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A century of mixed governmental policy and clever corporate maneuvers has delivered a U.S. telecommunications market devoid of competition. In most cases the cost of entry in the broadband internet market is prohibitively high.  (Source: Parker Brothers)

FCC Chairman Julius Genachowski today will hold a public meeting to discuss the rough draft of net neutrality rules to try to regulate this unruly market.  (Source: AP Photo/Danny Johnston)

Sen. John McCain and Washington Republicans have opposed the measure, but may be powerless to stop it. The telecom industry has donated or fund-raised millions in campaign contributions to McCain and others in a bid to secure their opposition of net neutrality and other restrictions.  (Source: AP/Zimbio)
Under the FCC's new rules "legal" traffic will be protected; though their are significant exceptions for wireless

The U.S. Federal Communications Commission will today hold a public meeting to discuss its draft of new internet rules and regulations.  The proposal, drafted by FCC Chairman Julius Genachowski, represents a relatively moderate approach and thus may draw fire from both strong net neutrality advocates and industry officials alike.

I. What's in the Draft

The draft is all about protecting an "open" internet.  It forbids internet service providers, such as Comcast or Time Warner, from throttling (slowing) legal traffic.  It also would likely outlaw plans, such as the pay-per-site scheme unveiled by wireless providers this week.

The rules have a number of exceptions, though.  Wireless carriers are allowed to throttle certain kinds of traffic (e.g. video), assuming they are not using that as a tool to promote their services in an anticompetitive fashion (i.e. the proposal permits them to "reasonably" manage traffic).  And while they may have to prove it's illegal, wired and wireless operators are allowed to throttle illicit traffic, such as P2P or bittorrent traffic of pirated materials.

Those limitations may bother some net neutrality advocates.  The mobile provision is particularly worrisome to companies like Google who are becoming increasingly reliant on mobile advertising and peddle a variety of high-bandwidth products (like YouTube).

While the outlook is good for video and voice services (e.g. Skype, YouTube, and Hulu) in the wired domain, trouble could show its face their as well.  The proposal permits wired carriers to adopt usage-based pricing, as many are eager to do.

Usage-based pricing is a mixed bag for the public.  For "low tech" internet users, who only check their email and read text-heavy pages like 
Wikipedia or The New York Times, their bills will likely be reduced.  But for "high-tech" users who video chat on Skype, stream movies from Netflix, or play online games they may soon see their bills skyrocket.

The FCC promises to monitor the markets for what it sees as abuses.  But the question is whether the Commission will act in time to prevent such abuses 
before they happen and whether its rulings will even hold up in court, given the fact that they're loosely defined in existing and pending regulation guidelines.

II.  Rise of the Collective Monopoly

i. The Past

Between 1934 and 1996 the internet popped up, cell phones became fashionable, and the telephone marketplace radically changed.  However, there was precious little new regulation to guide this new market.

And the root of the problem began long before that, even.

In the 1880s and 1890s, the Bell Telephone Company enjoyed a monopoly on telephone services in the U.S., thanks in part to the the United States defending its patent on the phone.  Those hoping to construct their own systems of phone lines first had to pay to license the Bell patent , and then had to navigate through a myriad of government restrictions designed to help Bell.

Under the system few legitimate competitors to Bell arose, and those that did were quickly acquired by Bell before they came a nuisance.

In 1899 the American Telephone and Telegraph Company (AT&T) acquired, Bell.  The net effect was to assign a new name and owners to the national monopoly.

A similar monopoly was developing in the wireless industry, with wireless giant RCA stomping out the competition.  Together RCA and AT&T held the critical patents on vacuum tubes.  And in the 1920s they agreed to a cross-licensing agreement that would essentially make them America's exclusive source of transmitted information over the next three decades.

In the 1960s and 1970s court rulings slowly chipped away at AT&T's domination of the market, by allowing third party devices and their ilk to connect.  And then a landmark decision in 1974 -- the 
United States v. AT&T -- force the AT&T monopoly to split into smaller companies.

Slowly many of these telephone companies began to merge back together, reducing the total number of options.

At the same time as all this was occurring, a handful of cable television companies (Cox, Time Warner, and Comcast) emerged and cornered the small, but increasingly lucrative paid television market.  Eventually some of these firms would be acquired by the telecoms and vice versa.

In 1996 U.S. President Bill Clinton passed the Telecommunications Act, the first major telecommunications legislation since the Communications Act of 1934, which established the FCC.  Among other things, the new law required telecoms to interconnect their wired networks (wireless networks could still operate independently).

ii. Today

Today a handful of companies largely control the wired and wireless internet in the U.S.  There are only four major wireless carriers, and only eight cable networks with a million subscribers or more.

Cable services tend to be what economists refer to as an inelastic good.  While providers make their decisions "independently" they tend to adopt common pricing in a particular region, and have in effect an unlimited supply.  

The cost of market entry is prohibitively high for small competitors to emerge.  Even with the ability to connect to their competitors wired lines, the infrastructure costs associated with launching a cable network to cover over a million people make it virtually infeasible for all but the biggest financial powers.

The question becomes how to regulate a competition-devoid industry that's essentially behaving as a collective monopoly and ever looking for ways to milk more money from customers.  That FCC has largely been saddled with that responsibility.

Many today, however, are unhappy with this state of affairs.  After all, they say, the government put us in this mess by promoting early cable, telephone, and wireless monopolies -- so what makes us think that they will get us out of it with more regulation?

Adding to the difficulty faced by the FCC and pro-regulation members of Congress, is a wealth of campaign donations from the industry's biggest players.  These donations have helped convinced some states to propose laws to effectively ban cheaper municipal Wi-Fi offerings -- an emerging alternative to big cable.  They also have lead politicians on the national scale to fight against new regulation on net neutrality and other topics.

The question, however, becomes -- if Congress and the FCC can't (or are unwilling to) extract the nation from the service providers ever tightening web of rising prices, who can?

III.  The Outlook for the New Rules

The FCC faced contention in its own ranks, when debating Chairman Genachowski's proposal.  Commission members Michael Copps and Mignon Clyburn only reluctantly gave their approval to the draft, while expressing misgivings about its exemptions for the wireless industry and various loopholes.  Mr. Copps commented, "While I cannot vote wholeheartedly to approve the item, I will not block it by voting against it."

The two votes from Mr. Copps and Ms. Clyburn gave the Commission a 3-2 vote, clearly split along party lines.  The two Republicans have both opposed the bill.  Commissioner Robert McDowell, one of the two Republican members of the Commission commented in a 
WSJ interview, "Nothing is broken and needs fixing.  Ample laws to protect consumers already exist."

Some industry analysts have praised the draft.  States Daniel Ernst, an analyst at Hudson Square Research, in an interview with 
Reuters, "Without regulation, rates could go up and up and up and emerging providers like Netflix and Hulu could have problems attracting users."

However, the proposal, as mentioned, is drawing the ire of some net neutrality groups as being too weak.  Craig Aaron, managing director of Free Press, criticized the bill's many loopholes and lax restrictions on the wireless industry, stating, "These rules appear to be flush with giant loopholes."

These advocates argue the FCC is abandoning its responsibility to protect the public and bowing to corporate influence.

While the bill clearly won't fully satisfy everyone, it does provide some barriers towards the anticompetitive/anti-consumer behavior that the telecommunications market has increasingly been experimenting with.  Thus some see it as a modest step towards preventing telecoms from abusing their artificially dominant position.

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Natural Monopolies
By monitorjbl on 12/21/2010 12:55:12 PM , Rating: 2
I've always been of the belief that business has no place in a natural monopoly because it gives companies no reason to improve. If there is only one phone/electricity provider in your region, you shouldn't be made to suffer for it just because you need it and internet connectivity is rapidly becoming just as crucial for day-to-day things. Not to compare the necessity of the internet to that of water, but there is definitely a reason water utilities are usually run by the local government. If a business can abuse its customers because they have no choice in the matter, then there is a problem.

However, with the internet where it is today, I don't think the Internet could survive as a government utility. The vast majority of voters are older and tech-useless, and they would end up having the final say on how fast the internet connectivity in their town was. Most of the older crowd would be fine with dial-up; it's fast enough to do email and it would hardly change their taxes if it were to be their town's only option. Maybe a decade or two down the line, when most people have been using the internet for most of their lives, this will make more sense. But for now, that only leaves us with regulation.

There's already a ton of regulation in place for telecom companies and though I'm not saying all of its current rules are good as-is, it definitely needs more. If your customers are using almost all of your bandwidth, the solution is to acquire more bandwidth, not screw your existing customers by throttling them and keeping the same amount of bandwidth. It's part of the growth of a normal business, but because Comcast's customers are more or less stuck with them, Comcast seems to think it's special.

I'm not saying that these companies need to be profitless in this enterprise, but I can guarantee you that Comcast can afford to upgrade its network. If this were a competitive environment, there would be no reason for this kind of regulation. But since it isn't, even the most conservative-minded person needs to keep in mind that their power bill could be a lot higher than it is now, were it not for government regulation.

RE: Natural Monopolies
By MrBungle123 on 12/21/2010 1:11:56 PM , Rating: 3
I think my powerbill would probably be lower were it not for government regulation.

I live in an area where they are tearing out hydro-electric dams, refuse to allow the power companies to build new power plants, and government regulation of some sort or another gets in the way of almost every new engery project that gets proposed.

Can we keep the dams we have? NO the government says they don't meet the requirements for recertification because they have no fish ladders.

Can we build fish ladders? No because the permitts etc. will cost more than removing the dams.

Can we build a new liqufied natural gas power plant? No because environmental regulations will not allow it.

Can we build a nuclear plant? No because environmental regulations have all but oulawed them in this state.

Can we build a biomass power plant? Maybe but we'll have to import the fuel for it because they've all but regulated the logging industry out of business.

What we can do is use regulation to stop every new energy project then blame the "evil" Pacificorp for rising electricity prices! I think the government can take its regulations and shove them up their ass, they cause more problems than they solve every time from my experience.

RE: Natural Monopolies
By monitorjbl on 12/21/2010 1:31:50 PM , Rating: 2
Those are all valid points, but imagine what that company could do for you if there were no regulations and no government-imposed "projects". They could charge whatever they felt like charging, and you really wouldn't have any choice but to pay it. I mean if you're stubborn enough, you could just go without electricity, but that isn't a realistic expectation of...anyone, really.

I do agree with you on some points though. Environmental regulation can be one of the stupidest things in existence, and I would dearly love for the stupid rhetoric that comes out of environmentalists about nuclear power to somehow be surgically redirected into their butts. So, not saying all regulation is good, but to expect that your power bill would be lower in an unregulated environment is just being too optimistic.

RE: Natural Monopolies
By MrBungle123 on 12/21/2010 1:53:26 PM , Rating: 2
No I don't think they could charge whatever they felt like charging. The power companies still have to deal with market forces. The power they offer has to be cheaper than what it would cost individuals to generate their own power otherwise people will buy generators instead of their services. They can't charge so much that people start making a concious effort to reduce their usage or they lose money because consumers will buy less of it(different side of the equation but the same effect on bottom line). They can't charge so much for it that businesses pack up and move to the next county or (factories and large stores use more power than 100s of homes).

They will charge something close to the "going rate" for power not because of government regulation but because it is a good business decision and charging too much or too little will negatively effect their business.

RE: Natural Monopolies
By monitorjbl on 12/21/2010 2:10:40 PM , Rating: 2
It's not cost-effective for a person to generate his own power until a certain, massive price point is hit. Solar is inefficient and most people are only at home when the sun goes down, so the only real option is diesel generators. With the cost of fuel being where it is now, you could safely say that you would need to be paying the equivalent of your mortgage in electric bills before that would even approach profitability.

Anyway, you're mostly correct, assuming all variables are static and all cities are equal. You're ignoring the scenario in which power companies offer their service at an attractive rate until they have enough customers, at which point they drive up costs to a higher, but still maintainable rate for most people and businesses. You're also discounting the fact that businesses may need to be in a particular area for access to a natural resource or clientele.

There are dozens of other scenarios but even in yours, the power companies could increase their rates by a lot before people or businesses would seriously consider moving/reducing their loads/generating their own power. Neither people nor businesses pack up and move to a new county just to save a couple of cents per kWhr, and even that much of a hike is a LOT of revenue for a power company with a lot of customers.

"We basically took a look at this situation and said, this is bullshit." -- Newegg Chief Legal Officer Lee Cheng's take on patent troll Soverain

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