The most obvious example of change sought by net neutrality advocates is their desire to eliminate prioritization of Internet packets. They want to prohibit transactions that “favor certain content on the Internet” so that the Internet can be “equally accessed by all innovators, speakers, and businesses. Like it is today.” But “popular” content is already given favored access by content delivery networks, as the FCC recently recognized in OBI Technical Paper No. 4. In Appendix 3, the FCC points out that “[c]ontent delivery networks (CDNs) are designed and deployed for the purpose of optimizing the end user Internet experience by storing and sourcing ‘popular’ content closer (by way of physical distance as well as fewer network elements) to end users.” CDNs improve network performance by reducing possible sources of network degradation such as packet loss (fewer network elements with packet buffers), packet jitter (less network connections between fewer elements), and latency (packets between the CDN servers and users have shorter distances to travel). (OBI Technical Paper No. 4, App. 3, page 23.) However, “not all content is subject to CDN distribution.” (Id.) In other words, CDNs are designed to favor popular content over less popular content – and in this context, “popular” means content provided by those who can afford to pay for CDNs to prioritize it.

Thus, to satisfy the goals of the public interest groups, the FCC would need to prohibit the use of CDNs (even though they provide consumers with a better experience). The FCC instead indicated in its Reclassification NOI that it intends to ignore this issue by refusing to address CDNs at all. (Reclassification NOI at paragraph 107.) But not addressing an issue doesn’t make it go away; it just leaves many questions unanswered. If prioritization via a CDN is permissible, how does it meaningfully differ from prioritization through other methods? Does the consumer care how prioritization is achieved? Can Internet access service providers offer CDN services? Reclassification isn’t intended to answer any of these questions.

Another way in which public interest groups want to radically change the status quo involves what the Net Neutrality NPRM calls “managed services” and what the Verizon/Google Proposal calls “additional online services.” Public Knowledge apparently believes there is only “one Internet,” and that “additional online services” aren’t currently offered over this mythical Internet. In reality, there are many services provided using Internet protocols and infrastructure that are not offered over the “public Internet.” As the FCC noted in the Net Neutrality NPRM, “AT&T offers its U-verse multi-channel, Internet-Protocol-based video service through the same network as its fiber-based broadband Internet access offering.” (Net Neutrality NPRM at paragraph 150.) Virtual private networks use the Internet, but are by definition not public. And new services on the horizon, like healthcare applications, may also use Internet protocols without being offered over the “public Internet.” As Dean Bubley so aptly put in a recent blog post, “networked services and applications are already split between [“public”] Internet and non-Internet, and they’re going to stay that way.”

That is to say, they are going to stay that way unless regulators decide to change them through misguided attempts to “preserve” something that doesn’t exist.

First, the agreement states clearly that the FCC “would not have any authority over Internet software applications, content or services.” As I’ve noted before, Internet software applications, content, and services “have as much potential to prevent consumers from enjoying the protections of the existing Internet principals as ‘broadband Internet access service’ providers.” Indeed, Google, with over 80% of the search engine market, has much greater potential to block consumer access to the Internet sites of their choice than does Verizon, who has a paltry 3.6 million FiOS Internet subscribers and “continues to bleed landline and DSL customers.” Google was nevertheless able to get Verizon to agree that Google remain completely free from any of the net neutrality regulations to which Verizon itself would be subject. That’s a significant win in any book.

Second, the agreement’s “non-discrimination” provision presumptively prohibits the prioritization of traffic. This is a significant competitive victory for Google, because Google already prioritizes its own traffic via its own content delivery network. “If Google were an Internet service provider, it would be the fastest growing and third largest global carrier, says Craig Lebovitz, Arbor Networks chief scientist.” Google uses its extensive content delivery network to speed the delivery of its packets – like YouTube – to end users. To compete with Google, competitors would need access to similar prioritization capabilities. Fortunately for Google, Verizon just agreed not to use its resources and expertise to help even track conditions for Google’s competitors. Win number two for Google.

Third, Google agreed that only the transparency principle would apply to wireless networks. On its face, this looks like a win for Verizon Wireless. But it’s a Pyrrhic victory. Google has nothing to lose in forswearing regulation of wireless because the wireless industry is incredibly competitive – and that competition ensures that wireless service providers can’t engage in discrimination that is harmful to consumers (without risking serious subscriber losses). And, with the recent success of Android and Google’s takeover of AdMob, Google is in a better position to leverage power in the wireless market than Verizon Wireless. When your operating system is increasingly powering the smartphones consumers are using to access the Internet, you have a virtual monopoly on mobile advertising, and the market power of network operators is constrained by competition, why would you want increased federal oversight? On balance, leaving wireless out of the net neutrality race is another trip to the winner’s circle for Google.

It’s usually quite difficult to prove a negative – i.e., that consumers would actually be worse-off if Carterfone and Computer Inquiry regulations had been applied to wireless devices. But, because Carterfone and Computer Inquiry regulations do apply to wireline service providers, we have an analogous market to which we can compare the development of devices pursuant to Carterfone and Computer Inquiry regulations with the market-based approach applicable to wireless devices. That comparison indicates that the lightly-regulated mobile device market is more competitive and consumer friendly than the heavily-regulated Carterfone and Computer Inquiry era wired Internet and PC markets have ever been.

In the Carterfone and Computer Inquiry era, Internet service was provided using a relatively static, monopoly-controlled network. Because it was a monopoly, the Commission required separation between the network and services and devices. A few providers also dominated market segments related to the personal computer (“PC”), which came of age together with the Internet in this regulated environment. (In this blog, I use 50% or greater market share as a (perhaps crude) proxy for dominance.) Similar to the network to which it was typically attached, the PC relied almost exclusively on a single, dominant operating system (“OS”) – Microsoft Windows, which had 93% of the market share of the client operating systems for usage on the wired Internet as of June 2010 (according to StatCounter) – and a single, dominant chip-maker, Intel, which had over 80% of the central processing unit (“CPU”) market for PCs in 2009 according to IDC (via PC World). Microsoft also dominates the PC market for productivity applications, with Microsoft Office currently controlling 80% of the enterprise market and Microsoft Explorer controlling more than 60% of the browser market (95% at its peak in 2002-2003). And, according to netMarketshare, Google controls nearly 85% of search engine market share. Thus, in the context of the wired Internet, which was subject to strict separation of network, services, and devices in the Carterfone and Computer Inquiry era, the PC device and applications markets have been dominated by a single operating system, a single CPU manufacturer, a single suite of core productivity applications, a single web browser, and a single search engine. In short, virtually everything of significance that happens on the device and applications side of the wired Internet is dominated by a company with over 50% market share. If you are the average consumer, you are (like me) probably reading this post using an Intel-based PC running Microsoft Windows that defaults to Google as the search engine of choice.

The last thing the government should try to do is make the innovative and highly competitive mobile devices and applications segments look more like the moribund PC environment.

The highly competitive and lightly regulated mobile industry has produced completely different results than the Computer Inquiry and Carterfone era of the wired Internet and the PC. There is no dominant device, operating system, or suite of applications in the world of the mobile Internet. The mobile device and applications industry is instead one of relatively equal competitors, without any one company dominating any particular part of the mobile broadband platform. A primary example of this highly competitive environment is the smartphone OS segment – the OS is “the most important software in any smartphone.” Given the importance of the OS to the smartphone experience, innovation and competition among smartphone OS is critical to the future of the mobile broadband platform. Fortunately, the current structure and light-handed regulation of the mobile platform market is increasing innovation and competition among smartphone operating systems.

The chart below depicts Q1 2010 smartphone OS market shares worldwide (according to Gartner via Wikipedia) compared to personal computer OS market shares (according to StatCounter). When looking at the chart, it’s important to remember that in Q4 2006, Nokia’s Symbian OS still held more than a 70% share of the smartphone OS segment. Due to fierce innovation and competition enabled by business model innovation and the competitive structure of the mobile broadband platform market, however, the Symbian OS has fallen to less than 50% market share today (i.e., has gone from dominant to non-dominant). In that time, two completely new smartphone OS, Apple’s iOS and Google’s Android, have been able to enter the market and gain significant market share using the managed device platform (“MDP”) approach in partnership with operators around the world. The ability of a new smartphone OS to gain significant market share against a dominant competitor is astonishing when compared to the PC, where Microsoft leveraged early success into sustainable dominance of the OS segment.

Why has the mobile smartphone OS segment been so much more dynamic than the wired PC OS segment? One possibility is that smartphone OS vendors have used vertical relationships to mitigate network effects in the mobile broadband platform market, an option that was unavailable in the PC context. Like physical networks, OS (and business software) are subject to network effects, and markets subject to network effects are monopolistic in nature. These network effects have been mitigated in the smartphone OS segment through partnerships among device manufacturers, OS vendors, and network operators, who are building integrated mobile broadband platforms. In the PC segment, OS vendors were unable to leverage partnerships with ISPs because vertical relationships were prohibited by Computer Inquiry and Carterfone regulations. The inability of these OS vendors to pursue partnerships with ISPs may have been instrumental in preventing new entrants from making significant gains in market share against Microsoft Windows. The model used by Apple to launch its iPhone successfully against a dominant competitor in the mobile market simply wouldn’t have been legal in the PC market.

For example, when Apple launched the iPhone in 2007, it was entering a mobile market segment in which Nokia’s dominant Symbian OS held more than a 50% share, and the success of the iPhone was unclear – at that time, many believed the iPhone would be a flop (see a contemporary report here). The ability to enter into an exclusive arrangement with AT&T, however, mitigated Apple’s risk and increased Apple’s chances of success with the iPhone by ensuring that AT&T would make iPhone-specific investments such as marketing support, handset subsidies, and modifying its network to accommodate bandwidth-intensive applications.

In addition to enhancing Apple’s opportunity for success with the iPhone, the partnership between Apple and AT&T enhanced innovation and competition throughout the mobile industry. After the iPhone’s successful launch, the industry scrambled to develop competitive alternatives. If the iPhone had been initially available for use with all networks in the United States, there would have been less incentive for device manufacturers to create rival products with similarly advanced features. For example, T-Mobile, like several other carriers, would have had less reason to invest in the development of Android-based devices (which was also a new smartphone OS). It is likewise no coincidence that Verizon entered into its exclusive arrangement for the Blackberry Storm shortly after AT&T partnered with Apple for the iPhone. The sale of the BlackBerry Storm exclusively through Verizon marked the first time that a CDMA BlackBerry device reached the market ahead of a GSM version.

If Apple had been allowed to partner with AT&T for use of the Mac on AT&T’s wired broadband networks, Apple’s OS X might have taken a larger share of the PC OS segment, and Windows may have been less dominant. Perhaps Apple would have created a touch-based PC before it created a touch-based smartphone. But this type of innovation was thwarted in the wired Internet context by Carterfone and Computer Inquiry decisions that prohibited such partnerships. As the Windows OS gained market share in the 1990s, potential competitors were unable to leverage vertical relationships with Internet service providers. Thus, as noted above, the business model that provided Apple with its opportunity to enter (and ultimately, transform) the smartphone OS segment was unavailable to competitors of Microsoft Windows on the PC. Without the opportunity to explore such innovative business models, new OS for PCs lacked an important tool for launching a competitive challenge to combat the network effects that sustain Window’s dominance even today. The result was a relatively stable Windows market share of over 90%, which Microsoft has leveraged into dominance of its core business productivity and web browsing applications. As a result, the PC OS segment has remained one of slow evolution, not revolutionary innovation.

If smartphones and other mobile devices are to avoid the same fate, the government should reject (rather ironic) calls to impose through regulation the PC model on mobile broadband platforms. The last thing the government should try to do is make the innovative and highly competitive mobile devices and applications segments look more like the moribund PC environment. Hopefully, the FCC won’t fall into the same trap as the Library of Congress.

Elaine Dickinson: No.

Airplane (1980).

In 2007 (while I was Wireless Bureau Chief at the FCC), the FCC issued a declaratory ruling (“Classification Order”) classifying for the first time wireless broadband services as “information services.” Perhaps more importantly, the FCC found that “mobile wireless broadband Internet access service is not a ‘commercial mobile service’ under section 332 of the Act.” (Classification Order at para. 1). The latter finding is likely fatal to any attempt by the FCC to reclassify mobile wireless broadband service as a common carrier service subject to Title II regulation or data roaming obligations. Why is this finding so pivotal to ongoing debates at the FCC regarding the regulatory treatment of mobile wireless broadband?

Because, in Section 332 of the Act, Congress specifically prohibited the FCC from treating any mobile service as a common-carrier service unless that mobile service qualifies as a “commercial mobile radio service” (“CMRS”). Section 332(c)(2) states: “A person engaged in the provision of a service that is a private mobile service shall not, insofar as such person is so engaged, be treated as a common carrier for any purpose under this chapter [which includes Title II].” And Section 332(d)(3) defines “private mobile service” as “any mobile service (as defined in section 153 of this title) that is not a commercial mobile service or the functional equivalent of a commercial mobile service, as specified by regulation by the Commission.” So, it makes no matter whether mobile wireless broadband services are “information services”: If mobile wireless broadband services are not CMRS services (as the FCC found in the Classification Order), they cannot be subjected to common carrier regulation.

Can the FCC now make a different factual finding? I doubt any court would sustain such an about-face. To see why, we need to examine the definition of CMRS and the basis for the FCC’s finding in the 2007 Classification Order.

Section 332(d)(1) defines CMRS as “any mobile service . . . that is provided for profit and makes interconnected service available (A) to the public or (B) to such classes of eligible users as to be effectively available to a substantial portion of the public.” (Emphasis added.) In the Classification Order, the FCC determined that “mobile wireless broadband Internet access service . . . is not an ‘interconnected service’ within the meaning of section 332 of the Act and the [FCC]’s ‘commercial mobile radio service’ rules.” (Classification Order at para. 41.) FCC regulations define an “interconnected service” as one that provides “subscribers the capability to communicate to or receive communication from all other users on the public switched network.” (47 C.F.R. sec. 20.3.) As the FCC concluded in the Classification Order: “Mobile wireless broadband Internet access service in and of itself does not provide this capability to communicate with all users of the public switched network.” (Classification Order at para. 45.)

To contradict its 2007 finding, the FCC could consider stating that mobile wireless broadband subscribers can now communicate with all other users of the public switched network. But such a statement would be patently false. Mobile wireless broadband Internet access service subscribers cannot reach plain-old-telephone-service subscribers without the use of a VoIP application, which is typically not bundled with mobile wireless broadband Internet access service. Put another way, the availability of downloadable VoIP applications does not alter the fundamental character of the mobile service that is being provided – which is not a CMRS service.

The FCC’s existing interpretation of Section 332 is by far the most reasonable and the most consistent with Congressional intent. I’d be surprised if the FCC were able to craft a revised interpretation that could withstand judicial scrutiny.

In its Sixth Broadband Deployment Report (“Sixth Report”), the FCC concludes that “broadband deployment to all Americans is not reasonable and timely.” (Sixth Report at para. 2 (emphasis in original).) However, the FCC doesn’t attempt to answer the question titling this blog post. To the contrary, the Sixth Report “emphasize[s] that [its] conclusion in no way diminishes the achievements industry has made deploying better and faster forms of broadband to most Americans, nor the Commission’s past efforts to foster broadband deployment.” (Report at para. 6.) The FCC can say that, but that doesn’t make it true. Somebody’s always at fault.

In this case, it’s the FCC that must shoulder the blame – because it hasn’t acted in a timely manner in its efforts to reform the Universal Service Fund. And Universal Service Funding (or some other method of subsidy) is the only way to achieve universal broadband service (the goal articulated by the FCC in the Sixth Report.) (See my earlier post on the Sixth Report here.) Efforts to fundamentally reform the Universal Service Fund have been ongoing for years, but have failed in the face of intense lobbying by rural carriers that benefit disproportionately from the status quo. The Report’s finding that the status quo isn’t good enough may finally give the FCC the political cover it feels is necessary to take responsibility for the Universal Service Fund and enact real reform. Otherwise, there’s little point in the Sixth Report’s conclusion regarding the “reasonable and timely” deployment of broadband to consumers that cannot be economically served by industry.

Section 706 of the Communications Act requires the FCC to annually “determine whether advanced telecommunications capability [i.e., broadband] is being deployed to all Americans in a reasonable and timely fashion.” In its last 5 reports, the FCC has concluded that broadband was being deployed in a reasonable and timely fashion. Now, in its Sixth Broadband Deployment Report (“Sixth Report”), the FCC has concluded that “broadband deployment to all Americans is not reasonable and timely.” (Sixth Report at para. 2 (emphasis in original).)

The primary basis for the FCC’s conclusion is that not all Americans have access to broadband service offering actual download (i.e., to the customer) speeds of at least 4 Mbps and actual upload (i.e., from the customer) speeds of at least 1 Mbps. (Sixth Report at para. 5.) While this is undoubtedly true, the question is whether broadband is being deployed in a “reasonable” fashion, which makes the definition of “reasonable” critical to the analysis.

In the Sixth Report, the FCC has set the standard for “reasonableness” in the Section 706 context so high that it could never be met by industry alone.

In the Sixth Report, the FCC has set the standard for “reasonableness” in the Section 706 context so high that it could never be met by industry alone. The FCC concluded that the “goal of the statute, and the standard against which we measure our progress, is universal broadband availability,” and that “market forces alone are unlikely to ensure that the unserved minority of Americans will be able to obtain the benefits of broadband anytime in the near future.” In other words, because market-based deployment would not result in universal broadband service (which is hardly a surprise), deployment is unreasonable and untimely. This definition of “reasonableness” places reasonable broadband deployment outside the hands of industry and directly into the hands of government.

So, what does this mean for the industry and the FCC? I’ll address that in my next post.

Dr. Peter Venkman: “It’s technical . . . .”

Ghostbusters (1984)

So far I’ve successfully resisted the urge to comment on the 700 MHz D Block issues percolating at the FCC (although I did reference the FCC’s report in an earlier post). After coming back from my traditional 4^th of July holiday, however, I’ve succumbed to the temptation to opine on the FCC’s “D Block Capacity Report.”

Others have already analyzed the Report in detail. (For Andrew Seybold’s comprehensive analysis, click here.) And I’ll try not to repeat their analyses in this post. Instead, I focus on the framing of the Report and, perhaps most importantly, what the Report doesn’t say.

The FCC frames its D Block capacity Report as a “technical” analysis intended to determine whether 10 MHz of spectrum is sufficient to meet public safety’s communications requirements in various scenarios. But, of course, this purported “technical” analysis is based as much on economic and policy assumptions as it is on engineering. It has to be: Because capacity is impacted by issues like cell density, which is in part a matter of economics, capacity isn’t solely a technical issue.

The FCC appears to concede that whether 10 MHz of spectrum is sufficient for day-to-day operations depends in part on how much money public safety has to deploy and maintain the network. (See Report at pages 5-7.) Indeed, the Report relies heavily on the potential economies of scope and scale that public safety would enjoy if the D Block is licensed to a commercial operator. (See Report at pages 16-17.) But the report erroneously assumes that the “benefits associated with sharing an LTE band class (Band Class 14) with the commercial D block licensee would evaporate” if the D Block were given to public safety. Isn’t it just as likely that public safety could use its access to an additional 10 MHz of spectrum (which, according to the Report, public safety doesn’t need) as an incentive to entice a commercial licensee into a mutually beneficial, voluntary partnership with public safety? Unfortunately, the Report doesn’t address this question or other alternative scenarios involving both economic and technical analysis.

Ironically, the FCC is clearly relying on significant relationships developing between public safety and commercial partners through roaming and priority access regimes. (See Report at pages 11-12.) However, the FCC apparently wishes to impose roaming and priority access requirements on commercial licensees as a matter of regulatory fiat, rather than allow them to develop through cooperative agreements between commercial licensees and public safety (using the D Block as leverage). It appears the FCC is more comfortable with imposing regulation on commercial licensees (who will be forced to allow public safety to access their spectrum and commercial resources) than giving more spectrum to public safety and relying on voluntary sharing arrangements. Regardless of its merits, this preference is one of policy and economics that has been given a dubious “technical” patina.

Now the FCC itself has confirmed the relevance of these factors to cell density. In a white paper released this week (“Public Safety Report”), the FCC published “a technical analysis of the capacity and performance of the public safety broadband network assuming that the National Broadband Plan recommendations concerning this network are implemented.” (Public Safety Report at 1.)

The Public Safety Report emphasizes that “sound network engineering principles” dictate high cell densities to maximize capacity. (See Public Safety Report at 5.) “Deploying greater numbers of cell sites achieves a greater aggregate capacity and higher overall level of spectral efficiency, consistent with Commission goals to achieve highest use for this scarce resource.” (Public Safety Report at 19.) Indeed, in analyzing a scenario in New York City (“NYC”), the Public Safety Report assumes there will be “considerably more than 3 times as many [700 MHz] cell sites” as were assumed necessary by the NYC Department of Information and Technology (Public Safety Report at 20). Although the propagation characteristics may have made the lower cell densities proposed by the NYC Department of Information and Technology possible, the Public Safety Report confirms that capacity concerns, rather than propagation characteristics, should dictate 700 MHz cell densities, at least in urban areas.

The Public Safety Report also recognizes that power limits inherent in mobile devices (due to concerns about human exposure to radiofrequency energy and adequate battery life) and desired data rates also limit cell sizes, regardless of favorable propagation characteristics. “The data rate and performance available to a device in a cellular broadband network is a function of how far it is from a transmission tower. . . . A network that must be capable of supporting a video device or other device that supports a high-data-rate application must therefore have smaller cell radii . . . .” (Public Safety Report at 13.) This is true in any geographic area, whether urban, suburban, or rural.

Although Dr. Peha was addressing the question in a different context, it’s still nice to see that the FCC’s Chief Technologist and I agree that propagation characteristics are only one of many relevant factors in mobile network design.

SpongeBob: “You have?”

Patrick Star: “No, what is it?”

SpongeBob SquarePants (1999)

Last week AT&T announced “new wireless data plans that make it more affordable for more people to enjoy the benefits of the mobile Internet.” How will AT&T do that? It is abandoning unlimited data services effecting June 7, 2010, and moving to usage-based pricing plans. The lowest-price plan is 50% less expensive than AT&T’s current unlimited data plan and offers enough data to satisfy approximately 65% of AT&T’s customers on average according to AT&T’s press release. The current unlimited plan is $30 per month. The new smallest plan available is only $15 per month for 200 MB of data (but, if customers exceed 200 MB in a monthly billing cycle, they will receive an additional 200 MB of data usage for $15 for use in the cycle). AT&T will also offer a plan that allows up to 2 GB a month of data usage for $25 (with an additional $10 charge for an additional 1 GB over the limit).

With these new plans it looks like the average AT&T customer will actually save money, which should make “consumer groups” happy, right? Not when it’s opposite day. Rather than recognize the benefits of a more rational pricing scheme – one that accounts for actual usage patterns – Chris Riley at Free Press accused AT&T of “price gouging” for charging “low-end users $15 per 200 MB” rather than the $30 per month they pay now for unlimited service they don’t need. Yes, SpongeBob, it is price gouging when you lower prices – on opposite day.