Archive for May, 2006

Martin Geddes left a great comment on the entry below that I'd like to promote to primary blog fodder.  (His very good blog is here.)  I'd like to take the chance to talk about internalizing externalities (what did you have for dinner tonight?).  Martin is a very clever guy, and I'm listening carefully to him.  He says:

Where common carriage means “no discrimination between destinations within a service type”, it would be reasonable to start charging telcos who don't provide this for rights of way. Rather than compaigning for network neutrality, you can then campaign for a telco tax, which should find plenty of happy takers in Congress — there's no shortage of public debt to service. In fact, reframing this around “no right-of-way subsidies to telcos” makes a lot more sense than “network neutrality”.

I think common carriage means offering service on a nondiscriminatory basis, neutral as to use and user.  If the innkeeper's customer has red hair, he shouldn't charge him more than his blond customers.  These are just bits we're talking about.  Making them into “service type” decides the question up front — they're not services until the carrier decides to call them that.  And it also seems to me that if the second customer speaks more quickly than the first customer (because he's done the equivalent of hiring Akamai or some other private middleman to help him out), the innkeeper also shouldn't discriminate. 

But discriminating between classes of application (or even specific applications) is a different think. Lumping it into “common carriage” doesn't make sense to me.

It does to me.  Martin continues:

And if they want to price discriminate between them, what's the big problem with sending out “Monopoly rents over here — come and get it!” price signals? Why pass laws that entrench the status quo forever by undermining the scope of possible competing business models that may rely on such application price discrimination?

Ah, but in the U.S. we just don't have competition for broadband access.  Americans don't have real choices in this area, and the upfront costs of starting an alternate national network are too high for anyone to do it realistically (unless Sascha Meinrath has his way and we all start forming ad hoc local networks right and left).  Monopoly rents won't be an occasion for competition to arrive — monopoly rents will just be monopoly rents.  And we'll all be paying them.

And what if your assumptions on how networks are run and finances slowly become obsolete, just as the definitions of the '96 Telecom Act became? (Think of how different Skype Zones are from traditional network payment methods, for example — should this be illegal? I don't think so.)

Aha.  This is where we get to the internalizing externalities point.  Telcos want to be sure to be able to monetize their networks by discriminating in favor of particular services and applications, and claim that if they do that they'll have incentives to build more broadband in the U.S.  In other words, they want to internalize the externalities created by these networks. But the network neutrality side of things doesn't think this makes sense.

The theory behind internalizing externalities (or spillovers), is that if property owners are both fully liable for third party costs (the burdens their property creates, like pollution) and entitled to appropriate all the benefits of their property, their interests will magically align with those of society, and they'll make efficient decisions.  They'll have all of our best interests at heart, and their private welfare will line up with general social welfare.  If you believe this theory, you think that spillovers (values that aren't captured by property owners) are bad because they get in the way of these optimal decisions.  These un-appropriated spillovers won't give enough signals of what consumers want.  (There's a recent paper called Spillovers by Lemley and Frischmann that explains this in a very clear way.)

But, in fact, spillovers can be good!  Route 128 failed and Silicon Valley succeeded, because the Valley allowed things to move around and allowed other people to make value out of initial innovations.  There are lots of social values created by internet use that aren't adequately “paid for” by individual internet subscribers, and aren't appropriately appropriated by network owners.  Innovation is one of those positive spillovers that we don't want to allow a single property owner to own forever, because the second innovator might do a better job with the idea.  Same thing online — the network owners shouldn't necessarily be allowed to internalize all of these externalities, because we can't assume that optimal social values will be the result.  Rewarding a single innovator isn't always the best thing to do.

This is a long way of saying that I disagree with Martin.  I don't think it should matter how Skype makes money.  I do think that transport — the substrate, the common carrier — should be treated differently than the layers above, because we don't have competition for transport.  So our costs are high and our speeds are low.

The idea that the telcos have zero competition (where there's no cable, for example) isn't true, because there's always (at a price) the option for users to collectively revolt and built their own access network. The proposed neutrality regulations are a tonic that soothes the pain of monopoly and ensures that the level of local political outrage never reaches a critical action threshold.

Don't throw me into the neutrality patch, Mr Fox!

I do think these guys have zero competition (or only gentle competition) because the upfront costs of an alternate network are insuperable.  I do think there's a risk of creating a “neutrality patch” that is a comfortable humid swampy environment for these monopolists, and that's why I'd rather treat them like any other utility.  Like a pipe.

For years and years (back to 1998 at least), the telcos have been saying that if we only gave them enough incentives and enough freedom, they'd install fiber-optic lines in the U.S.  Trusting in our Lucy-and-the-football way, we gave them concession after concession — undoing unbundling, undoing interconnection, and (finally) giving them the same regulatory treatment as traditionally proprietary cable systems. 

The network neutrality battle is yet another plea for concessions by the telcos.  Give us incentives! they cry.  But why should we believe them this time?  Why would this next step – monetizing their networks – give them them any more oomph than they've had so far?  After all, with the exception of Verizon the Bells are spending less on capital investment than they're claiming as depreciation.  Which means, in translation, that they're already spending less than the assumed cost of maintaining their current networks. No oomph to speak of.

Why should we trust them now? We've already given them incentive after incentive, access to rights-of-way (presumably in exchange for common-carrier behavior, as Dan Berninger points out), and the regulatory shirts off our backs. 

Similarly, the cablecos often claim that they need incentives in exchange for their $100 million investment in broadband.  But that investment happened years ago.  Why would making them comfortable now make a difference? 

The incumbents' incentives arguments are very similar to those highlighted in the copyright wars, and particularly in the Eldred battle.  “Give us incentives or we won't create!” was the cry then.  The economists' amicus brief in Eldred made the point that the Sonny Bono Copyright Term Extension Act would provide no significant incentive to create new works. 

Same thing here:  given what we've already been through with the telcos, and the extensive concessions they've already obtained, there is zero evidence that they'll magically do better with broadband penetration if they win the net neutrality fight.  They're asking us to take a leap of faith and believe in their property rights argument, but we know there will be significant social costs if we give in — and we have no reason to believe that the additional incentive will make any difference.

Thanks to Dave Burstein for talking to me — he has some stories to tell about SBC that I won't reveal here, so watch for his next newsletter.

On Monday, May 15, Andrew Raseij and Micah Sifry are putting on Personal Democracy Forum 2006 here in NYC.  It's at the City University of New York’s (CUNY) Graduate Center, located at 365 Fifth Avenue at 34th Street, across the street from the Empire State Building.

Between 5 and 6pm, at the end of a long and interesting day of panels and plenaries and blogging and chatting, I'll be part of a debate about network neutrality.  Come by so that you'll be around when it's time to go out for drinks with the panel.

Suggestion for those who heads may be spinning and eyes may be glazing by 5pm:  consider playing NN bingo — make up squares for words like “local loop” and “extortion” and “heavy-handed regulation” and “quality of service” and “let the market decide” and “permission” and “ecommerce giants” and “chokehold abuse” and “long tail”.  Then play the game behind the panelists' backs, on the chat screen.  Should be fun! 

The XXX decision on Wednesday by ICANN's board, which voted 9-5 to reject the XXX contract, represents a low point for ICANN.  I am a member of ICANN's board, and I voted in favor of the agreement.

Here is the statement I made in connection with the vote on Wednesday afternoon:

We are asked today to approve a draft registry contract with ICM Registry, who is proposing to run a top-level-domain.  The string chosen by ICM and proposed by them to ICANN is “xxx”.

ICANN’s mission is to coordinate the allocation of domain names and numbers, while preserving the operational stability, reliability, and global interoperability of the Internet.  The vision of a non-governmental body managing key (but narrow) technical coordination functions for the Internet remains in my view the approach most likely to reflect the needs of the Internet community.

ICANN’s current process for selecting new gTLDs, and the artificial scarcity this process creates, continues to raise procedural concerns that should be avoided in the future. I am not in favor of the “beauty contest” approach taken by ICANN thus far, which relies heavily on relatively subjective and arbitrary criteria, and not enough on the technical merits of the applications. I believe this subjective approach generates conflict and is damaging to the technically-focused, non-governmental, bottom-up vision of ICANN activity.  Additionally, both XXX and TEL raise substantial concerns about the merits of continuing to believe that ICANN has the ability to choose who should “sponsor” a particular domain or indeed that “sponsorship” is a meaningful concept in a diverse world.  These are strings we are considering, and how they are used at the second level in the future and by whom should not be our concern, provided the entity responsible for running them continues to comply with global consensus policies and is technically competent.

We need to adopt an objective system for the selection of new gTLDs, through creating minimum technical and financial requirements for registries.  Good proposals have been put forward for improving this process, including the selection of a fixed number annually by lottery or auction from among technically-competent bidders.

In the meantime, I am not persuaded that there is any good technical-competency or financial-competency reason not to enter the draft registry agreement between ICM and ICANN that has been posted for public comment.  I therefore vote “Yes” on the motion to approve the draft agreement. 

Additionally, ICM is saying that it will establish elaborate registration requirements for second level domains using this top-level-domain string, will comply with the promises it has made as an applicant, and will, among many other things, “create automated tools to monitor registrant compliance with registry policies related to labeling and the prohibition of child pornography.”  I have carefully reviewed the concerns raised by the Governmental Advisory Committee in its 28 March 2006 communique, and have compared them to the draft contract, and I am satisfied that these concerns have been addressed by this draft contract.  Indeed, I believe we may have gone too far in addressing these concerns.  Policies as to the use of domain names, as opposed to the registration of domain names, are not appropriate subjects for ICANN decisionmaking.  By keeping such a short leash on ICM’s development of its policy organization, which will in turn make decisions about the use of names at the second level, ICANN may be getting into dangerous territory.  We should not run the risk of turning ICANN into a convenient chokepoint for the content-related limitations desired by particular governments around the world.  Governments have many powers within their territories, and are free to use them there.

Added later:  Veni Markovski posted his statement here.  The entire voting transcript is here.

Let's start with a local betrayal, just as a warm-up.  Michael Maranda and Sascha Meinrath told me this afternoon that the Illinois Citizens Utility Board recently proposed (in the company of AT&T) that consumer protections for telephone services be eliminated — in exchange for a price cap for the next four years.  Even though prices should be going down anyway.

The Illinois CUB is supposed to be a public advocate for Illinois consumers, representing their interests before the Illinois Commerce Commission.  Now they look like they're on the other side.

Here's a national betrayal — the NSA scandal-on-scandal reported by USAToday this morning.  The Administration has, with the cooperation of Verizon, AT&T, and BellSouth, been collecting call information on the cell, landline, and internet use of everybody they possibly can, since Sept. 2001.

This is illegal.

It was done without a court order (needed under FISA if there was real-time interception going on).  It was done in derogation of the CPNI provisions of the Telecommunications Act (under which telephone companies are supposed to protect the proprietary information of their customers).  It may also be illegal under ECPA.

Some people may say — aww, FISA, CPNI, ECPA, what does it matter, we have to catch that Osama bin Laden just in case he is hiding in Ohio. 

It does matter, and the hope is that the uproar will be sustained enough that it will catch the attention of everyone from the far left to the far right.

=====

Speaking of uproar, but at a much lower volume level than the NSA furor, I am abiding by the ICANN Board's decision not to comment on the XXX decision until all director statements are reviewed and published by ICANN.  I am personally distressed by my inability to comment. 

The FCC has a practice of allowing statements to come out simultaneously (whether dissenting or agreeing), before the order comes out.  This is possible because the Commissioners there have worked out the order in advance of the public meeting, but haven't finalized it.  So they can comment on it at the public meeting and their statements can be released then.  This is also possible because the FCC is an enormous government agency, with regulatory powers and Commissioners who are paid to be aware of the details of what they're doing (and are presumably made aware of those details by their staff).

Because the ICANN Board meetings are actual discussions (and they should be public discussions — working on that too), it is difficult to get statements out at the same time the decisions are made.  Thus the 48 hour waiting period, so that directors can review what they have said and correct any transcription errors.  There should be a way to allow dissenting detailed views to be made clear at the same time the majority detailed views are made clear.  Both are part of the decision.

I am not questioning that the decision has been made and that my vote was in the minority.  I am concerned that the full picture of the decision is not made available to the public, and I hope we can find a way to make this possible in the future.  All suggestions welcome.

This is a post about taking the train.

I take the train a lot.  I live in New York, and I go to Boston and Washington frequently.  The Boston trips have a different rhythm to them – no serious businessperson takes the train to Boston, because it takes too long.  The DC trips are like getting on a bus with a lot of student council types.  Very earnest and programmed.

The secret to the Boston trips is:  it's a beautiful ride.  You've got your coastline, your villages, and your train-elevating-over-water moments, when you can't even tell that there's a track underneath you.

I took an early train down from Boston this morning and worked most of the way in complete peace.  There was no one within two rows of me, there were no phones ringing, and it was a sunny morning.  I got off in NY feeling just fine — not dehydrated and soul-departed, the way a plane ride will leave you.

But in the middle of the ride, maybe around Groton CT, I got the sudden sense that this couldn't possibly last.  Everyone on the train was asleep, as far as I could tell; everyone had plenty of room; and no one had paid too much to take the trip.  This must be completely unsustainable for Amtrak — not the sleeping part, but the part about the half-empty train and the low fares.

So I wanted to write this post as a kind of marker for myself.  This can't go on, these lovely placid train rides.  There aren't enough people who want to do it, and it's too slow.  But if it ever ends, I will miss it acutely.

Last Friday the D.C. Circuit heard argument in the CALEA case.  The estimable Matt Brill, representing the entities and associations challenging the FCC's August 2005 order, did a great job on all accounts.

According to Reuters, Judge Edwards didn't think much of the FCC's argument that CALEA, which excludes “information services” from its coverage, should properly be read to include information services.  He used words like “gobbledygook” and “ridiculous,” and at one point flatly told the Commission that its argument made no sense.  (The Commission, after all, has been steadfastly maintaining since 2002 that broadband access is an information service — to take the opposite view for purposes of CALEA made for a very strained legal argument.)

The primary reason that Japan and Korea do so much better than the U.S. on any measurement of broadband (availability, penetration, price, speed) is that there is fierce competition in the market for broadband internet access in these countries.

That's pretty simple.

How do you increase competition in the U.S. for broadband access?  Right now, we have giants fighting with each other — cable and telephone companies.  Small numbers of these companies control 80%-90% of the market for broadband access.  After the BellSouth merger, AT&T, Verizon, and Comcast alone will control 49% of the market.  This competition couldn't be described as disruptive in any way — in fact, there seems to be a tacit agreement among these Shamus and Godzillas not to provide unfettered (unprioritized) internet access.  In Japan, the incumbent controls only about a third of the DSL market — two-thirds of the market is made up of new entrants.

There are three routes towards increasing competition in broadband access:  (1) “local loop unbundling,” which means requiring the incumbent to physically open its facilities to new entrants, who then find new ways to provide services to end-customers; (2) “wholesale access,” which means requiring the incumbent to sell a wholesale broadband access product to all comers; and (3) encouraging other kinds of broadband access (“facilities-based competition”), which means helping new entrants have their own networks without having to deal with the incumbents at all.

Let's look at these routes.

Facilities-based competition would be desirable here in the U.S., but the up-front costs are enormous.  Even MSN/Google/Yahoo! would have to join up together in order to make this happen, and doing so admittedly wouldn't be playing to their strengths as companies.  Plus, while you're waiting for the mystical additional modality to arise (wider wireless, for example), customers may have already made their choices and tied their identities to some vertically-integrated telco behemoth – so the switching costs will be very high.

Wholesale access sounds facially attractive (give the incumbent the dignity of control over its own facilities!) but it turns out to lead to astounding game-playing by the incumbents.  The U.K. has adopted this approach to BT, and found [large pdf, at 65] (a while ago, in 2004 — things may have changed) that BT wasn't really giving equal access to its competitors:

Without regulation to ensure equality of access, the incumbent has an incentive to provide this link [last mile access to customers] on inferior terms compared with the service it provides to its own retail activities, disadvantaging its competitors in the retail market. In the UK this is particularly so because price controls on wholesale access to BT’s network limit the returns BT can make at the wholesale level. As such, BT has few incentives to respond to the demands of other wholesale customers, and strong incentives to undermine competition at the retail level by restricting the ability of retail operators to compete on a fair basis.

Allowing the incumbent to package wholesale access doesn't necessarily lead to increased competition.

Unbundling is the hardest of all, but perhaps the only route likely to be effective.  Both Japan and Korea have taken this approach, using fierce regulatory mandates, and competition has erupted there (prices have gone down, speeds are 100mbps).   

The U.S. 1996 Act tried mandating unbundled “network elements” for sale to competitive carriers, and  it's fair to say that the Baby Bells were quite successful at making this regime a nightmare for all concerned.  Through a variety of steps, unbundling obligations in broadband markets in the U.S. have been eliminated.

So what's the answer?  Governmental willingness to get involved to improve broadband infrastructure — that's what's needed, in the absence of non-incumbent modes of getting broadband access. A simpler, stronger way of mandating unbundling will be key.

But the first point, the most important point, is that ferocity of competition is predictive of a better broadband picture.  The policies we have now won't get us there.  We have something to learn from Japan and Korea on these points.

It's not easy:  you have to find a way to give the incumbent enough of a return on its last-mile investments so that maintenance/upgrading continues, and you have to find a way to make that price low enough so that new market entrants are willing to take the plunge.  Right now, we're focusing only on one side of the equation – the investment side – and not enough on the new market entrant side.  We're falling farther and farther behind as a result.

Book recommendation:  Global Broadband Battles, Martin Fransman, ed.

When I was in New Zealand a few weeks ago, I heard an awful story about Telecom — the local monopoly phone company.  It seems that a law firm in New Zealand suddenly noticed that their online connection was barely working.  They called Telecom.  Telecom said:

I'm sorry, but you've exceeded your monthly bit allowance.

The law firm protested and asked for additional bandwidth (and would have paid for it).  Answer:  No.

So now we have some good news out of New Zealand (a country that has been worried about its broadband penetration standing):  Telecom's lock on online access is being broken by regulation, in a few ways.

1.  The incumbent is going to have to permit ISPs to interconnect with its network — the local loop will be unbundled.

2.  The incumbent will have to separately produce accounts (and have those accounts monitored) concerning its wholesale business.

3.  The government will encourage investment, both private and public, in alternative online access methods, and will work on making spectrum available for wireless alternatives.

4.  The government will continue to analyze structural separation — considering making Telecom act like “only a pipe” by separating its wholesale from its retail operations.

The entire (very large) Cabinet paper is here.  Those Kiwis could teach us a thing or two.

Remember CALEA?  In a brief, pious open meeting on Wednesday, the FCC said that the costs of making wiretapping easy for law enforcement should be shifted to everyone other than law enforcement.  There's an argument in the D.C. Circuit about this on Friday, and we'll see whether the FCC had any legal basis to take this step.

Background.  Back in August of 2005, the FCC issued an order that said that CALEA required all broadband providers and “interconnected VoIP” providers to make their services easily tappable by law enforcement.  Lots of problems:

1.  The 1994 CALEA statute expressly, vividly, and intentionally excluded “information services” from its coverage.  The FCC has taken the view that broadband provision is an “information service,” and that online applications are “information services.”  The August 2005 order's legal argument (charitably described as a “stretch” by Commr. Copps on Wednesday) is that CALEA's facial exclusion of “information services” can be ignored because these new services are “substantial replacements” for phone service.  The D.C. Circuit case (see CDT page here) focuses on the weakness of this argument.

2.  The August 2005 order said that these new actors had to comply with CALEA (making their services easily tappable by law enforcement) by May 2007.  A big catch:  the order didn't say what compliance meant.  Law enforcement filings made clear that they wanted to deal with compliance via “deficiency” proceedings — in other words, “you go ahead and invest in your new businesses, and if we don't think what you've done is compliant, we'll make you retrofit your application to our desires or just take it down.”  The threat to innovators is clear:  you should go talk to law enforcement first, before you launch, so that they don't bring you down later.  You should ask permission.

3.  The August 2005 order also made clear that the Commission planned to extend the reach of CALEA to other services (like all VoIP services, whether or not they're capable of connection to the public telephone network), and to require that all devices running VoIP be “location-aware” — capable of telling law enforcement where they're being used.

What happened on Wednesday.  On Wednesday morning, the FCC met in public session.  No comments from the floor are allowed, and the FCC doesn't issue the actual order until later.  So what you get are Commissioners reading their comments on a yet-to-be-issued order.  Each one of the Commissioners said about the same thing (save for the Copps quip about the legal weakness of the FCC's reading of CALEA):

1.  FCC's support of law enforcement and Homeland Security goals is primary, and the primary goal of the Order is to ensure that law enforcement agencies have everything they need.  Each Commissioner solemnly emphasized the key Homeland Security goals of the FCC (“our highest calling” in the words of Commr. Adelstein).  (Prediction:  someday FCC will be part of DHS.)

2.  We're not going to extend the May 2007 deadline for anyone.

3.  We're not going to tell you what compliance means — we'll rely on standard-setting activities to do that.  (My understanding is that these standards activities are not well advanced — and there are many hard questions to be answered.  What, for example, is “call identifying information” online?)

4.  Everyone can use “trusted third parties” (also called TTPs by Commissioners.  The FCC loves acronyms) to comply with CALEA.  This will reduce costs.

5.  Speaking of costs, although the 1994 CALEA statute called for carriers to be paid back for their costs of compliance, we will not be doing any of that.  All covered entities (including, potentially, free VoIP services) will be responsible for their own costs of compliance.  (Commr. Tate said that these costs are “speculative” and can't outweigh the requirements of national security.)

Then they all voted in favor of the order.

What this means.  This is a very big step that won't get as much attention as the Net Neutrality fight.  But it's very related to that fight, and very important.  What's going on here is that the FCC is independently reading a statute that embodied a particular Congressional undertaking (“we won't design the internet for the needs of law enforcement”) to mean the opposite (“we will design the internet for the needs of law enforcement”).  And the costs of making data look familiar to law enforcement, so that they can stay comfortable in their telephony-based understandings, may be enormous. 

There are costs to innovation — having to ask permission before launching a new service.  There are costs to privacy — having to design everything to have a back door for law enforcement.  And there will be powerful intermediaries (the Trusted Third Parties) with whom everyone will have to deal, who will have no constitutional limitations on their actions.  There is no principled limit to what the FCC feels it can do in the name of assisting law enforcement.