Often stepping back to gain perspective and to try and see the forest for the trees, can be highly instructive. However, if one steps back to see the big picture of how this FCC is attempting unilaterally to change U.S. Internet policy, the view is surreal.

  • Increasingly, this FCC is becoming an island.
    • It is insisting on self-asserting its exceptionalism and its supremacy over the Internet; and
    • It is ignoring an overwhelming amount of important and contrary input, advice and evidence from Congress, the Courts, DOJ, FTC, past FCCs, industry, and the public.
  • Simply, this FCC increasingly appears to view itself as exceptional and as the supreme authority on and over the Internet, unconstrained by Congress, the courts, law, economics, markets, or the public.
Consider the avalanche of input and evidence that the FCC is completely ignoring as it proceeded yesterday with its announced plans to have a preliminary vote June 17th to enable the FCC to officially declare broadband a common carrier regulated service for the first time and to mandate its currently illegal proposed open Internet regulations.
1. Ignoring Congress: A majority of members of Congress now oppose the FCC plan in writing (285 of 535) per the National Journal.

  • Specifically, this FCC is ignoring the strong majority of House members (245 of 435) who oppose its Internet policy in writing; see letter from 74 House Democrats and a letter from 171 House Republicans).
  • This FCC also is ignoring the “grave concerns” expressed in a letter from John Dingell, Commerce Committee Chairman Emeritus, the most experienced telecom legislator in the House, who states that the FCC likely will lose in court and that Congress, not the FCC, should make Internet policy.
    • Many House members oppose FCC efforts to end run Congress by essentially implementing legislation that was introduced in the House, but never even considered by House subcommittee — the Markey Eshoo bill (HR3458).
  • In the Senate, at least the magic number 41, and maybe a majority, oppose the FCC on this too, given the opposition letter from 37 republicans and the fact that over a quarter of House Democrats oppose the FCC on this.

2. Ignoring Courts/Law: It is instructive that the FCC’s is not appealing to the Supreme Court the D.C. Circuit Court of Appeals Comcast decision that ruled that the FCC does not have the legal authority to regulate the Internet. This implies the FCC does not disagree with the court’s legal judgment.

  • In its own words, the FCC’s “third way” is a creative way to invent legal authority that doesn’t currently exist and that, in effect, circumvents the normal processes of legal appeal or seeking authority from the Congress.
  • At core, if the FCC believes it can invent fundamental legal authority all by itself, for itself, that is in direct contradiction to existing law, the FCC effectively is claiming effectively to have exceptional, supreme, and supra-constitutional powers without limit or constraint.
    • Top appelate experts from both previous Democratic Administrations do not believe the FCC can invent its own legal authority: see former Clinton Administration Solicitor General Seth P. Waxman’s legal analysis here; and Former Carter Administration, Assistant to the Solicitor General, H. Bartow Farr’s III, First Amendment analysis here.
    • The previous Democratic FCC Chairman Bill Kennard, who also served as FCC General Counsel, described in detail why applying Title II to broadband was wrong-headed and unworkable.
    • Longtime FCC expert and former FCC Associate Bureau Chief Barbara Esbin explains in great detail why the FCC can’t invent legal authority this way; see her legal analysis here.
    • The entire broadband sector is unanimous in its detailed legal analysis, based on its collective experience and expertise, that the FCC cannot invent new authority that does not exist in law; see their copiously documented FCC filings here and here.

3. Ignoring Bipartisanship: This FCC is ignoring the fact that all the major decisions that the FCC wants to essentially reverse unilaterally were originally near unanimous bi-partisan congressional votes, i.e. the 1996 Telecom Act and the repeated extensions of the Internet Tax Moratorium, and unanimous (5-0) FCC broadband information services decisions: cable modems (2002); DSL (2005), BPL (2006) and wireless broadband (2007).

  • House Democrat Gene Green said the letter from 74 House Democratsclearly shows it is not a partisan issue. A large number of Democrats have reservations about such a significant regulatory shift and the impacts it will have on jobs and investments.”
  • Moreover, the two Republican FCC Commissioners, Robert McDowell and Meridith Atwell Baker oppose the FCC’s “third way” as contrary to law, existing successful FCC policy/precedent, and destructive to investment and jobs.

4. Ignoring the DOJ: This FCC has also ignored the finding of the Federal Government’s expert agency in assessing competition, the DOJ Antitrust Division, which rejected the FCC’s market failure thesis, making it very difficult for the FCC to argue persuasively in court that the competitive facts have changed sufficiently to warrant a wholesale reversal of U.S. Internet policy.

5. Ignoring the FTC: There has been amazingly little public discussion that the FCC’s proposed “third way” would be a big power/authority grab from the FTC.

  • Section 5 of the FTC’s legal authority includes a common carrier exemption, meaning if the FCC declares broadband to be a common carrier for the first time, the FCC would effectively seize oversight authority over broadband providers from the FTC.
    • This implies a serious rebuke of the FTC’s competence from the FCC.
  • Most importantly, under the Constitution and law, Congress decides which congressionally-created entities have what legal authority over whom — not the FCC.

6. Ignoring Economic Impacts: The FCC is ignoring overwhelming evidence and analysis that the FCC declaring broadband to be regulated for the first time — after years of business model evolution, innovation, and hundreds of billions of dollars in infrastructure investment — would be exceptionally disruptive and destructive to the sector and to the U.S. economy at large.

7. Ignoring the Public: An overwhelming number of newspaper editorials around the country have opposed the FCC on this, e.g. The Washington Post, Chicago Tribune, Denver Post, Detroit News, Arizona Republic, etc.

  • Moreover, a national poll by Rasmussen found that 53% of Americans do not want the FCC to regulate the Internet, 27% do, and 19% are undecided.

In sum, the evidence above is overwhelming that this FCC may think it knows best, but Congress, the courts, the DOJ, the FTC, the market and the public think it does not.

  • The evidence shows this FCC is exceptional only in its delusion that it should, or does, have supreme unconstrained authority over the Internet.

 

The big missing part of the policy debate over how to best ensure continuation of an open Internet, i.e. through existing policy or the FCC’s proposed preemptive regulations, is what makes the Internet universal?

The Internet is near universal because it is entirely voluntary. All of the Internet’s signature elements are voluntary, not mandated by government(s).

  • Internet protocol (IP) is a networking protocol that became universal precisely because it offered the ability for everyone to communicate in basically the same “language.” No one was required to use/adopt IP;” people voluntarily adopted it because it was better and offered the most universal networking opportunity. Moreover, the Internet Engineering Task Force (IETF), whose “mission is to make the Internet work better,” has is an entirely voluntary collaborative process that functions outside of any government(s) control.
  • The Domain Name System (DNS), essentially the Internet’s address system, rapidly became universal precisely because people voluntarily recognized its essential value and adopted it. No country owns, controls or approves Internet’s addresses; its a voluntary market process.
  • The world wide web (WWW) became the third voluntary leg of Internet universality, because it offered a universal application to enable people to get to and display most any kind of Internet content available.

In describing the Internet, the FCC’s own broadband policy statement says: “No single entity controls the Internet; rather it is a ‘worldwide mesh of hundreds of thousands of networks, owned and operated by hundreds of thousands of people.'” [Bold emphasis added.] [footnote 1]

The current open Internet policy trajectory was originally established by the Clinton Adminstration, with strong bipartisan support. President Clinton said: “For electronic commerce to flourish, the private sector must continue to lead. Innovation, expanded services, broader participation, and lower prices will arise in a market-driven arena, not an environment that operates as a regulated industry.

  • The fact that most governments around the world have followed the U.S. lead and not tried to control, dictate or micromanage the Internet via preemptive national regulation has enabled the Internet to become the highly open and nearly universal “network of networks” that it is today.

Given that the FCC’s proposed Open Internet NPRM would change current “market-driven” Internet policy to a new more FCC/regulation-driven Internet policy — what effect or unintended consequences could this FCC policy change have on the universality of the Internet?

First, rather than having most of the world’s 200+ governments following the U.S. current example, i.e. not regulating their national component of the Internet and reinforcing the Internet’s universality, the FCC’s new preemptive regulation policy based on scant evidence and thin justification, would set an entirely different and new leadership example for countries around the world, i.e. to assertively put their own national and political stamp on Internet policy.

  • Unfortunately, setting a new U.S. example that it is OK and better to regulate their component of the Internet than keeping it more market-driven, emboldens national interests and local politics around the world to take a more command and control approach to Internet policy.

Second, a new FCC example of a more national-oriented Internet policy, could trigger a de-globalization Internet trend where the centrality of Internet universality takes a back seat to more nationalistic and local passions of the moment. Simply, the new U.S. example of politicizing Internet policy in order to justify a more government-centered Internet policy, could trigger more politicization of Internet policy around the world.

Third, because the old adage is true that all politics are local, more politicized Internet policymaking around the world could encourage and justify a return to protectionism in the Internet space under the guise of an “open Internet.”

  • Since the FCC’s proposed open Internet policy effectively picks U.S. broadband network providers as losers and the American netopolies of Google and eBay-Skype as winners, other nations will be encouraged to update their Internet policies to advantage their own “national champions” and to disadvantage American companies. Once unleashed, protectionism can be very hard to contain.
Fourth, since the U.S. has been the world leader over the last two decades in fostering an open Internet free of government interference and micromanagement, the FCC’s current proposal to preemptively regulate the Internet for the first time risks triggering a “domino effect” of new Internet regulation around the world, as other countries mimic the thin new U.S. justification for regulation and implement whatever preemptive Internet controls they desire by claiming a new concern about a new potential problem that they alone foresee.

In short, those who are politicizing Internet policy in order to justify new preemptive regulation of Internet access, are unwittingly putting in motion the unintended consequence of balkanizing Internet policy and balkanizing the Internet itself.

  • At core, the new and 180-degree different example that the FCC’s proposed open Internet NPRM would represent to the rest of the world, would encourage political balkanization of the Internet and undermine its universality.
  • The ultimate irony is that the supposed push to ensure an open Internet via a U.S. policy edict, would very likely result in the exact opposite: a balkanized less universal Internet.
  • Common sense and experience tell us that trying to “fix” something by hitting it hard, often can shatter it into pieces.

 

A scan of the major comments just delivered to the FCC on the National Broadband Plan (which is due to Congress February 2010), spotlighted the big broadband policy “fork-in-the-road” decision that the FCC now has before it.

  • One road of the fork-in-the-road, continues down the road of:
    • Promoting facilities-based competition;
    • Encouraging private investment in a wide diversity of technologies; and
    • Facilitating a cooperative public-private partnership to address unserved broadband areas and lagging adoption of widely available broadband.
  • This road:
    • Involves no loss of the substantial competitive momentum that exists in the American broadband market;
    • Facilitates public-private cooperation to accelerate, uninterupted, the shared goal of achieving universal broadband access as soon as practicable; and
    • Produces the most and broadest economic growth and job creation.
  • Simply, this road is all about moving forward together towards a worthy and achievable goal that can bring the economy and society great benefits.  

The other road in the fork-in-the-road was best encapsulated by FreePress’ comments to the FCC 6-8-09. Many view FreePress as the leading voice calling for a complete overhaul of U.S. broadband policy; they are the operator of SaveTheInternet.com and a driving force behind InternetforEveryone.org.

FreePress believes “The FCC’s broadband plan must chart a new direction for technology policy for this country.”

  • That “new direction” is the functional equivalent of a “U-turn” and moving backward about a decade. That “new direction would be a de facto “do-over” and reversal of the broadband policy set by the Kennard-FCC near the end of the Clinton-Gore Adminstration.
  • Specifically, FreePress recommends in its public comments that the FCC:
    • Turn around, go back and “revisit” …”every major regulatory decision since the 1996 Act...” (p. 5); and
    • Go back all the way to 1999 and do-over FCC Chairman Kennard’s decision to encourage facilities-based broadband competition, i.e. “reverse the foundational mistake of its broadband policy framework by reclassifying broadband as a telecommunications service,” (p.5) (A “telecommunications services” classification would mean common carrier regulation of broadband prices, terms and conditions).
 

 

In addition, to advising that the FCC move backwards a decade, Free Press also advises that the FCC and Congress put the proverbial “cart before the horse” in recommending that extremely controversial net neutrality rules should receive equal policy priority with the achievement of the high-consensus, Congressional goal of universal broadband:

  • Congress should concurrently pass a law to place these nondiscrimination protections in the Communications Act.” (p. 6)
  • Why FreePress’ advice puts the “cart before the horse” is that it insists on implementing its version of perfect broadband access before much of the country gets any broadband access at all.

Finally, despite some net neutrality proponents claims that an “‘extreme’ version of net neutrality is never what advocates have sought” — i.e. zero tolerance for any bit management or prioritization at all — FreePress, the leading advocate for net neutrality via its operation of SaveTheInternet.com, is still strongly advocating the “extreme net neutrality” of no bit interference in its FCC comments on the National Broadband Plan:

  • No Internet packets should be given priority over others — whether the priority comes in the form of access, latency, or bandwidth.” (p. 163)
    • (This extreme net neutrality position would overturn FCC policy allowing for “reasonable network management” and it would totally prohibit any network cybersecurity to protect consumers, businesses, the economy or the Nation from cyber-attack or cyber-crime.)
  • Second, nondiscrimination rules must prohibit network operators from selling or offering any capacity to prioritize some Internet packets over others, whether to a third party or to an affiliate.” (p.164)
    • (This extreme net neutrality would effectively outlaw the existing diversity of products, services, tiers, prices, speeds and features in the marketplace that meet consumers’ wide diversity of needs, wants and means. Moreover, it would disincent any private broadband investment, because it would offer no opportunity for competition, innovation or return on investment.)
  • Finally, nondiscrimination rules must prohibit Internet access providers from charging additional fees to allow specific types of Internet content, applications or services to be used.”
    • (This extreme net neutrality position would be grossly unfair, requiring the vast majority of light to average broadband users to heavily subsidize the high cost of serving the 5% of bandwidth hogs.)

In closing, the real big decision for the FCC in devising its National Broadband Plan for Congress is choosing which road to take at the fork-in-the-road ahead.

  • Does the FCC choose the consensus broadband road that is proven to move most everyone forward — together and most quickly?
  • Or does the FCC choose FreePress’ “extreme” road which explicitly would require the FCC to move backwards ten years to “do-over” the last ten years of FCC/court broadband policy decisions?

 

The recession has created new urgency for multiple content industries to find a better way to protect and monetize their property/content in the digital world.  The dotcom bubble ethos that “information wants to be free” is like a gross mold destroying the incentives to create and distribute valuable content digitally. (Be sure not to miss the shocking analysis at the end of this post comparing revenue generation per user in the digital “ecommony” versus the real economy.)

The first point of this post is to connect-the-dots why several content industries are currently in the news actively pushing back against the “ecommony” anti-business model, where content owners are expected to effectively give away their valuable content to the open Internet/digital commons without the requirement of permission or payment.

The first broad and serious counter-movement by business may be in the offing to ensure that valuable content is indeed paid for when distributed digitally. Serious financial and business risk is driving creative thinking about how to better protect and monetize valuable content digitally.

Growing business model innovation:

Leading network owners and cable providers are exploring innovative business models to distribute valuable video content online. These new models would make the content only accessible to paying subscribers in order to ensure that the popular branded shows that consumers most demand, can have a reasonable digital business model. See stories by:

  • WSJ:Cable firms look to offer TV programs online,”
  • NYT: “Don’t count cable out online,” and
  • AP:Cable companies want a way to win with online TV.”

Leading newspaper interests are also exploring innovative business models to distribute their valuable reporting and analysis online. They are exploring alternative business models like micropayments, in order to ensure that the journalism can be monetized profitably in the future. Pieces by:

  • Time: “A bold, old idea for saving journalism” by Walter Issacson
  • NYT: “Battle plans for Newspapers
    • ‘Culture of free’ is suicide” Steven Brill
    • Fewer readers paying more” Joel Kramer
  • Seattle Times:Wake up to Google’s threat to Journalism
  • WSJ: “Quote of the day”
    • op-edInformation wants to be expensive” Gordon Crovitz
  • AdAge:look at… whether journalism should be not for profit.”
  • Blog Herald:Time to hang up the pajammas
  • FreePress: StopBigMedia.com; “What’s so bad about Big Media

Book authors/publishing interests are also struggling to find business models that pay them for their value creation –in all forms like audio-books — when “ecommony” interests want their works available for very little or free.

  • NYT op-ed: “The Kindle Swindle? A new technology to shortchange writers
  • GlobeAndMail: “Googleopoly — Google is poised to become most powerful literary force in the world.”

Atrocious “Ecommony” Revenue Production

The second point of this post is to explain why there is, and should be, a business counter-movement emerging organically that is pushing back on the digital “ecommony” utopian ideal. The severe recession, focuses minds on real economics and real return on investment, and not on Web 2.0 commons pixie dust that  “information wants to be free.” (The estimates below are based on data from Veronis Suhler Stevenson’s Annual Communications Industry forecast 2008.)

  • First, the worst of the “ecommony” models claiming to be successful is eBay’s Skype which generates a beyond pathetic three cents of revenue per user per month. That is hundreds of times less than companies in the real economy generate.
  • Second, the hot web 2.0 business of social networking has a business model in the pathetic range. Facebook is estimated to generate 16 cents in revenue per month per user. MySpace does better but still just about 66 cents per month per user.
  • Third, applying this comparison to the Yahoo and Google “ecommony” advertising business models and one learns that the much-hyped ability to target relevant ads generates an anemically bad $1.16 and $2.60 of revenue per user per month, for Yahoo and Google respectively.
  • Fourth the ultimate irony, is that the subscription business model of AOL, which the “ecommony” utopians have derided and destroyed with the “information wants to be free” ethos, still generates more revenue per user per month than even Google does — about $3.16 per user per month.
  • Finally, how do the business models do in the real economy that produce valuable content that people/advertisers will pay up for?
    • TV/Cable/Satellite/Newspapers all generate roughly $40-$60 of revenue per reached consumer per month which is:
      • ~15 times more than AOL;
      • ~20 times more than Google;
      • ~300 times more than Facebook; and
      • ~1650 times more than eBay’s Skype.

Bottom line:

The revenue line for content in the digital “ecommony” is atrocious. Companies/industries have to explore innovative business models to protect and appropriately monetize the value of the content that they create and distribute.

  • I can already hear the push back from the “ecommony” utopians… “but look at how much money the consumer saves by getting information for free on the Internet.”

If no one pays what is costs to produce and reward content producers, the quality of content will inevitably plummet. In the end you get what you pay for.

We should not forget that communicatons broadly is the fifth largest economic sector in the U.S. economy per Veronis Suhler, almost one trillion dollars in sales.