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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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RE: Telecoms = Dummy Pipe
By Zaranthos on 12/21/2010 1:56:21 PM , Rating: 2
Nothing the government runs ever works well for long. It gets loaded down with bureaucratic nonsense and red tape. How's the post office doing these days? Terrible. How about that social security trust fund. Spent and gone. Government home loans and student loans? Far in debt. Medicare? Mostly unfunded and in terrible shape. There is no perfect world. There is no hope of some pie in the sky utopia where we all get our cake and eat it to. Life isn't fair. I just wish people would figure this out and quit thinking the government can fix everything. The more you try to let them fix the more you surrender your own freedom for shackles of an out of control government.

RE: Telecoms = Dummy Pipe
By room200 on 12/21/10, Rating: 0
RE: Telecoms = Dummy Pipe
By Klinky1984 on 12/21/2010 8:23:59 PM , Rating: 2
How'd that self-regulated financial & housing market fair? Oh wait, that's right... Corruption only exists in the government, silly me...

RE: Telecoms = Dummy Pipe
By myhipsi on 12/22/2010 9:45:05 AM , Rating: 1
Go look at the facts before you state your opinion on the subject. The market hasn't been "self regulated" since the early 1900's, and arguably never has. There are countless government mandates, regulations, and controls on the market that create endless moral hazards. This is how giant corporations hold onto their monopolies, it's how wall street gets rich at the expense of the tax payer, it's why the little guy (small business owner) finds it tough to compete, it creates barriers to entry into the market (strengthening established monopolies), and actually is the source of 99% of the corruption in the market.

On the subject of net neutrality; Do you really want the internet to turn into cable TV? Cause that's what will eventually happen if we allow it be regulated like every other part of our lives. The internet is the only free, unregulated medium we have left, and it has worked wonderfully since it's inception. Why fix something that isn't broken. Let the market decide with their dollars.

RE: Telecoms = Dummy Pipe
By Klinky1984 on 12/23/2010 1:51:11 AM , Rating: 2
Bandwidth caps, throttling & double-dipping for bandwidth fees doesn't sound that free. The Internet is already "regulated" by the ISPs that can limit your access as much as they want by capping, throttling or charging whatever they want because usually you have no alternative. Cable TV is poorly regulated. These companies need to be broken up and there needs to be more competition or they need to be strictly regulated so as to ensure they are providing fair & consistent service while existing as a local monopoly/duopoly.

Also the fact that that financial market wasn't completely unregulated doesn't excuse the fact that business could have taken the moral high-ground instead of short-sighted profiteering. Morals aren't the concern of business though & one shouldn't expect that they will keep their hands out of the cookie jar.

RE: Telecoms = Dummy Pipe
By myhipsi on 12/23/2010 9:58:56 AM , Rating: 2
Of course the internet isn't free monetarily, that's not what I meant. It's free as in freedom.

Where I live there essentially exists a duopoly, but they are fierce competitors. I constantly get mailings from both companies with offers of lower prices, more features, etc. One offers unlimited usage with 5 mb of bandwidth, the other offers 95 GB per month usage with 10 mb of bandwidth. I actually chose the capped one because of the higher bandwidth, and I rarely use more than 95 GB a month, so it works for me. Neither of the companies throttle, or "charge whatever they want".

On your second point, when the fed provides trillions of dollars of cheap (almost free @ 0.25%) money, what do you expect will happen? It's like providing free booze to a bunch of teenagers. My point is, if interest rates were market driven, they would be much higher than 0.25% and the leveraging party would never have occurred. When people can get rich by simply borrowing money and lending it out at a higher interest rate, over-leveraging is the natural result. It's called moral hazard, and government policies and regulations cause many of them.

As far a business ethics are concerned, I disagree with your assertion that businesses have no morals. Financial markets are a little bit different, and investors do, in most cases, not consider morals in their investment. But in a free market, greed is balanced by fear. If banks and investors were allowed to go bankrupt during the financial collapse, that would have set the stage for a much more conservative future in banking and investing. But since the government bailed them all out, they will just repeat the same mistakes. If you maxed your credit card and there was always someone there to bail you out, why would you stop. You would continue to be irresponsible because it would benefit you. It's the same in financial markets. Again, government bailouts = moral hazard.

RE: Telecoms = Dummy Pipe
By Klinky1984 on 12/24/2010 12:15:07 AM , Rating: 2
...and by "free" I meant it as in "freedom", the ability to use your connection as you see fit w/o interference from the ISP. Money is power & the connection from your home to Internet is power. Digital connections are content agnostic as you can carry voice,video & data across them. I would say by placing caps, throttling services they do not like & trying to extort fees out of content providers on the Internet, all the while promoting their internal services, that is an attack on "Internet Freedoms", being able to do what you want when you want with whom ever you want. Ultimately I could see them trying to charge rates so excessive as to make Internet content distribution unfeasible or at least change the Internet into something they can control and tax.

Also I think it's somewhat scary that consumers are now beholden to a small group of mega-corps in each sector. Maybe Google will step in an save us or MSFT against evil Comcast, Verizon or AT&T? These companies just keeping getting bigger and bigger, at what point does a business have their hands in two many pies to where the market & consumers are negatively affected?

I have Comcast & Verizon in my area, Comcast recently sent a notice they are raising rates, this happens to occur around the time that Verizon sold their FiOS service to Frontier Communications which is planning to stall fiber to the home services, interesting indeed. Verizon DSL is still around but is pathetic at what they offer. Also there are a lot of apartments in this area that are locked down to one provider or the other, where there is absolutely no way to get a competing service installed. This can be the case with your apartment or even the entire city.

Also I am not sure how your mind works where you're suggesting that because business/financial sector couldn't keep themselves from taking advantage of a moral hazard, this means we should entrust them with more freedoms because they wouldn't create a moral hazard in the first place? It also wasn't just a low interest rate that caused the problem, there was a ton of foreign money flooding wall street which everyone wanted a piece of the pie. So banks went so far as to give people loans based on fraudulent information, then have their buddy rating agencies rate these investments as gold, while shorting against them. By now the cheap money is a tiny fraction of the problem and the main issue is integrity of the people running the companies, which you seem to think need more leeway?

The whole financial sector is F'd-Up from the Fed Reserve, to the market makers to the high frequency traders & to the derivatives market...etc..etc..

RE: Telecoms = Dummy Pipe
By Jaybus on 12/22/2010 5:06:32 PM , Rating: 2
I agree. I do not trust government to operate a nationwide network with anything resembling efficiency. I believe competitiveness could be brought to this market with two straight forward regulations.

1. An FCC license should require a standardized network sharing agreement with all carriers large and small.

2. Customer contract terms can be for no more than 30 days (month-to-month basis), and "setup" fees are limited.

The first has the effect of allowing anyone with some sort of network cable running to the premises to purchase a service plan from any carrier in the US that they so choose. The sharing agreements dictate the percentage of the bandwidth allocated to them, and they are responsible for that same percentage of the maintenance costs.

The second allows consumers to change carriers anytime they wish without undue penalty. This is crucial. Customers must be able to easily switch service to the provider they deem best for their purposes. Providers must not be allowed to essentially enslave customers with unreasonable lock-in agreements as is being done in the wireless sector.

Once competition is introduced into the market at the local level, the rest will take care of itself.

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