Comcast Unhappy With Free Market Title I Nirvana. Demands “Access Charges Bailout” But No Reg Oversight.

It says something about the messed up world of telecom today that the “Connect America Fund” the FCC will vote on tomorrow has become the “what the heck are we going to do about IP-based interconnection” proceeding. In particular, the rather high-profile spat between AT&T and Comcast (andother cable companies) over access charges illustrates exactly the kind of cosmic cluster#@$! we predicted would happen if the FCC failed to classify broadband as a Title II telecom service. AT&T is100% right on the key argument: Comcast has the access charge regime it fought for and deserves. Letting Comcast collect access charges as if it were a traditional telecom provider subject to Title II, while shielding it from any actual oversight or obligations as a Title I information service, is nothing more than an undeserved windfall to the company that tore up the social contract in the first place.  If they don’t like the outcome, then perhaps they should have thought about it before they declared Jihad on Title II.

More below . . . .

So What Are AT&T and Comcast Fighting About?

For those new to the issue, access charges are part of a complicated suite of charges and paymentsbetween providers of what we collectively think of as “telephone service.” What makes this complicated, irrational and dysfunctional system even less manageable is the confusion over voice-over IP (VOIP). The old public switched telephone network (PSTN) is the classic (and increasingly the only) telecommunications service governed by Title II of the Communications Act. Why? Because the FCC decided ten years ago that anything sprinkled with Magic IP Pixie Dust is not, in fact, a Title II “telecommunications service” but an “information service” governed by Title I of the Act. Thanks to Comcast challenging the FCC’s enforcement of its old Internet Policy Statement (aka Net Neutrality 1.0), the DC Circuit has found that the FCC has extremely limited and uncertain authority over information services.

A VOIP call that interconnects with the old public-switched telephone network resides in a mysterious no man’s land. The FCC could classify it as Title II, since it looks exactly like a phone call and the statute does not say anything about Magic IP Pixie Dust. But the same cabal that waged Jihad against classifying broadband as Title II last year (which included Comcast and the assembled cable operators) have waged a similar campaign to prevent VOIP (or anything for that matter) from ever being declared as Title II ever again. Indeed, Michael Powell, the man who as Chairman of the FCC engineered the “lets deregulate the entire telecom system by refusing to ever classify anything new as Title II so that telecom regulation will whither away and only unregulated information services remain,” now heads the National Cable Telecommunications Association (NCTA), the trade association for Comcast and the other cable providers which spent last year telling the FCC, the Tea Party and Wall St. that if the FCC ever thought the phrase “Title II” too hard it might drive away all future investment in broadband and amounted to a “government take over” of the internet.

The result is that Comcast Voice and most other cable voice services, although advertised as phone services and performing identical functions to phone services in every way, are not “phone services” for regulatory purposes. Thanks in large part to their own massive lobbying efforts and legal challenges, through the magic of IP Pixie Dust, cable voice services exist outside of the traditional telecom regime and potentially outside the FCC’s regulatory authority. Sadly for Comcast and its industry allies, this has not turned out to be the free market nirvana that Powell and the other architects of the Magic IP Pixie Dust strategy foresaw. Rather than producing the Free Market Paradise envisioned by the Faithful, the title II Jihad appears on its way to creating a market much more akin to Somalia or Sudan.

Why Did This Come Up Now? 

Many years ago, I worked for the Department of Energy and they had a pigeon problem. So they set up a bunch of plastic owls around the areas of pigeon infestation. The pigeons, recognizing their traditional predator, at first stayed away. Over time, however, some adventurous pigeons moved closer. When nothing happened, they began to settle on the owls. Eventually, one could see hordes of pigeons gleefully doing their business all over the plastic owls, delighting in the symbolic humiliation of their ancient enemy. I have no doubt pigeons flocked from their usual perches at the neighboring buildings for the sheer joy of symbolically crapping on the plastic owls.

Over the past decade, the FCC has become a plastic owl for the telecom industry. As a result, an increasing number of carrier pigeons (if you will pardon the pun) are doing the equivalent of taking a dump on the owl. Normal modes of behavior are breaking down, and behavior that was simply unthinkable as between carriers a few years ago now happens on a regular basis.  With the very authority of the FCC to address these issues questionable, coupled with the lack of any political will to make hard decisions that offend powerful interests, the FCC has remained in a state of continual paralysis. Meanwhile, the campaign by the telco and cable industry for state deregulation and federal preemption of IP-based services has made it increasingly impossible for state authorities to resolve these disputes.

Meanwhile, the market and the technology have changed dramatically, enhancing both the incentive and the capability of participants to game the system. Back when cable operators were just getting into the voice business, and when the FCC still pretended to have some regulatory authority over these services via Title I “ancillary jurisdiction,” AT&T and Verizon agreed to treat interconnected VOIP like standard phone calls. If a Comcast customer called an AT&T or Verizon customer, Comcast paid access charges. If AT&T or Verizon customers called Comcast, Comcast paid access charges (or reciprocal compensation, or whatever was appropriate under the existing crazy-quilt of things).

Years pass, and cable operators replace incumbent local exchange carriers (ILECs, like AT&T and Verizon) as the dominant providers of residential phone services. So now, instead of AT&T and Verizon being a net receiver of access charges, they are a net payor of access charges. Add to this hard economic times, and the transformation of the FCC from fearful regulator to plastic owl, and you have all the ingredients for parties to start rethinking how they do business.

Unfortunately, markets undergoing flux like this tend to be unsettled and destructive, with lots of disputes. Most of the time in free market capitalism, we don’t care. An extremely important element of how markets work is that firms that businesses can, through no fault of their own, become irrelevant and die. When that happens, business expectations can get disrupted until the market settles. But where this impacts critical infrastructure, we care a lot, because the period of disruption can have what economists call “negative externalities.” I.e., lots of people get screwed very badly.

Put another way, I was sad when Borders died and the death of book stores generally is rather hard on those of us who like paper books. But if the communications grid crashes because the communications market is “unsettled,” and “going through a period of transition” which may “result in service interruptions while parties negotiate and learn to evaluate the true value of their products and services,” I am more than sad. I am in deep pigeon crap, and the only thing I (and other consumers or even businesses) have to protect me in that circumstance is a stupid plastic owl.

So AT&T and other traditional carriers have increasingly been telling Comcast and other VOIP providers that, because VOIP is not a Title II service, they are not entitled to access charges or other revenues governed by Title II. Nor are they entitled to mandatory interconnection – another Title II right/obligation. Instead, these terms should be negotiated in good old Title I free market information service fashion. You know, like the way Comcast negotiated its “access charges” with Level 3 last year for video traffic. Says AT&T to Comcast: “what’s the difference between video and voice? It’s all IP! There are the same things, just different applications. Why does Comcast get to charge Level 3 all the traffic will bear for video but AT&T can’t do the same to Comcast for voice?”

Comcast (and, to be fair, a lot of other folks, but it rains on the just and the unjust alike in the Libertarian Free Market Paradise of Title I) argue that this is NOT FAIR. After all, VOIP networks are functionally identical to traditional PSTN networks (even if they are regulated totally differently by virtue of Magic IP Pixie Dust), and if access charges (and other forms of compensation) are supposed to be about recovering costs then we ought to treat functionally equivalent networks the same. Unless it involves video, in which case it is TOTALLY different. Besides, having different rules for different networks invites fraud and arbitrage and waste. Unless, of course, we are talking about different rules applicable to different video distributors so that we can deny access to over the top video providers like Sky Angel, which is TOTALLY DIFFERENT from AT&T treating us differently on voice.

So Who Is Right?

As you might have guessed from the above, I think AT&T is spot on the money when it tells Comcast: “Y’all didn’t want to be Title II. Hell you’re the guys that filed the case that killed the FCC’s ‘ancillary authority’ over Title I information services. Now you want the guaranteed revenues of a Title II telecom service without the obligations or regulatory oversight? Fuggetaboutit.”

Comcast’s argument, by contrast, is essentially a species of “too big to fail.” If the FCC doesn’t give Comcast an access charge bail out from the deregulated Title I Paradise Comcast insists on, then our telecom infrastructure will up an die. The FCC therefore needs to make sure that Comcast gets all those yummy access charges and other revenues for connecting calls because its business model depends on it (and there are actual costs involved). On the other hand, you can’t force Comcast to accept the other side of the social contract, like consumer protection regulation, because the FCC lacks authority to regulate Title I information services like cable voice-over-IP. And as a cherry on top of this free money Sundae, Comcast and its trade association claim any effort to regulate VOIP or classify it as Title II is a “regulatory overreach” so offensive that opponents routinely analogize it to China and Iran censoring internet freedom.

I also don’t think much of the “we do all the same work and incur all the same costs” argument. If you do the same work as Title II networks, have the same costs as Title II networks, and provide the same service as Title II networks, the WHY THE HECK AREN’T YOU TITLE II NETWORKS? That is, after all, what the statute requires. There is nothing in the statute about Magic IP Pixie Dust. But if Magic IP Pixie Dust really works, then it works equally as well for access charges and for interconnection as it does for network neutrality and for Comcast/Level 3 “peering.” Because, I say to Comcast: other than the fact that the result would be convenient for you, why does the FCC have authority over your “peering dispute” with AT&T for voice but not with your “peering dispute” with Level 3 for video?

But let me put aside my personal bitterness and frustration, along with any notion of fairness or equity. I am, after all, a denizen of Washington, where the regulatory chameleon, the beast that changes its regulatory classification based on regulatory convenience, is practically the local mascot. AT&T itself is fond of claiming a right to programming under Section 628 as a cable provider, but reserves the right to play around with PEG because it uses IPTV rather than QAM.

Also, there are a lot of good actors besides Comcast who don’t deserve to be covered with pigeon poop because Comcast has made hypocrisy a fine art in this proceeding. Cox, for example, has actually tried to build out a real telephone network – including a run at wireless services. And many other actors that stand to get screwed here actually want the FCC to classify the service they provide. Time Warner Telecom, for example, filed a Petition begging the FCC to classify facilities-based VOIP as Title II. “Please, oh FCC!” Time Warner Telecom and a number of other competing local exchange carriers (CLECs) have said. “We are totally cool with the social contract where we agree to some modest oversight and consumer protection rules in exchange for making sure that the phone network actually works. We do not like this Libertarian Free Market Nirvana with its “negative externalities” and the total breakdown of what had been a functioning (if somewhat inefficient) market. For the love of God, pleasestop sitting there like a freaking plastic owl and actually do your job!”

Unfortunately these good actors, along with all of us consumers, are trapped in the world that Comcast and the Title II jihadist have made. Even if the FCC totally agrees with Comcast ‘n friends that cable VOIP is too big to fail and they ought to force AT&T to pay out access charges, while simultaneously demanding nothing in return by way of the social contract, it is not at all certain that the FCC has theauthority to do what the cable guys are asking them to do. Thanks to that pesky lawsuit Comcast brought that killed Net Neutrality 1.0, and everything else it and NCTA said about the FCC having no authority under Title I, the FCC cannot act with any certainty that it will be upheld.

And just to make sure, Verizon now offers to drive the nail in the coffin with its lawsuits against data roaming and against Net Neutrality 2.0. Indeed, the FCC’s net neutrality order explicitly relies (among other things) on its authority over VOIP as ancillary to the traditional PSTN. That is, of course, precisely the argument Comcast and its buddies have made here. If Verizon prevails in those cases, it is difficult to see under what theory the FCC could say: “well, you guys are not Title II services, but you are entitled to get treated like a Title II service.”

(Mind you, the opposite is also true, if the D.C. Circuit finds the FCC has authority to impose net neutrality rules and/or roaming, it also has authority to fix the access charge regime with regard to VOIP. This may put Comcast in the odd position of wanting to intervene in support of the FCC. Y’all have until Monday to think about it, when the deadline for intervention expires.]

So here we are, exactly where we at PK predicted we would be, with Comcast now looking for loopholes in the world of its own creation and taking the rest of the cable VOIP industry down with it. Because apparently, in their hubris and wounded pride when the FCC told them to stop throttling BitTorrent and be honest with their subscribers about network management, they never considered how they might need the FCC to have authority to solve their own problems.

Where Do We Go From Here

We do not have the false choice Comcast has tried to force us into making. It is not a question of giving Comcast an “Access Charge bailout” with no strings attached or watching the telecom industry collapse. Even now, the FCC could assert its unambiguous authority by finding that interconnected VOIP (not even residential broadband, just interconnected VOIP services like Comcast Voice) is a Title II telecom service. The FCC solicited comment on this very question in the Connect America Fund Notice of Proposed Rulemaking. It could include this in the Order it will vote on tomorrow.

But Comcast and its club of Title II jihadist still won’t agree to even modest obligations under the social contract of Title II. Comcast and its cable cohort still dream of establishing Cable Caliphate where cable operators offer broadband “information services” preempted from state or federal oversight while enjoying all the privileges of interconnection and access charges traditionally given to Title II telecommunications services. As in Somalia and the Sudan, the outcome of these religious jihads is so rarely the paradise envisioned by believers.

So the question is not whether we give Comcast what it wants with no strings attached or risk seeing our telecom infrastructure come crashing down around our ears. The question is whether the FCC will awake from its paralysis, shake off the bird poop, and stop being a plastic owl. We have a social contract in the form of Title II. Until Comcast and the Title II jihadist are ready to accept some modest obligations on their side in exchange for the privileges they seek, they can enjoy the Free Market Nirvana they created.

Unfortunately, so must the rest of us. At least until the FCC decides to stop being a plastic owl and do its job.

Stay tuned . . .

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