First quarter financial results prove that the success of the broadband sector’s facilities-based competition, is an exceptionally strong foundation on which to build a National Broadband Strategy. (See 1Q09 results: AT&T, Verizon, Comcast and Time Warner Cable, companies are listed by revenue size.) The results show:

  • Rare financial/economic stability:
    • With the overall U.S. economy in greater decline than any time since the 1950’s, — a 6.1% decrease in GDP — the broadband sector is a rare brightspot — out-growing the overall economy by 6-11%.
  • Broadband penetration increasing strongly:
    • Reported broadband connections of the broadband bellweathers indicate the broadband industry added between 1.5-2.0 million new broadband users in the first quarter of 2009 alone — despite the worst economy and consumer spending in 50 years.
  • Speeds are increasing:
    • Speeds are increasing as cable is upgrading quickly to DOCSIS 3.0 which currently enables 50-100 megabit offerings and Verizon’s Internet FIOs had a record quarter in fiber to the home broadband additions.
  • Value is increasing:
    • Competition is driving increased value, (price per megabit) as broadband providers routinely increase speeds for the same price to retain customers.
      • Cablevision will be offering 100 Mbs downstream for $99.95 to its whole footprint in response to competition from Verizon FIOS.
      • And Sprint is offering deeply discounted data plans to stay competitive in wireless broadband.
  • Strong infrastructure investment/deployment:
    • The first quarter results also indicate that the broadband sector continues to invest more in infrastructure than any other industry in this severe economic downturn.
    • Investment and deployment of next generation infrastructure, Wimax, LTE, DOCSIS and Fiber also remain strong relative to the rest of the economy, which has drastically reduced investment in innovation because of the deep recession.
  • Sustaining other sectors:
    • Finally, in further evidence of the competitiveness of the sector, broadband companies continue to advertise at a very high rate, which is a rare bright spot in the advertising sector.
    • This leading adverising spending by broadband providers is also a key economic lifeline to many struggling newspapers and broadcasters ravaged by the collapse of other traditional big advertisers — autos and housing.

In sum, broadband is not a sector that is failing, underperforming, or in need of government assistance or intervention.

Facilities-based broadband competition is succeeding in all the measures that matter: economic growth; jobs stability with above average pay/benefits; broadband penetration, investment, and deployment; and increased speed, value (price per megabit) choice.

  • Broadband is a shining success story of stability, growth and value during one of the toughest economic periods since the Great Depression.

In addition, the broadband sector continues to be a consistent and positive partner in solving many of the nation’s most pressing problems — by helping lower the costs of education and health care and by helping reduce energy use and pollution, through increased telecommuting.

The FCC’s pending National Broadband Strategy should build upon the strong foundation of broadband competition and economic growth.

Advertisements

Uneconomics appears to be a new economic school-of-thought struggling for some credibility in Washington.

  • FreePress, the well-known leading proponent for mandated net neutrality regulation, also appears to be the lead proponent of uneconomic thought — as outlined in their recent letter to the House Energy and Commerce Committee on broadband consumption-based billing.Lessons in Uneconomic Thought as taught by FreePress:

    First, “We urge you to consider whether above-cost metered pricing for broadband constitutes an unfair business practice.” (p. 3, 1st para)

    • In economics 101, “above-cost… pricing” is:
      • Called “profit;”
      • The goal and necessity of every private enterprise;
      • Essential for the sustainability of any business;
      • The ultimate source of any investment for the future, new products/services, R&D, innovation, etc.;
      • Necessary for any growth, job creation and progress; and
      • Basically, the core driver of a market-based economy.
    • A “business” is defined as:
      • “The purchase and sale of goods… to make a profit; and
      • A person, partnership, or corporation engaged in commerce, manufacturing, or a service; profit-seeking enterprise or concern.”
    • Unfair business practices have long been well-defined by the FTC, the statutory authority on unfair business practices, as involving three factors. Does the practice;
      • Injure consumers?
      • Violate established public policy?
      • Constitute unethical or unscrupulous behavior?
    • Long established facts have determined that “above-cost…pricing” or profit does not:
      • Injure consumers…
        • On the contrary, profit is the source of the sustainability and improvement of the service to the consumer and the well spring of innovation that benefits consumers.
      • Violate established public policy…
        • Communications competition and a free market Internet have been the bi-partisan law and policy of the U.S. since 1996.
        • Antitrust law has existed for over one hundred years to prevent and address anti-competitive behavior.
      • Constitute unethical or unscrupulous behavior…
        • Given that business for a profit generates over three quarters of all economic output in the U.S. it is unlikely that our economic system of profit-seeking would be judged unethical by the mainstream.
    • Second, “The burden of proof to demonstrate that prices are just and reasonable must fall to the companies.”
      • FreePress’ uneconomics approach is based on incorrect assumptions.
        • The law of the land is competition and not government price regulation.
        • FCC policy, affirmed by the Supreme Court in Brand X is that broadband is an unregulated information service.
        • In a market economy, prices are set by competition, providers who ill-serve their customers lose them and the revenue and profit they generate.
      • Moreover, FreePress’ invocation of the “burden of proof” being on the companies, is an unconstitutional guilty-until-proven-innocent approach to economic regulation of a competitive market.
        • The FCC, FTC, and DOJ have repeatedly found that these communications markets are competitive and not monopolies warranting antitrust action or price regulation.
    • Third, “In a robust network, substantial use of the Internet by consumers should have near zero marginal cost.”
      • Core to FreePress’ school of uneconomic thought is that the economics of the communications business are based on marginal costs and not fixed and total costs.
      • Freepress’ assuming away the existence of fixed costs in a tremendously capital intensive network business and the high marginal cost of customer churn and acquisition in a competitive broadband market, is simply devoid of reality.
      • FreePress’s uneconomic myopia for only marginal costs rests on flawed assumptions in at least four dimensions:
        • Broadband networks are not isolated from the reality of time — networks are dynamic and cannot be disconnected from the reality that they require constant replacement, upgrade, maintenance, protection, improvement, investment, innovation, etc.
        • Broadband companies are not isolated from the reality of the company they are owned by — and communications companies offer multiple products and services, multiple lines of business, and multiple marketing bundles that all use different portions of the network at different times in different ways. Networks are not businesses, companies are.
        • Broadband companies are not isolated from the reality of competition — companies must be economically able to recover the high cost of customer churn, marketing and installation.
        • Broadband companies are not isolated from the reality of the economic recession where some business lines and some regions get hit much more than anticipated and the business needs to maintain economic cushions in order to preserve the viability of the franchise.
    • Finally, “Imposing arbitrarily low usage limits and arbitrarily high usage fees on Internet access may have substantial negative impacts on competition, innovation, and long-term economic growth.”
      • FreePress’ upside-down uneconomics school of thought also has an upside-down view of competition.
      • Competition will over time eliminate any price experimentation that proves not to be competitive with what others are charging.
      • Moreover, the price regulation approach FreePress is advocating has proven to discourage innovation and long-term economic growth — not encourage it, as FreePress tries to imply.

    To put this all in context, FreePress’ uneconomics approach declares price experimentation and market forces as “price gouging.”

    • FreePress’ myopia on consumption-based billing constraints affecting only a small percentage of extremely high users of bandwidth, totally ignores that broadband competition has rewarded most all broadband users with much more speed at the same or lower price over the last few years — greatly enhancing broadband value to the average consumer.
    • FreePress’ concern about broadband affordability overall simply does not comport with the facts.
      • Data in a broad new study by the International Telecommunications Union (ITU) of 150 countries, show the U.S. substantially in the world lead with the lowest broadband prices as a percentage of per capita GNI. (See the tables on pages 56 and 66.)
        • Interestingly, the data show broadband in the U.S. is 2.5 times more affordable than Japan, and three times more affordable than South Korea and France (p. 66).

    In sum, FreePress’ “Uneconomics 101” approach to broadband policy simply does not withstand scrutiny based on the facts, merits and/or mainstream economic thought.

High profile Internet security/safety/privacy problems continue to spotlight the Open Internet’s growing security problem.

“Computer hacking attacks soar as gangs focus on financial data” — FT

  • Computer hackers stole more sensitive records last year than in the previous four combined, with ATM cards and Pin information growing in popularity as targets, according to a study…”

“Computer Attackers target popular sites in quest for profit” IBD

  • Symantec… “found new varieties of malware rose 265% last year vs. 2007.”
  • This is about fraud and theft — I don’t think there’s any doubt in anyone’s mind,” said Dean Turner, director of Symantec’s global intelligence network unit. “Where this is headed is not good for anybody.”

“Computer Spies Breach Fighter Jet Project” WSJ

  • “…He spoke of his concerns about the vulnerability of U.S. air traffic control systems to cyber infiltration, adding “our networks are being mapped.” He went on to warn of a potential situation where “a fighter pilot can’t trust his radar.”

“New Military Comand to Focus on Cybersecurity” WSJ

  • The move comes amid growing evidence that sophisticated cyberspies are attacking the U.S. electric grid and key defense programs.”

“Online fraud is flying high at many airline web sites” IBD

  • A tough problem to detect. Crooks using stolen credit card numbers buy tickets; carriers lost $1.3bil in ’08

“False Security: Scareware spreads” WSJ

  • What started out as a small-scale racket to defraud computer users is becoming big business. Rogue antivirus programs — also known as “scareware” — had a banner year in 2008.

“Cyber gangs blamed for data breaches” Washington Post

  • Roughly 100 confirmed data breaches last year affected about 285 million consumer records worldwide…”

“The mobile high tech threat; smishing” Yahoo Tech

  • Smishing” is the name being given to the not-entirely-new but growing practice of sending phishing come-ons and scams via SMS message. And spammers are apparently finding it an increasingly easier proposition to text a phishing message to you rather than to email it traditionally.”

“Businesses warn of rising risk of counterfeiting on Internet” The Independent

  • Popular brands have called for stricter policing of the internet, as they fear fraud will soar during the first “digital recession”. “Marks & Clerk, an intellectual property group, will today reveal that 80 per cent of businesses surveyed believe their brands are at a “much greater risk” of counterfeiting than in previous recessions because of the rise of the internet.”

“Web 2.0″ Internet too dangerous for normal people” Information Week

  • The computer security industry has failed computer users, and the Internet has become so unsafe that average users can’t protect themselves… The Internet cannot be safely used by normal people,” he said. “Most people are not prepared to make the technical decisions necessary to safely use the Internet.”

“Social Hackers on the rise” The Escapist

  • According to Trend Micro, an internet security firm, more than 40% of teens are “social hackers”… The “new” idea of “social hacking” is that many social details are on view via social networking sites such as Facebook. A competent social hacker can find information which tends to give away security question answers. So that rather than rummaging through dustbins for passwords, social hackers simply rely on their Google-Fu.

Is Facebook an unsafe environment for business? ZDNet

  • “Zuckerberg’s vision for Facebook is to become the web-based platform of the future. But has it become tainted with so many changes that it has become an unsafe environment for building a business? According to Nick O’Neill, yes.”

“FBI warns of high tech cyber ID theft” CBS5.com

  • When criminals manipulate voice mail systems they can make calls appear to be coming from anyone. Imagine your phone rings: the caller ID reads FBI and the caller identifies himself as an agent and asks for your social security number. “Scammers have found ways to utilize this technology and circumvent the caller ID systems to make it look like they’re from a legitimate business,” Pavelites said. With those most in need becoming the biggest targets. “We see mortgage fraud and debt elimination schemes work at home,” Pavelites said.”

Why do internet security/safety/privacy problems continue to garner so little relative public policy attention?

Previous parts of the series on: “The Open Internet’s Growing Security Problem” can be found here: Parts: I, II, III, IV, V, VI, VII.

There is a new circular logic argument being offered that in effect takes fast rural deployment of broadband hostage to the net neutrality movement’s latest demands for net neutrality to be put above all other broadband or Internet goals.

  • A post by Stacey Higginbotham of Gigaom effectively connects Free Press’ latest demand that the FCC apply net neutrality to wireless for the first time and argues in her post that if wireless providers are allowed to apply for stimulus grants for rural broadband without mandated net neutrality, they somehow could control what a subscriber could access on the Internet.

Hopefully, the FCC, NTIA and RUS folks that are working on this won’t waste time running in circles trying to make sense out of this new circular logic.

  • It is not a new argument. And it is not logical.
  • It’s simply an assertion dressed up as an argument that net neutrality should be the supreme concern, and come before, and be above, all other broadband or other priorities, like economic growth, job creation, broadband deployment/investment etc.

How is this circular logic that doesn’t make sense?

  • First, this Higgenbotham hypothesis assumes that the reason for the rural grants is to implement net neutrality.
    • The purpose of the stimulus is to quickly stimulate the economy and job growth — and to get broadband to unserved and underserved areas as quickly as possible.
  • Second, adding new burdens and barriers to serving the hardest and most expensive segment of the nation to serve, would be highly counter-productive as it would add costs, slow deployment and limit participation.
  • Third, by arguing for applying mandated net neutrality to wireless for the first time, it could have the perverse outcome of making it unworkable and uneconomic for wireless to serve as an option for rural deployment under the stimulus package.
    • Not only would this prevent rural areas from benefiting from the technology that may best serve a specific area’s needs,
    • It would also have the perverse effect of ensuring that wireless technologies could not qualitiatively operate as necessary to be considered effective competitors or substitutes for wireline technologies.

The task of getting broadband to all Americans quickly in a severe recession is difficult enough without counter-productive and unwarranted demands for mandated wireless net neutrality.

Given that eBay’s announced spin-off/IPO of Skype in 2010 is a material market event, this high-profile IPO represents a potentially tectonic development in eBay-Skype’s (and FreePress‘) push for wireless net neutrality/Carterfone regulations and applying the FCC’s broadband principles to wireless providers for the first time. There are much broader implications of this market development than many appreciate.

Some brief background information is helpful to understand the broader implications:  

  • Reportssuggest that eBay’s plans for a public IPO in 2010 is a result of eBay not being able to get a high enough private market price ($1.7b) for Skype and the fact that current market conditions are not ripe for initial public offerings. (eBay originally paid $2.6b for Skype and added an additional $500m later, then subsequently wrote down $1.4b of Skype’s value.)
  • eBay-Skype unsuccessfully petitionedthe FCC in 2007 to apply monopoly-era Carterfone regulations to wireless. The FCC did not grant the petition.  
  • The issue resurfaced again in Washington as FreePress, in a 4-2-09 letter to the FCC, argued that net neutrality should apply for the first time to wireless networks and specifically that Skype’s voice application should be able to make calls over carrier’s 3G networks.     

So how does eBay-Skype’s pending IPO change the landscape?

  • First, Skype’s public pushfor wireless net neutrality is highly material to the valuation of the Skype IPO and eBay going forward.
    • The financial purpose of the IPO is to unlock value for eBay shareholders, potentially billions of dollars over time, and to harvest a higher value for the Skype spin-off-IPO, potentially in the hundreds of millions of dollars.
  • Second, under SEC regulations eBay-Skype have to be forthcoming to public investors that the perceived prospects of their public push for wireless net neutrality could have a material impact on the value and offering price of the Skype IPO.
    • Even a perception facilitated by eBay-Skype that the FCC somehow would grant Skype forced access to wireless carriers’ private competitive networks for free, would mean that Skype investors could be led to anticipate a future profit windfall, because such a decision could materially accelerate Skype’s growth in minutes, revenues and profits.
    • Now that the intention to pursue an IPO has been formally announced, eBay Skype has to be careful to fairly represent the prospects for wireless net neutrality regulation at the FCC.
    • Moreover, when eBay decides on a date to register the IPO in late 2009 or first half of 2010, eBay-Skype will be tightly restricted in their public comments under SEC “quiet period” regulations. That would include material public policy comments that could affect the value of the IPO. These SEC regulations exist to prevent a company from inflating the perceived offering price of the IPO to the detriment of public investors.  
  • Third, the pending IPO will complicate eBay-Skype’s ability to continue to publicly lead in the public relations/policy push for new wireless net neutrality or wireless Carterfone regulations.
    • In the past, Skype has maintained the PR facade that wireless net neutrality was not about Skype, but only about enhancing user freedom to access the Internet content of their choice.
    • Now the pending IPO, makes it clear that Skype has maybe the single biggest monetary stake of any company in the outcome of wireless net neutrality.
    • In other words, eBay’s business decision to maximize the value of  eBay and Skype in an IPO while simultaneously pushing for special regulatory dispensations, makes obvious that Skype has a big financial stake in the public policy outcome of wireless net neutrality.
    • Skype’s advocacy can no longer solely be cloaked in a user freedom message, but must now also include an admission that forced wireless net neutrality would effectively tip the competitive playing field to advantage eBay-Skype and effectively put the FCC in the position of choosing one company and one technology as the winner in the marketplace.
    • FreePress is now in the thorny position of appearing to advocate for a public policy provision that many of its members may view as a de facto public bailout of eBay for its mistake in buying Skype for the inflated price of $3.1b.
  • Fourth, the public spin-off/IPO of Skype will put renewed scrutiny on Skype’s stand-alone business model. Several important facts will emerge over time as Skype is put under the public spotlight.
    • Skype’s business model is pure arbitrage. It attracts customers by effectively offering the network services of its competitors for free, then monetizing value-added services. 
      • At core, Skype’s business model is uneconomic without arbitrage, because it enjoys the benefits of a physical world communications network without having to pay for the costs of using those networks. All of Skype’s business success and profitability depends on the arbitrage of cost avoidance.  
      • I explained how the “uneconomics” of Skype’s model is anti-market-based-competition in an earlier post: “Skype’s Anti-competitive Uneconomics.”
    • Skype’s voice/video app is by far the dominant player in that Internet market segment. 
      • Skype is reportedlythe world’s largest provider of long distance communications despite having no physical long distance network.
      • Like the Internet network effects we have seen elsewhere on the net that produce world dominant players, e.g. eBay commands 95% share of online auction listings, and Google commands a rising 70% share of search advertising, Skype is the runaway dominant player in Internet long distance voice/video communications.  
    • Upon closer examination, can anyone compete with a world dominant communications provider long term that already has four times more customers than the largest American communications provider, and more importantly that does not have to pay for the cost of benefiting from their competitors’s network facilities?    

Bottom line: eBay’s decision to make a public offering of Skype in an IPO in first half of 2010, has much broader implications than many may have appreciated.