Net Neutrality, Broadband Plan and Industry Business Models: Making Assumptions Explicit

The evolving network neutrality debate is not obviously and directly related to the Federal Communications Commission's proposal for National Broadband Policy. The net neutrality debate sometimes is framed as a struggle over the 'future of the Internet' or 'freedom of speech' or the First Amendment.

It really isn't. On a panel at the Comptel convention this week, Andy Schwartzman, Media Access Project CEO said it was, but also agreed with Rick Whitt, Google telecom and media counsel, and Robert Quinn, AT&T SVP, that all their groups and companies agreed that the FCC (News - Alert)'s 'Internet Freedoms' principles are not at issue.

All the firms and groups agree that those rules give users access to lawful applications and devices, at least on the wired network. Extension of those rules to wireless networks remains a contentious issue, though. We didn't have time to probe that important issue more fully, but if 'freedom of speech' and 'blocking' really is not the issue, what is?

Much of the disagreement, though not often stated directly, is about participant revenue and revenue shares in the changing Internet and Web ecosystems.

Whitt, for example, though emphasizing that the official Google (News - Alert) concern is strictly for consumer welfare provisions, advocated extending Title II common carrier regulation to broadband access services, though such services always ahve been regulated under far-different Title I computer services rules.

Quinn pointed out that, to the extent there are obvious consumer protection issues, the Federal Trade Commission was the proper place to resolve them. Sometimes arcane disagreements about Title I and Title II have huge implications for access provider gross revenue, profit margin and ability to raise investment capital to upgrade facilities.

Simply stated, regulating broadband access under Title II, as common carriers, would lead to imposition of a whole range of rules on terms of service and pricing that would make the whole business like the old voice business used to be. The 'upside,' some would say, is better universal service. The 'downside,' others would add, is a screeching halt to innovation.

If you think the Internet, openness and loosely-connected ecosystems lead to faster innovation, while common carrier regulation leads to slower innovation, with a mix of pricing impacts, that shapes one's views of which regime is better.

The voice business, under common carrier regulation and monopoly industry structure, did a good job of providing universal services and moderate prices for consumers, though it also meant high prices for some services, such as long-distance calling, and business services.

Most readers will not remember a time when domestic long distance cost 25 cents a minute and international long distance calls were measured in dollars per minute. But that was the bargain: universal service, subsidized consumer prices, high business and long distance prices.

Title II regulation implies a somewhat similar change. Broadband access would become a low-innovation, cost-controlled service, with a caveat. There would be no monopoly. Providers would be unable to subsidize consumer services by high business service profits.

Instead, providers would operate in highly-competitive markets, with low to moderate margins and very-high business case hurdles for attracting new investment. To the extent that 100-Mbps networks really are what the nation wants, Title II would throw up huge barriers to achieving those goals.

That is not to say there are no consumer protection and welfare issues: there are, and service providers and policy advocates agree on that.

The often-unstated issue is that the goal of Title II regulation includes shifting the cost of upgraded access facilities squarely to access providers in new ways, while shifting the benefits of applications to application providers, in new ways.

In other words, as there are corresponding private interests for every public policy, some would gain, and some would lose, under Title II, as compared to Title I.

Applications, for example, never have been seriously seen within the Title II framework. But what if they were? Application providers would tell you their business models would be challenged in serious ways.

Applying Title II to broadband access would the ultimate regulatory codification of broadband access--the only sustainable and unique business any telco really has, as 'dumb pipe' providers of commodity access service, unable to attract robust amounts of new investment capital, unable to modernize networks, unable to mix low-margin services with adquate high-margin new services to sustain service and quality levels.

Network neutrality is not centrally about content 'freedom.' All participants agree that users should be able to use lawful applications and devices. What they disagree about is how the cost of 100-Mbps networks can be apportioned among ecosystem participants, how the flow fo capital can be ensured, how profit within the ecosystem is shared, and what the costs of doing business are, for each participant.

In that regard, there are some significant implications one can draw from the FCC's proposed national broadband plan.

The other really-significant implication is that the future will belong to wireless. In fact, the really-big proposal is to reallocate 500 megahertz of wireless spectrum away from TV broadcasting and to wireless communications.

In fact, though any of us might grumble that prices are too high and speeds too low, the FCC's own data suggests that 'access' actually is not a problem, even restricting the definition to fixed networks.

The FCC says 78 percent of U.S. homes already have access to two broadband service providers. About four percent have a choice of three providers. Another 13 percent have at least one provider. Only five percent of homes do not have at least one fixed services provider. And, again, those estimates do not include two satellite broadband providers and between one to four mobile broadband providers as well.

Separately, the FCC notes that 77 percent of U.S. households already can buy service from three wireless broadband providers. Another 12 percent of homes have a choice of two mobile broadband providers, while none percent of homes have at least one mobile broadband service provider. Only two percent of U.S. homes cannot buy mobile broadband service.

For a variety of reasons, the FCC plan implicitly acknowledges that the current fixed broadband duopoly is about as good as it will get, and that, going forward, mobile broadband is the new battleground.

The FCC probably is completely right in that assessment. Mobility is the one industry segment that would have relatively little trouble attracting lots of new capital investment, and mobility is the one segment of the whole communications business that is exploding globally, not just in the United States.

Mobility is the segment where innovation already is the fastest, where new applications and devices are proliferating most rapidly, and where consumer interest and new adoption is highest.

Like it or not, the FCC always works within a political context. It has to work within the constraints of what is possible, and the emphasis on wireless is a clear reflection of those constraints. The FCC is smart enough to understand that, so long as private capital and private firms must drive the bulk of national investment and service provision, the agency must work within the constraints of the capital markets, which clearly signal that the perceived upside, and therefore investment interest, lie in wireless and over-the-top applications, not more wired infrastructure.