Tales of the Sausage Factory

The FCC Releases the Comcast Complaint Order Part I — Why This Is A Huge Win.

The FCC just released the text of the Order adopted on August 1 finding for Free Press on the Comcast Complaint and Declaratory ruling and denying Vuze’s Petition for Rulemaking. You can get the pdf here.

Larry Lessig pretty much says it all with his letter commending the FCC on its decision. For myself, I see this as another in a series of important wins, building on previous wins. Read it, particularly the footnotes, and you will find reference to the C Block openness conditions, the Adelphia Transaction Order, and every other baby step along the road that proved absolutely critical to getting us this far.

And, just as with those victories, we did not imagine for one moment that we had finished our task or that we had solved our problems. The danger to an open internet that remains a platform “as diverse as human thought” in the face of broadband providers trying to convert it into a combination shopping mall, movieplex and theme park continues. But we prevented Comcast from creating an “industry standard” around blocking or degrading peer-2-peer applications and put every ISP on notice that they will need to make real disclosure of their “network management practices” when those practices block or degrade subscriber choices. That the market would not respond on its own — at least not in a positive way — is evidenced by the fact that Comcast, despite all the negative publicity, promises to change, etc., is still targeting bittorrent. To the contrary, had we not acted, I do not doubt that other broadband ISPs would, over time, have adopted this and similar techniques, and without notifying their subscribers in any meaningful way.

We have also created another positive precedent for the day when a future FCC or Congress will adopt rules that provide the level of protection we need to maintain an open and competitive internet. This FCC opinion establishes the jurisdictional basis for any future rulemaking and, while declining to adopt rules now, explicitly states that the FCC retains the jurisdiction to create rules in the future — noting that the Carterfone network attachment rules began as an adjudication and ultimately culminated in Part 68 of the Commission’s rules. Despite a raft of theories (conspiracy or otherwise) to the contrary, this Order does not weaken our efforts to get general rules or get legislation passed. To the contrary, by recognizing that rules protecting the openness of the Internet further the important interests of the First Amendment (Par. 43 n. 203), this Order strengthens our ability to get rules or legislation in the future.

While it leaves certain critical questions — such as whether a third party can pay a broadband access provider for “premium” treatment regardless of user preferences — unresolved, it does so in a way that leaves us free to come back without any bad precedent or presumption. Copps and Adelstein can continue to press for adoption of a fifth principle on non-discrimination without fear that voting for this Order somehow put them in a box.

More below . . . .

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Tales of the Sausage Factory

Rural Carriers File “Skype-Lite,” or “Wireless Carterfone, it's not just for developers and other parasites anymore.”

Today, the FCC will most likely dismiss the the Skype Petition. I’ve already written why I think this is a phenomenally bad idea and, while I continue to respect Kevin Martin and understand why he is doing this, he is totally wrong here. Once again, those worried about “unintended consequences,” “first do no harm,” etc., etc. fail to appreciate that a refusal to take action and granting permission to carriers to control the sorts of devices, applications and therefore what innovation and what free speech, go on over their networks is as much an action as granting the Skype Petition. There is no evading responsibility or avoiding unforseen consequences.

Which brings me to the Petition for Rulemaking filed by the Rural Carriers Association (RCA) to prevent exclusive deals on equipment, aka “Skype Lite.” Mind you, the rural carriers opposed the Skype Petition as much as any other carrier, arguing that it would be awful for their limited capacity rural networks if they could not control what equipment attached to their networks and what applications ran on that equipment. Nevertheless, they too are unsatisified in a world where market size and raw capitalism dominate. So, without ever once raising the same arguments as Skype or referencing the Commission’s information policy statement, the rural carriers argue for what amounts to the same relief as Skype, only tailored differently. Rather than regulate all carriers to require open networks, they ask the Commission to limit the market power of the major carriers by prohibitting exclusives. Otherwise, they argu, rural America will never know the joy of the iPhone or any other significant innovation — since the major carriers will tie up the most valuable applications and equipment in exclusive deals.

Nor are the rural carriers alone in finding the world according to Coase and Friedman less than they desire. The Commission has before it a good handful of petitions from carriers asking for mandatory roaming reform, access charge reform, and other limits on the ability of the dominant, vertically integrated providers from exercising their market power. Of course, all of these carriers asking for regulatory intervention are simultaneously celebrating the dismissal of the Skype Petition, piously telling Skype and the rest of the non-carrier industry that they are a bunch of parasites and that if they want access to a network they need to get their own licenses and build one.

I do not write to underscore the hypocrisy of these contradictory positions. That would be a waste of bits. Companies make whatever arguments they need to make in order to survive and thrive. No, my warning to the rural carriers and the rest of the Skype-lite crowd is simply one of practicality. You cannot win your request for special regulation while simultaneously singing the praises of the fiercely competitive broadband market and arguing that there is no place for regulation in this great free market success story. By contrast, if you simply admit that the industry now suffers from excessive concentration and the cure for this requires a comprehensive approach, you will find yourselves much more likely to prevail.

Martin indicated that he would dismiss the Skype Petition “without prejudice,” meaning that Skype or others will be free to try again — say, in six months or so when the FCC changes hands. In the mean time, I suggest the rural carriers and the other industry players anxious for regulatory relief — whether in the form of spectrum caps in auctions, mandatory roaming, or access charge reform — rethink their strategy.

Or, to put it another way, “regulation, it’s not just for developers and other parasites any more.”

Stay tuned . . . .

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Tales of the Sausage Factory

It's Nice When the FCC Listens Part II — The Cyren Call Investigation Is Out.

When it rains, it positively pours. The FCC just released its Inspector General Report on whether Cyren Call screwed up the D Block. As readers may recall, I and my friends from the Public Interest Spectrum Coalition (PISC) sent a letter to the FCC as soon as the auction ended, asking the FCC to investigate the allegations over whether Cyren Call scared away D Block bidders. To his credit, Martin referred our letter to the FCC’s inspector general. The IG did a quick and thorough job, which you can read here. I shall add that it always gives one pause to find oneself as a subject heading in an IG report.

Generally, I’m satisfied with the report, which confirms my own suppositions after the anticollusion rules lifted and Cyren Call started yapping. Critically:

1) The meetings took place;

2) They were understood by all participants to be business negotiations, not “take it or leave it” demands;

3) The lease payment itself was not a deal breaker, but the potential bidders interviewed said that so many questions about potential financial liability and business model remained — aggravated in part by the uncertain role of Cyren Call — that they opted to stay away (or, as the IG concludes “this was just one drop in many different buckets”);

4) No FCC rules were broken and no one acted in bad faith, therefore there is no need for a referral for any criminal investigation.

Personal reflections below . . . .

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Tales of the Sausage Factory

700 MHz Auction: D Block Panic, Damping Expectations, And My Final Thoughts Before the Opening Bell.

After so much pre-game hype, it’s hard to believe we have actually gotten down to the 700 MHz Auction week. The fun and games will start January 24, although we won’t know (much) about the auction until it is all over sometime in late February or early March.

Not surprisingly, the news that Frontline Wireless , the company that did so much to shape the rulemaking around the “D Block” public/private partnership, went belly up before the auction even started has triggered a round of hand-wringing about the fate of D Block and finger-wagging by those who always thought it was a bad idea to impose any kind of conditions on licenses. As a result, we see a slew of stories questioning whether anyone will bid for D Block (or, at least, meet it’s $1.3 billion reserve price), with some spillover questioning about the future of the auction itself.

While I agree with GigaOm that wireless auctions aren’t for wimps, I do think the panic over Frontline’s failure to scrounge up capital to make the necessary up front payment (the “ante” required to buy “bidding credits” to participate in the auction) is exaggerated. Nor am I as pessimistic that the auction will produce some groundbreaking changes as others, although it could well happen that we get through this auction with no new “disruptive third-pipe providers.” I think we will certainly see the auction hit the $10 billion Congress estimated (and the FCC set as aggreagte reserve price), and we will see C Block meet its $4.6 billion reserve price.

On the other hand, if things start to go poorly in the auction, we may see some panic moves by the FCC, particularly with regard to D Block. The possibility that the FCC may retroactively drop the reserve price on D Block (possibly without holding a reauction) may introduce strategic behavior into the auction. Of course, since no one (including the FCC) can actually talk about this possibility makes the speculation even more insubstantial than usual. Still, since the possibility does exist, and because I think such a course would create real problems with the auction, I briefly discuss it below.

Analysis below . . . .

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Tales of the Sausage Factory

Martin Gets the Ball Rolling On “Blocking” Investigation: What Does It Mean And What Happens Next?

As always, I am impressed with the ability of so many people to hate whatever Kevin Martin does, and for so many different reasons! At CES, Martin announced that the FCC would investigate allegations of blocking content and determine whether they violated the FCC’s four broadband principles. Comcast pledged to cooperate in any investigation (although, unsurprisingly, Comcast representatives — along with supposed object of Martin’s affection AT&T and other big telcos and cablecos — said at CES they would restructure or eliminate FCC altogether).

As I said in my PK blog post, while details remain unclear, I am “cautiously optimistic” that this will be a good thing. But it did not take long for the folks in the “Martin is a bastard 24/7 crwd” to express themselves. DSL reports doubted this would go anywhere, while the “why ya gotta hate on cable” crowd at Techdirt opined that Martin would never investigate if it were a telco rather than a cable co.

So we flash forward to yesterday, when new developments began to percolate out of the FCC. Of significance:

1) The FCC issued a public notice asking for comment on our Petition for Declaratory Ruling that Comcast’s “network management practice” of messing with BitTorrent uploads violated the FCC’s “Broadband Policy Statement,” which includes a principle that network operators may not block or degrade content or applications. In a separate public notice (but as part of the same proceeding), the FCC also seeks comment on the Vuze Petition for Rulemaking on how broadband access providers handle and shape IP traffic generally. (Copy of Vuze Petition here, copy of our Petition here).

2) Separately, the FCC issued a separate public notice seeking comment on a Petition filed by Public Knowledge and the usual suspects asking the FCC to declare that wireless carriers cannot deny short codes or block text messaging. This goes after Verizon’s high profile “oopsie” of denying a request by NARAL for a short code. Although, as we pointed out in the Petition, the more likely and pernicious problem is with plain old anticompetitive blocking, such as denying a short code to VOIP provider Rebtel.com and denying applications to major banks offering competing services.

3) Comcast confirmed that the FCC has lanched a formal inquiry into whether it violated the FCC’s broadband policy statement. Comcast reiterated that it will fully cooperate with the FCC, and expects any investigation to show that Comcast did not block content and has engaged in legitimate network management practices.

Not bad for a commitment made a week ago. But what does it mean and where will it go from here? Analysis below . . . .

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Tales of the Sausage Factory

700 MHz PreGame Show: Cable Cos Largely Pass — No Surprise And A Win for Public

Yesterday was the day for companies interested in bidding in the 700 MHz auction to file their “Short Form” applications with the FCC. While it will still take a few days for the FCC to process the forms and for companies that made errors to correct the forms and give companies a chance to correct possible errors, we are seeing a few interesting developments already — notably in cable land. It is also interesting to see that MetroPCS and Leap never did get together before the auction.

On the cable side, no real surprise that most cable cos are sitting this one out. (Back in August, I already doubtful they’d want to play.) Actually, the mild surprise is that Cox is going it alone. I have not expected Spectrum Co. (the Comcast/Time Warner/other cable co joint venture) to bid, despite winning big in the 2006 and AWS auction and participating in the rulemaking for the 700 MHz auction. For one thing, thanks to the introduction of anonymous bidding, the cable cos cannot effectively target their industry rivals (like the telcos or the DBS guys) to drive up prices or block them altogether, as they did in the 2006 AWS auction. So a big motivator for the cable companies to participate, i.e. strategic blocking outside the value of the spectrum itself, is gone.

In addition, Sprint divorced itself from the partnership and shacked up with Google, leaving the cable cos with an ugly alimony settlement for the AWS auction and no wireless partner to help them build the network. And, finally, the cable guys haven’t figured out what the heck to do with the AWS spectrum they acquired last summer. While that went relatively cheap (45 cents/mhz pop), it still cost $2.5 Billion with nothing to show and a danger that if the cable cos don’t start building out a network they will lose the licenses at the end of the license term for failure to meet the mandatory performance metrics. (Licensees are required to meet build out and service requirements. The aren’t terribly onerous for the AWS band, but they do require you to build something and push a signal through it.) Given that the 700 MHz licenses have the most rigorous build out requirements ever (in no small part to ensure that folks like Spectrum Co. don’t win the spectrum and then “warehouse” it), the cable cos are very unlikely to buy spectrum on the off chance they’ll figure out something to do with it.

Finally, there is the big reason every is pointing to — the cable stock valuations. Cable stocks have declined significantly this year, both as a function of the general decline in the market and because it looks like Verizon bet right on fiber to the home. Competing against FIOS means that cable operators (particularly Comcast, Cablevision, and Time Warner) are in for another round of expensive capital investment to maintain their competitive footing or risk losing customers to FIOS. In this sort of situation, the last thing investors want to see is cable companies spending billions for licenses they can’t use unless they spend billions more to build networks from scratch.

This last is probably why Cablevision is sitting it out, despite vigorously playing in the AWS auction in ’06, and why Cox, which recently went private, has decided to toss its hat in the ring and play. Cox also has the advantage that licenses that overlap its territories (assuming it does not go for C Block or D Block) also have significant overlap with the area covered by AT&T with its purchase of Aloha. This potentially removes a major competitor for the A and B Block licenses, giving Cox a chance to get coverage of it’s network and offer a package of wireless and wireline services down the road. So Cox can ante up for a chance to catch a bargain without taking a stock hit. By contrast, Cablevision directly overlaps with Verizon for the licenses that cover its region and the adjacent markets into which Cablevision would want to expand. Verizon will fight like a tiger because it wants the spectrum, so the inability to block due to anonymous bidding does not help Cablevision. And, because Cablevision is publicly traded, even anteing for a chance to play will cost it big time.

UPDATE Apparently, Cablevision did file a short form. A Cablevision spokescritter said that Cablevision was reserving the right to bid, but declined to say if Cablevision would bid. Earlier stories I had seen said they wouldn’t bid. Well, I give them credit for trying. Good luck trying to break out of NYC.

All in all, I consider the elimination of Comcast and Time Warner as potential bidders to be a real win for the public interest. As I have written before, allowing cable companies to bid for this spectrum raises extremely serious competition problems and would make it virtually impossible to see a new, independent broadband provider emerge. Given that the 700 MHz auction creates a potential “transformative moment” for wireless broadband, and therefore potentially for broadband generally (especially the much hoped for “third pipe”), I breathe a huge sigh of relief to see the cable boys out of it.

Stay tuned . . . .

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Tales of the Sausage Factory

Sprint Swaps Spectrum Co. for Google: Care To Guess Who Bids in 700 MHz Now?

As I repeatedly observed during the lead up to last Tuesday’s FCC meeting to decide the rules for the 700 MHz band, it is an extremely risky business to try to guess who will bid at this stage. Despite the much shorter time between announcing the rules for the AWS auction last year and the time bidders needed to get their forms in, numerous companies changed their positions, created new ventures, and generally did the unexpected.

Now, with everyone speculating whether whether or not Google will really bid or whether the cablecos will give the telcos a run for their money, comes a significant change. In the course of a week, Sprint has forged an alliance with Google, followed a few days later with a surprise request to exit the cableco consortium SpectrumCo. This comes on top of Sprint’s announcement two weeks ago that it will team with Clearwire to do nationwide WiMax.

And suddenly all those wise speculations about how Sprint won’t bid because it doesn’t have the cash and it has enough spectrum, Clearwire won’t bid because it’s too small to challenge the telcos, and Google won’t bid because they don’t have the expertise and don’t want to spend the money, need some serious recalculation. A Google/Sprint/Clearwire consortium (with possible help from Intel, which both owns a chunk of Clearwire and participated in the auction rulemaking as part of the “4G Coalition” with Google, Skype, and Yahoo!) looks like much more of a spectrum player than any of them alone. Sprint and Clearwire have the infrastructure and expertise, Google has the bucks and the need to expand into wireless. Further, depending on the nature of the partnership, Google could start testing and and marketing its wireless services now so that it does not have to wait until it has built and activated a network (which probably won’t be until 2010 at the earliest).

Meanwhile, what happens to SpectrumCo.? Granted the cablecos still have no plan for the licenses they got in the AWS auction (since, lets face it, the real reason to show up was to block DBS from getting a terrestrial broadband pipe), but to the extent they pretended to have a plan, they usually cited their ability to work with Sprint as a means of implementing it. So what happens now? Granted the cablecos still have tons of money to throw at this, but how will Wall St. treat their stocks if they look set to pour another couple of billion into a business without the benefit of an experienced partner with existing infrastructure? And besides, with the FCC adopting anonymous bidding, the cablecos will find it much harder (if not impossible) to target and block rivals without going all the way and actually winning the licenses. (Remember, blocking is usually cheap because you don’t usually have to spend the blocking premium, you just have to prove to the other guy that you are willing to spend the blocking premium. It’s like when tough guy walks in on shopkeeper and asks if shopkeeper would like to buy “insurance.” Tough guy doesn’t have to actually trash the store to get paid. As long as shopkeeper believes tough guy will break his legs, shopkeeper will pay to avoid testing the theory.)

So, a mere three days after the FCC announces rules, we find ourselves reexamining the conventional wisdom in light of changed events. McDowell rather relished the warning he gave Martin and the rest of the majority that it was “risky” to tailor the band plan to attract a single “white knight” who would become a new national broadband provider. Suddenly, Martin’s confidence that if you set the table folks will come to dinner seems a bit more justified.

But it’s still a few months until FCC forms to participate will be due, and anything can happen in between.

Stay tuned . . . . .

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Tales of the Sausage Factory

Comcast Morally Outraged That America Channel Adjusts Business Model to FCC Rules. Cats outraged when mice fight back.

Some of you may recall The America Channel and their efforts to blow the whistle on Comcast’s exercise of market power in the cable programming world. As part of resolution of the Adelphia transaction, the Commission declined to provide any specific relief for The America Channel. They did promise to have a general rulemaking on the carriage complaint process (whereby independent programmers complain that cable operators have illegally discriminated against them) and the leased access process (whereby independents can lease access to the cable system) (a proceeding the Commission announced last month). The Commission also created special protection for regional sports networks (RSNs) so that Comcast could not do unto others as they did unto Mid-Atlantic Sports Network. As part of the FCC’s order approving the Adelphia transaction, a regional sports network can demand carriage on Comcast or Time Warner, and can require that an arbitrator resolve the cost issues.

TAC, seeing that it would get nowhere with its old programming idea, proceeded to reinvent itself as a regional sports network. It has deals with a number of NCAA Division I schools — particularly for the less popular women’s sports, which it will bring to the various regions the schools are in. TAC will pay for the production costs but will not pay for the games themselves, a reversal of the usual royalty agreement I understand. TAC has gotten carriage on cable overbuilder RCN, provided TAC can reach the critical mass of carriage on other providers to achieve viability.

So how’s that working out, and what will the FCC do? More below . . . .

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Tales of the Sausage Factory

Kerry drops another good bill

Senator John Kerry (D-MA) has introduced the Wireless Innovation Act of 2007. This bill is essentially the same excellent bill to force the FCC to open up the White Spaces that Kerry, Allen (now no longer in the Senate), Boxer and Sunnunu introduced in 2006 and was later incorporated into the Stevens Bill.

The bill requires the FCC to complete its pending rulemaking on the broadcast white spaces and allocate the use for unlicensed spectrum. Given that the FCC has shifted into reverse on this and has decided to reexplore the licensed v. unlicensed question, it’s nice to see folks on the Hill pushing for this.

Stay tuned . . . .

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Tales of the Sausage Factory

Why Yoo Is So Wrong on AT&T Net Neutrality Condition

Professor Christopher Yoo of Vanderbilt sent an email to Dave Farber’s Interesting People list explaining why the inclusion of network neutrality conditions in the AT&T/BS merger agreement violates the Administrative Procedure Act (APA).

I usually disagree with Yoo on matters regulatory (he being of the neo-con deregulatory school, I being of the pragmatic regulation for a real world school). But that’s a matter of opinion. Here, however, he’s legally and factually just plain wrong. While he’s entitled to argue that he thinks “regulation by merger” sucks rocks (a point with which, no surprise, I disagree), the idea that the merger conditions run afoul of the APA is contrary to statute, contrary to case law, and contrary to the facts of the instant case (with which Professor Yoo seems surprisingly unfamiliar).

Usually, I wouldn’t bother to respond to something like this, but it got picked up by Communications Daily and seems to be making the rounds among tech folk unfamiliar with the case law in question. So while no offense to an opponent who usually knows his stuff, I explain in blistering detail what’s wrong with Yoo’s argument below….

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