The Multi-Billion Dollar Impact of FCC Title II Broadband — for Google & entire Internet ecosystem

April 30, 2010

Investors understandably have focused first on whether or not the FCC will upend the broadband Internet sector by deeming broadband a Title II common carrier service for the first time, and second whether or not the FCC actually has the legal/constitutional  authority to do so.

  • However, as a result of that political and legal focus, what has been almost completely ignored is the potential multi-billion dollar impact of such an FCC decision, that by definition, would make all currently unregulated and un-metered Internet traffic bits, regulated and metered “telecommunications” tele-bits for the first time.

Simply, deeming broadband Title II legally could compel bit metering and bit payments in the U.S. for the first time.

  • That’s because of the way the law and the forbearance provision are written; they apparently do not allow for any immaculate ruling where the FCC somehow rules the service and carrier of Internet traffic are regulated, but not the Internet traffic itself that is precisely what defines the service and carrier.
  • Legally and logically, one cannot happen without the other.
  • To employ an apt metaphor here, a Title II broadband steamroller is no discriminating surgical scalpel.

Thus, the potential financial liability of deeming broadband Title II could be on the order of tens of billions of dollars a year on major asymmetric Internet traffic originators like Google-YouTube, but also others like Netflix, Amazon, etc. That is because:

  • Broadband (Internet traffic) is currently an unregulated information service.
  • Title II broadband would legally and logically transform unregulated information services traffic into regulated “telecommunications” traffic with cost-based metered pricing by law (See sections 251(b)(5) & 252(d)(2)(A))
  • FCC’s regulatory forbearance authority apparently does not apply to metered “telecommunications.”
  • Many Internet content and apps providers originate much more traffic than they terminate.
  • Unregulated peering is largely free.
  • The operative “telecommunications” metered rate is $.0007 per minute or translated to bits per seconds: 18 cents per gigabit per second or $182 per terabit per second. (See the methodology for all these calculations at the end of this post.)
  • Thus the potential financial liability for every one terabit per second of internet traffic asymmetry would be $5.749b per year, (if the FCC did not devise a new cost-based telecom-Internet blended bit rate.)
  • This means, in particular, Google-YouTube — as the Internet’s largest narrowcaster who sends an estimated 40 times more traffic than they receive — would have a reciprocal compensation cost liability alone of between $5.7b to 16.4b per year, depending on Google’s overall ratio of originating traffic to terminating traffic.

In a nutshell, deeming broadband service to be a regulated telecommunications service by definition simultaneously deems internet traffic to be regulated metered “telecommunications.”

  • Thus the big unintended consequence of deeming broadband Title II is a de facto multi-billion “FCC bit-tax” on asymmetric Internet traffic.
  • The lesson here is perverse legal theories can lead to perverse financial implications.
  • The supreme irony here is that price regulation of Internet traffic (bits) for the first time would force immediate creation of a new inter-carrier compensation regime and universal service subsidy mechanism, that by current law would have to be cost-based. This ironically would force the interests the FCC seeks to protect, Internet content/apps/cloud computing interests, to pay potentially billions of dollars for what they currently get for free.
    • (See below for the detailed explanation of why deeming broadband Title II would have these perverse financial consequences — by law.)

In sum, those advising the FCC that deeming broadband to be a regulated Title II service have not thought through the logical legal and financial implications of that decision.

  • Under the  section 10 forbearance language of the statute, the FCC apparently doesn’t have the authority to use a de-regulatory provision to change a statutory definition of “telecommunications” in order to accomplish a re-regulatory purpose.
  • Those advising broadband Title II, risk the FCC profoundly changing the real economics of the Internet, seriously financially disadvantaging the Internet content and application providers they say they intend to protect, and effectively making the current economics of much ecommerce and cloud computing business models unworkable going forward.

Finally, the last time the FCC imagined that it had the facility and competence to replace the invisible hand of the market with the visible hand of the FCC, it was an unmitigated disaster, creating fiber backbone/CLEC bubbles/crashes, mass CLEC bankruptcies (WorldCom, Global Crossing, PSINet etc.), and the destruction of over trillion dollars in investor and pensioner wealth.

  • (See my 2002 Congressional testimony before the House Financial Services Subcommittee recounting and explaining that financial and business disaster, if you want the gory details.)


Supporting Analysis:

What is the legal and financial analysis behind this conclusion?

Most everyone has overlooked the multi-billion dollar impact of deeming broadband Title II because they were looking only through the net neutrality myopic lens of getting around the D.C Circuit Comcast decision to empower the FCC with police powers over the American Internet.

  • If one steps back and looks for the logical repercussions and legal ramifications of such a ruling, this analysis, and conclusion, becomes more clear.

First, those that know their communications law understand that “telecommunications,” has its own definition separate and distinct from “telecommunications service” and “telecommunications carrier.”

Second, the FCC’s section 10 forbearance authority expressly applies only to a “telecommunications carrier” or a “telecommunications service,” not to “telecommunications” itself. In other words, given the D.C. Circuit Comcast decision, it is doubtful that the FCC has the express authority to forbear from, or effectively ignore, the clear implications of an explicit definition in the law.

  • (As an aside, it is obvious in the way the de-regulatory 1996 Telecom Act forbearance authority was written, that Congress never anticipated the bizarre potentiality where a future FCC would try to reverse engineer the de-regulatory forbearance authority in the Telecom Act to enable and clean up behind FCC re-regulation contrary to Congress’ express intent.)

Third, this is highly problematic for the FCC because of the provisions that govern financial compensation for “telecommunications.”

  • Title II Section 251(b)(5) Interconnection… Reciprocal Compensation,” mandates that the newly Title II broadband provider would have:
    • the duty to establish reciprocal compensation arrangements for the transport and termination of telecommunications.”
  • Title II Section 252(d)(2)(A) “Pricing Standards… Charges for Transport and Termination of Traffic…”
    • For the purposes of compliance by an incumbent local exchange carrier with section 251(b)(5) [above], a state commission shall not consider the terms and conditions for reciprocal compensation to be just and reasonable unless–
      • Such terms and conditions provide for the mutual and reciprocal recovery by each carrier of costs associated with the transport and termination on each carriers network facilities of calls that originate on the network facilities of the other carrier; and
      • such terms and conditions determine such costs on the basis of a reasonable approximation of the additional cost of terminating such calls.”
  • Perversely, these provisions could compel a broadband provider to end unregulated and un-metered Internet peering arrangements and negotiate telecommunications interconnection financial agreements under state public utility commission auspices.
    • This could ensnare all major Internet carriers of Internet traffic like: Level III, Google, Amazon, Skype, Akamai, Limelight, Facebook, and many others.

Fourth, this is highly problematic because it would make resolution of the alreadly mind-bogglingly complex inter-carrier regime for telecommunications (that the FCC hopes to reform and put into better balance over a long ten-year glide-path), dramatically more complex and urgent.

  • (It would also have huge implications for rural carriers who could better build out broadband to all Americans much faster, if they were compensated for terminating Internet traffic.)

Fifth, this is highly problematic in that it could legally compel that U.S backbone carriers, which are among the largest in the world, to start charging or paying foreign companies and foreign countries for any net overage of Internet traffic rather than the current best efforts and generally free Internet peering arrangements.

  • Thus this change in U.S. policy could cascade across the world requiring other countries to meter bits so they did not assume huge new financial liabilities for themselves.
  • In this cash-strapped economic environment, many would jump on any pretext to generate new revenues.
  • The unintended consequence of “opening” the door to bit-metering could be to seriously balkanize the Internet by putting it under the rate-regulation thumb of foreign regulators and the ITU.

Sixth, it is highly problematic because of the enormous potential financial liabilities that classifying broadband as Title II could create.

  • Since Internet traffic has never been classified as a Title II telecommunications, because it was classified as an unregulated enhanced/information service, internet traffic developed massively differently and more asymmetrically than more symmetric “telecommunications” traffic.

What is the methodology for the financial impact on Google for example?

Lets look at the potential implications of this for Google because, as the world-leading video webcaster, Google is estimated to send (narrowcast video) roughly 40 times more bits than it receives in email bits requesting the videos.

  • Thus, moving to Title II could create $5.7-16.4b worth of annual reciprocal compensation payment liabilities going forward for handling Google’s potentially newly defined “telecommunications” traffic.

The math behind the Google liability estimate of $5.7-16.4b per year:

  • Start with the current operative FCC inter-carrier compensation rate of $.0007 per minute for this kind of traffic.
  • Then convert that $.0007 per minute cost into bits per second cost.
    • Assuming a VoIP call is ~64 kilobits per second, the $.0007 per minute is the functional equivalent of $.0001823 per megabits per second, $.18 per gigabit per second, or $182 per terabit per second — for any asymmetric overage of Internet traffic.
  • Then estimate how many terabits a second are on the Internet overall.
    • Using the most recent independent Arbor Networks study, Arbor estimates that the Internet is exchanging ~9 exabytes a month. That would be about ~300 petabytes a day, ~360,000 terabits per hour at peak usage, or ~100 terabits per second.
  • The Arbor Networks study estimates Google’s traffic to be 6% of total Internet traffic, so Google generates about 6 terabits per second world wide.
    • If we estimate that 1/2 of the traffic is U.S. (~1/2 of Google’s revenues are U.S.) that suggests Google uses ~3 terabits per second subject to U.S. FCC jurisdiction.
  • Now lets see how much a terabit per second of net overage traffic would cost someone like Google.
    • Take the FCC intercarrier derived rate of $182 per terabit per second times 3600 seconds in an hour, times 24 hours, times 365 days… and a terabit per second reciprocal overage would cost $5.749b in reciprocal compensation liabilities.
  • Now assuming Google uses the 3 terabits a second above and sends 2-1 more traffic than it receives it would cost Google ~$5.7b a year given current FCC rates.
    •  If Google’s reciprocal ration was 5-1 it would cost Google ~$11.5b a year, 10-1 would be $14b, and 40-1 would be $16.4b.

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