Sympatico), and, in competition with companies world-wide, content. Unlike Enbridge, Bell Canada does not have exclusive rights on broadband service since they compete with Rogers and others for both wired and wireless broadband. The difference is important since they are not a monopoly and that is, apparently, sufficient for looser, or at least more permissive regulation. Thus, UBB.

Putting aside for the moment the Bell Canada's true costs and their justification for their rates, let's look at what they are in effect charging for content distribution. However, we should first not that there is a type of exemption for what are purportedly the majority of broadband DSL users, those whose usage is below the threshold for UBB.

Currently, only a small percentage of users download enough data to hit these new caps. But many fear these fees will soon apply to everyone as the internet becomes more video based.

Since I am a customer of Primus I directly received the widely-reported email that they sent to their customers to outline the new fee schedule, partly to inform us but also I believe to add some fire to the brewing public relations battle. Here is their description of the new fee schedule

• Your existing High Speed Internet plan will now have 25GB of monthly usage included
• For the minority of customers who exceed this amount, additional usage up to 300GB will be charged at $2.00/GB to a maximum of $60.00/month. Usage in excess of 300GB per month will be charged an additional $1.10/GB
• Additional Usage Plans can be purchased starting at $5/month for an additional 40GB

Of course most people have at best a vague understanding of the relationship between traffic volume and content, and until now they haven't had to give it much thought. That is, although video streaming has a large impact on traffic volume, far more so than for voice and music, outside of Canada, even in the US, the caps tend to be much higher than 25 GB.

The service [Netflix] launched here in September, offering movies and TV shows streamed over the Web for a monthly subscription fee of about $8...
...
Video streaming eats up a lot of bandwidth. This isn’t a problem for Netflix in the U.S., where one of the strictest plans is Comcast Corp.’s, which limits users to 250 gigabytes per month. That’s still enough to watch eight hours of Netflix per day. In Canada, Internet providers have capped bandwidth use much more aggressively.

This seems to agree with what I've heard first-hand from Netflix users that one hour of video content is about 1 GB: 1 GB x 8 hours x 30 days = 250 GB. Therefore to stay under the 25 GB cap here in Canada limits Netflix users to under one hour per day. Of course this is misleading since other uses of broadband would already be eating up a substantial amount of that 25 GB. This is especially true in households with several people, including children, where their current usage may already be enough to incur UBB fees.

Therefore let's assume that all Netflix usage is subject to UBB fees. As shown above, Primus will pass along a charge of $2/GB, which translates to $2/hour of Netflix. Since the fee is capped at $60/month, this is 30 hours of content, or one hour per day. If you consume more than 8 hours, and provided you stay under 300 GB/month, the hourly rate will therefore decline in proportion to hours of content. For example, watch 2 hours/day and the effective UBB fee is $1/hour of content. Nevertheless, for that $8/month Netflix subscription you can easily pay far more, $60/month, to the distributor, Bell Canada. Nice, eh?

As a private company Bell Canada certainly has a right to run a profitable business that provides a financial return to their investors while offering a legal set of services that customers value and will pay for. Since they are not a monopoly the regulator is justified in avoiding micro-management of their business, or those of their competitors. However, as we all know too well, competition is limited and is not enough to drive costs down to those of comparable companies in other markets. With effective competition not only would prices come down but customer service would improve and they would use every business and technology trick-of-the-trade to drive down costs even further so that they can lower prices further.

As matters stand, their profits are not outrageous but they are misleading since they have limited incentive to lower costs through increased productivity. For those of us outside of Bell Canada (and even for most within the company!) getting a true picture of costs, and of costs that can be well-correlated with any one or several specific services, is nigh impossible. Yet that doesn't stop many commentators from declaring that Bell's costs are really much lower than they are saying, even though Bell doesn't break this out in their financial reports (and probably couldn't do so if they wanted). The CRTC does see some detailed service costing information, which is kept confidential for good reason, but this is almost certainly massaged to Bell's best advantage while still appearing credible. The CRTC's ability to challenge those figures is limited, even though they are sometimes foolish enough to think they should.

This brings us to CRTC telecommunications policy, a subject I've covered many times in the past, which is focused on promoting facilities-based competition, not retail competition layered on incumbents' networks, as the appropriate way to achieve true competition and market-driven pricing. Interestingly, this point is finally striking its mark, just as the CRTC (and the government for that matter) have intended.

Andrew Day, the chief executive officer of Primus Telecommunications Canada Inc., says that, taken together, the CRTC’s recent decisions provide a clear view of the future, including what it would cost to own and compete over more of its own facilities; in short, becoming what is known in the industry as a “facilities-based” competitor that owns its own network, such as Bell or Rogers Communications Inc. “It gives clarity to competitors on how to make investments going forward,” says Mr. Day. “You now have perfect information to put forward a facilities-based business case.”

Unfortunately, as I've also said before, facilities-based competition is neither quick nor cheap, so don't hold your breath. Wireless competition will help but only in part. We'll have to wait to see if CRTC's policy will truly create effective alternatives across the country, even if only in some urban centres. Everyone will benefit, including Bell Canada and the other incumbents in the long term as they adjust their cost structures to industry norms.

Congestion, Content Buffering and Complexity

Just as a chain is only as strong as its weakest link, a network connection can only be as fast as its slowest link. An IP network is comprised of many connections and routers, and the path that each packet takes can be change during the duration of a connection (such as downloading a web page). Depending on congestion and routing the effective transfer rate can greatly vary during a connection. Usually the weakest link for many users is the speed of their ISP access service, and is therefore where congestion is most likely.

[As an aside there is also a lot going on under the hood, so to speak, to make internet data communication work, and can also bear on congestion. The ISPs and carriers employ many network design and operations staff, automated and manual network management, and all the hardware and software (and real estate) to keep things flowing smoothly. Data transport below the IP layer -- which can include, among other things, DSLAMs, multiplexors, ATM and MPLS -- and applications above the IP layer -- HTTP, SIP, RTSP,etc. -- are unconcerned with all of this network-layer stuff, and so I will ignore it all in this article.]

Congestion is a large topic which I will not attempt to cover in this article. What I do want to discuss is one aspect of congestion management, and that is network content caching. This is, in brief, the technique of reducing network congestion by placing content closer to the user. This is accomplished with a cache of files or other popular content that the network will redirect to when requests are received. Sometimes it is explicity accomplished with mirror sites, which you have likely encountered in the past, or implicitly in a manner that is transparent to the user.

I was reminded of this when I read this article in Ars Technica about buffering. There are a few things that bother me about this article, although it is generally pretty good, since it blends together topics such as congestion, buffering, latency and caching as if they were the same rather than the closely linked but separate items that they are. I don't want to dwell on the article too closely except to, I hope, add some clarity with the following observations:

1. Bit-km as the network loading metric: The object of mirror and cache sites is, in large part, to reduce the overall load on the internet across all of its component networks. If we exclude data compression -- the largest downloads are media files, which are already compressed -- we can only reduce network load by reduced the distance between the user and the content. If you are in Ottawa and you want to download a movie, the bit-km is lower if the content is cached, say, in Toronto rather than Los Angeles. The content is transferred to each cache once, and each local user doesn't tie up transcontinental network capacity.
   
2. Congestion has a time-frame: Imagine you are at the supermarket and you are looking for a cashier. If there is one free you would rush over there, avoid congestion for your transaction. If they're all busy, with other customers queued up at every cashier, you encounter congestion. Come back a few minutes later and you may find there is, again, a free cashier. This is an example of periodically high short-term congestion but low long-term congestion. The grocer's challenge is to engineer an acceptable amount of short-term congestion (long-term congestion is almost always bad) to optimize their economic outcome by balancing their costs and your continued patronage. Networks are similar, where there is some tolerance for short-term congestion as long as long-term congestion is kept under control.

When we talk about buffering in general it is about those line-ups, whether it be for cashiers or routing to the next link in a network data path. This is more about the impact on latency since caches and mirrors don't really affect congestion in the long run. The reason is that the network operators follow good engineering economics practice by only provisioning enough capacity to meet the demand; caches and mirrors reduce the overall demand and therefore the required amount of equipment and transmission capacity. Similarly, the grocer doesn't like cashiers sitting around doing nothing since it costs money, although as a customer you certainly prefer it that way. However all customers potentially benefit in both cases since with lower costs there can be lower prices.

Unfortunately all this efficiency has its own costs. Grocers have to do manage employee numbers and schedules against predicted -- never certain -- customer demand, just as network operators have to manage choice and placement of caches against predicted demand for that content. That complexity isn't free and therefore must be carefully assessed in every situation. All these systems add complexity to the network and create a need for specialized skills to manage the complexity. This is not only costly but also creates more failure modes. There have to be compelling cost reductions before taking on the risk of going down that path.

Against that complexity is the relative simplicity of adding more network capacity. This is a less-risky choice since it means doing more of the same thing: equipment, staff and processes. In addition, the costs are more predictable if, possibly, higher. Oftentimes throwing more capacity at the problem of both short-term and long-term congestion is the superior solution, at least until the pain of doing so becomes financially unacceptable.

If you want to come up against this first hand, try to sell a network operator on installing a new type of equipment into their network to solve the congestion problem. Should you succeed, congratulate yourself on achieving a monumentally difficult objective. More often you will fail but rarely turned away cold; the person you are selling to may know the potential benefit of what you're selling but will also know the risk to them (both personal and to their employer) of choosing unwisely. It is tempting to instead call up the Cisco sales rep and order a few more blades for those routers that are already running the network just fine.

User-transparent caching (or buffering, if you prefer) sounds good in theory but can be very costly in practice. Beware discussions of this topic that fail to mention complexity, cost versus alternatives, and reliability.

New Year Market Reversions

Thursday was a peculiar day for me on the stock markets because pretty much my entire portfolio went up, and in some cases by a ridiculous amount. In one case the stock price climbed after an earnings warning. This is all very nice, but nothing to get excited about since there have also been days when the reverse happened. It did however get me thinking once more of some of the pricing peculiarities that can happen in the days before and after the turning of the calendar.

You may be familiar with tax-loss selling, where you sell shares of stocks before year-end to capture the loss to offset current or future capital gains. This effect can drive the price of a stock down further in December when it is already in a marked downtrend. If only one could reliably know that a stock price is being artificially depressed by tax loss selling there is an opportunity to make a quick profit in January. The theory being that the stock will rise once more when the selling pressure ends at December 31 (minus 3 market days to account for trade settlement). I have seen a few losers in my portfolio rise substantially this week, but I have no idea if this is the reason.

The other new year effect is selling winners in early January. These are the stocks that have had a good run and investors want to realize some of their profit. You would choose to sell now because the gains are realized in the new year, and therefore capital gains taxes are (usually, but not always, depending on how closely CRA is watching you) paid in the subsequent years. In this case, 2012. Therefore we expect a tendency for stocks in an uptrend to suffer a setback in January and recover thereafter. Again, I have seen examples of this in my portfolio but I cannot claim that this is the reason.

For example, gold has just suffered a persistent decline all this week (as have the gold miners) after reaching new records in December. Perhaps this is a case of selling winners or perhaps people are truly bullish on the economy and no longer see an advantage of holding too much gold.

In my case I sold about half my holdings in a gold miner just before the new year, thus violating the January rule I outlined above. Here we see another effect that acts as a counterweight: RRSP. Since the gains (income, really) of stocks in an RRSP account are not realized until deregistered (explicitly or mandated subsequent to retirement) there is no advantage to watching the calendar too closely to make those buys and sells. Except, that is, to capture the benefit of others trading to their capital gains and losses: buying winners that dip in January or buying losers that dip further in December.

My own sale of that gold miner stock was done to capture the uptrend in advance of what I believe is an ongoing bull market in stocks and a corresponding decline in gold later in 2011, not about capital gains or losses.

Of course this discussion is not terribly useful now because most of the new year pricing impacts have already taken place. It is still useful to keep in mind eleven months from now. What you can do now, however, is review the past few weeks of price movements in your favourite stocks and see if you can spot examples of new year reversions, both losers and winners. It could be very educational.

Disclosure: I prefer to avoid mentioning specific stocks in my portfolio even though I highly doubt that would ever affect the stock mentioned. Therefore, no companies are named in this post.

Skype Outage Changes Nothing

Skype suffered a wide-scale outage recently and it doesn't matter one bit since it will keep being used, will keep adding new features and will in fact keep growing. Does this seem counter-intuitive? If it does, it may be because of falling into the trap of comparing Skype (or similar services) to wire telephony service where reliability remains a key metric. The media, even the technology trade media, has largely fallen into that very trap. This is the wrong way to assess Skype's episodic woes.

A good indication of what I see going on is by comparing the Skype outage to this week's woes of the iPhone and its new year alarm glitch. Even though Apple at first responded in the same negligent manner as they did when their antenna problems came to light earlier last year -- by saying that the problem would self correct in a couple of days, which it reportedly did not -- I would imagine that no one expects that iPhone users are about to jump ship and buy Android phones. It just won't happen, nor should it.

Skype, like the iPhone, has a tremendous amount of consumer acceptance -- an emotional attachment -- that is very tolerant of occasional failures or even persistent problems. In their eyes, the benefits are so overwhelming that the negatives do nothing to change their views. Indeed, they will even rush to defend their favourite product or service when it comes under attack during these inevitable screw-ups.

One bit of link bait I read (which I won't link to!) claimed that Skype's outage could irreparably harm its increasing acceptance among business users. I and many of the people I work with are Skype users and although the outage was annoying I heard not one peep from my Skype contacts about how angered and upset they were about it. In fact no one said much of anything. The media, too, has gone quiet, or at least they merely moved on to the iPhone alarm problem as the next great headline fodder.

No one seriously compares Skype to their wired phone from Bell Canada or other telephone companies. They are instead seen as complementary, and also complementary in some respects to mobile phones. The reason is that Skype is really good at doing some important things that the humble and oh-so-reliable telephone cannot:

• Cheap: I can make long international calls (which I do for business) at zero cost.
• Features: Conference calls are a breeze to set up and manage, I can check on a person's availability at either a glance or with a quick text message, the audio quality is good, there's video and more features that I are nice to have even if I don't use them much or at all.
• Convenience: It works like a good-quality speakerphone or I can attach a headset to the PC for even better quality.

It works so well that I even use it for local business calls, despite the flat rate on the home phone. But what is more pertinent is that when Skype fails I still have several alternatives to reach people, including both real time communications and non-real time messaging. That is, I don't depend on Skype the way we once were utterly dependent on a monopoly-operated telephone system. In the case of the iPhone, I doubt that anyone this week couldn't similarly find several devices that would wake them up.

Conversely, Skype and its ilk are not about to render the phone company obsolete, or at least not so fast that the carrier industry can't adapt. They did it with wireless and the internet, and they could do it again, despite the distraction of cord cutters. However this is not to say that there is not a real threat that causes concern in some quarters.

Experts say companies like Skype operate in a legal grey area and that the notice is a warning to them not to grow too big or to challenge the state-owned telecoms...“This notice is actually protecting the telecoms' traditional voice services,” said Mr. Kan, [a director of China VoIP & Digital Telecom Inc., a company that has offered Internet phone services] who is also a professor at the Beijing University of Post and Telecommunications.

This is also why Skype and Google Voice had to scale back their mobile phone apps on carrier-locked smart phones, achieving an uneasy and unstable compromise between keeping users connected and protecting (to a degree) carrier voice revenue. It is unstable because the marginal cost of voice minutes is very low, and getting lower, and more people are realizing that simple truth.

Ofcom also found that cost, more than anything, determined how long people talk for and whether they prefer a landline or a mobile call.
...
Less talking does not necessarily mean less phone use. According to Nielsen the number of paid texts per subscriber has grown rapidly over the same period, recently surpassing 700 per month.
...
Skype, the internet phone service, is growing rapidly. In the first half of 2010 users racked up 95 billion minutes in voice and video calls.

For the present, Skype will continue to grow, as too will Apple and Google, among others. They will do so despite episodic glitches and outages since their perceived value is high. The carriers will continue to generate profits for their shareholders, but without the same enormous growth or even any growth at all. Of course the landscape could change sooner rather than later since it is a market ripe for massive disruption by the persistent march of technology.

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.

Tactical Misdirection in the Network Neutrality Debate

As the FCC proceeding on network neutrality gets closer to a critical point it is interesting to witness how the contending parties are attempting to influence the regulator, Congress and the public. These generally fit within the following categories:

1. Obfuscate the issue so that it becomes difficult to impossible to discern what network neutrality actually is and, when confusion is successfully established, offer a clear and simple solution which coincidentally (!) benefits the proposing party or at least is disadvantageous to its competitors.
2. Obfuscate another's obfuscation of the core issues (see previous point) and then offer a clear and simple solution which... well, you can fill in the rest.
3. Disentangle and clarify the core issues so that everyone can have a clear understanding of the numerous technical and business aspects of network neutrality. Sometimes this is done in an effort to facilitate the discussions but can sometimes be used to promote an agenda. The agenda may be to maximize the public good, but that is still an agenda.

Perhaps a simpler way of saying this that everyone has an agenda and will do what it takes to promote that agenda, even if occasionally one must go so far to even resort to the truth! Unfortunately the volume and quantity of proposals, attacks, misdirections and often poorly-informed reporting makes it difficult for the targets of all this (mis)information to understand anything other than what the best-placed voices want them to conclude. In other words, the public discourse on network neutrality is not only a mess, it's a political mess.

The FCC is quite used to putting up with attacks from the public, industry and Congress. While some of it is justified, it is also true that there are many competent people on staff that understand the issues perfectly well. With perception being reality (as the saying goes) they end up spending much of their time fending off the attacks rather than crafting good public policy that is in accord with the letter and spirit of the law. That, of course, is the objective of those attacks; while the FCC gets knocked around the key players, those that stand to gain or lose from what the FCC ultimately decides are busy influencing the politicians who are in a position to make their interests take precedence in the FCC's deliberations. Politics and regulations are inseparable, whether the industry is telecommunications, resource extraction, banking or pharmaceuticals. This isn't going to change.

Despite the sorry state of affairs, allow me to briefly describe what I believe are a few of the key industry issues that get bundled under the network neutrality banner, since they are so often obfuscated, conflated, misrepresented or otherwise mangled by so many of the antagonists.

• Carrier control over vertical services: It is always in the carrier's interest to be the provider of all services offered to the public over their networks. Vertical services -- value-added services over and above raw carriage -- have higher margins than transporting bits. This should be apparent if you think about it, although I went so far as to calculate the added benefit years ago when the array of services was much smaller than today. Even better is if the carrier not only offer these services but also can exclude others from offering these services over their networks. This is why the FCC's intent to reclassify broadband under common carrier regulations is bringing out the big guns in political lobbying. This is also why Bell Canada is so opposed to GAS-enabled 3rd-party ISPs and why Bell Canada toyed with building a content empire, including CTV, and Comcast is acquiring NBC. However it is possible to push too hard and suffer what Australian government has just done to Telstra by splitting wholesale (network utility) from retails (vertical services). Yes, sometimes governments really do try to favour consumers over major corporations.
  
• Traffic management: Every carrier requires mechanisms to manage network performance so that no one user sees more their share of service degradation; network capacity is always finite -- even though it is expandable, within the bounds of reasonable capital expenditures -- and there is always the risk of one user's activity impacting the service quality of other users. This is especially true for broadband, more so than telephony, because there is a wide range in volume and timing of traffic demand across the user base. The problem comes when traffic management is surreptitiously employed to favour the carrier's own business interests over that of other services that their broadband users choose to access, even if they are not directly competitive with equivalent services offered by the carrier. It has been surreptitious or even misrepresented because blatant discrimination can result in serious political fallout and harm their long-term interests if the government feels compelled to quell voter outrage with some heavy-handed market intervention. Traffic management will remain an issue even if broadband falls under common carrier regulation because it is so much of a cat-and-mouse game where the carrier has all the control and outsiders are hard-pressed to prove a solid pattern of discrimination.
  
• Volume and speed pricing: When control over vertical services and traffic management are prohibited or otherwise fail to glean the revenue and market control the carriers would like, they can in the end resort to pricing strategies. These fall into the categories of usage-based billing (UBB) and speed tiers where the more data you consume and the higher the access speed you desire, the more you pay. If (and I mean if) the carriers are truly relegated to the role of broadband utility with no competitive vertical services and no ability to throttle selected applications, it can be reasonably argued that pricing should be in proportion to network load. Where this crosses the line into the realm of network neutrality is when they price by volume and speed in a manner that is implicitly discriminatory, especially if they pursue this strategy in parallel with offering competitive vertical services. This has come up time and time again in the CRTC proceedings on Bell Canada's GAS technology coverage and traffic management practices where the accusation is that if they do not similarly throttle or price their own retail services then they are ensuring 3rd-party ISPs offer an inferior service. Also telling is how carriers position and promote volume and speed tiers that can inherently place a monetary burden (or at least allegedly) on users that subscribe to services such as Netflix, where there is in effect an extra charge to the user for downloading a movie or other bandwidth-intensive media. That is, even if the carrier isn't or is prohibited from these high-value vertical services, by pricing broadband with surgical precision they directly derive revenue from those services. Precision is required since if the price-volume boundaries are too aggressive, the majority of users will be hit even though these types of services currently have low penetration (although this will change) or, in the other direction, they will fail to garner the desired revenue from carriage of those services. That is, they want to get paid but without attracting unwanted attention from the regulator. This is the reason they make a public show of all the pain they feel when a (current) minority of users use these services. If successfully executed, the regulator doesn't act and their revenue will climb substantially in the coming years. Of course if they offer competitive media services they can even double dip.

Apart from the tactics I listed at the beginning of this article I was planning to say a bit more about how the US carriers are manipulating the regulatory proceedings and political process on network neutrality to get what they want, but I've run out of time. I'll come back to this in a day or two.

To end this article I will repeat a point that I (and many others) have stated: in a truly competitive market there is no need for regulations over company business practices and services since market forces alone will compel all companies to lower prices and offer more and better services if they intend to survive and maximize shareholder value. We are still a long way from achieving that in the telecommunications industry despite what many of dominant carriers would like us to believe. There are few enough choices for consumers to reach the content and services they desire that all these political games do have a major impact. The fight for and against network neutrality will be with us for years to come.