Apple, Google, AT&T and Verizon

This article over at Seeking Alpha is interesting. It describes the "small numbers bargaining problem" in telecom. Quoting the article:

Verizon has already shown resistance to putting the Apple iPhone on its platform for fear that it will use tremendous amounts of data without sharing any of the third party application profits with the carrier. Now VZ is beginning to play games with Google saying that they won’t pick up the Nexus One, planned to be released spring of 2010. Google loses access to the carrier’s more than 90 million users, and seems to have stumbled for the time being in becoming a major player in the mobile handset market.

AT&T has not picked up the phone either. But AT&T has more problems than just Google, they are trapped in a mutually hated relationship with Apple now, where neither party can get rid of the other. It really is the marriage from hell. Apple doesn’t have another carrier, and AT&T can’t throw Apple off for fear that its massive amount of iPhone users will defect from its completely inferior network. So AT&T is trapped having to provide Apple with more and more bandwidth, towers and other infrastructure, as the public and media scream at AT&T to get their network up to Verizon’s standards, not to even mention how well Sprint (S) works. AT&T is for sure frustrated that they have to make these capital expenditures and see no increased profit from them, it’s like bailing out the water from a ship with a 20 foot hole in the bottom. You’re just spending energy trying to stay afloat.

Something has to give here, this can’t go on forever, and I think we are soon to see a resolution to the issue of the telecom giants paying for the network on which Apple and Google make tremendous amounts of money. Maybe the telecoms chose the nuclear option and just stop building their networks holding Apple’s feet to the fire. Steve Jobs can’t revolutionize the content distribution market without a network to do it on, and believe me, the stuff that he wants to do is going to take a lot more bandwidth than is available today. Do we really think the carriers are going to pay for that to happen? Maybe Apple will buy a carrier, or perhaps even build its own network with a next generation technology they have been developing.

I wonder to what extent the independent LTE network proposed by Harbinger (see this) will be the event that shakes things up? In many ways, the situation described above seems to be an analog of the drama being played out over network neutrality in that we have infrastructure investments required for applications that are not easily monetized by the infrastructure owners.

Economics in the wireless industry

This item over at the tech. liberation blog is fascinating. It makes clear the deeper battles going on releated to "wireless network neutrality". I am becoming more convinced than ever that the network neutrality discussion is largely a question about political economy -- that is, who gets which revenue and who pays which costs. But is allocating more spectrum to mobile, as the article goes on to suggest, the answer?

Google and Verizon

This joint statement is interesting less for what it says than for who is saying it (see also this item).

We can frame the net neut discussion as a faceoff between application providers and network operators about who gets to pay (and how much) -- i.e., we frame it as a problem in political economy. In that world, Google is the 800 kg gorilla amongst the apps provider and Verizon is the 800 kg gorilla (at least for a significant fraction of the US population) amongst the operators. An agreement between these two is likely to set the tone for the rest of the community (the joint statement is far from an agreement).

This is eerily reminiscent of the bargaining that took place between the Associated Press and Western Union in the 1860s. At the time, AP was WU's biggest customer, so AP had the traffic to build their own telegraph network; WU had the local resources (in telegraph operators) to build their own news agency. The agreement between the two was basically an agreement to not compete with each other in their core markets.

Is this shaping up to be a similar business arrangement? Are there parallels worth considering or is the WU/AP analogy worthless?

Facts about broadband provision

Today's WSJ had an op-ed by Holman Jenkins. In it he claimed the following:

Two-thirds of Comcast's new broadband subscribers signed up in a recent quarter were defectors from DSL. "Churn" is the biggest challenge to broadband profitability, especially as competition drives down margins. According to Arbor Networks, the cost of fielding a single call to customer service can wipe out three years' profitability for a customer's broadband account.

Open source and marketing

This article over at Ars Technica is interesting. Apparently, ipoque, a manufacturer of "Deep Packet Inspection" (DPI) equipment has released the code for parts of its key inspection engines to reassure the public that it does not include the ability to store personal information associated with users, which has been a concern voiced about these technologies.

The interesting thing about this article for me was the tradeoff made by ipoque between the value of their intellectual property and the value of the PR they would gain, followed, they must have presumed, by increased sales.

As the article in Ars points out, that privacy isn't the only concern; others are concerned about DPI from the perspective of bandwidth caps for certain applications, which would be enabled by this technology.

Broadband carriers and government funding

This article is interesting. According to the atricle

As the Aug. 20 deadline nears to apply for $4.7 billion in broadband grants, AT&T, Verizon and Comcast are unlikely to go for the stimulus money, sources close to the companies said.

Their reasons are varied. All three say they are flush with cash, enough to upgrade and expand their broadband networks on their own. Some say taking money could draw unwanted scrutiny of business practices and compensation, as seen with automakers and banks that have taken government bailouts. And privately, some companies are griping about conditions attached to the money, including a net-neutrality rule that they say would prevent them from managing traffic on their networks in the way they want.

While it is quite possible that some of the rules, such as "network neutrality" may affect them anyway, it is clear that the carriers felt that the cost of participating in this program outweighed the benefits. A significant part of their concern is related to uncertainty about the consequences of an irreversible commitment. Thus, it seems an apt subject for a real options analysis.

Doing such an analysis rigorously would be challenging since the uncertainty is not easily quantifiable. But clearly carriers have concluded that the high probability of a modest upside does not outweigh the uncertain probability of a potentially large downside.

Net Neutrality in the UK

I found this article over at Ars Technica interesting and worth reading. The article describes an ongoing "discussion" between the carrier BT and the content provider BBC. BT is using tier-based categories to implement a price discrimination. While this is normal in telecom (and arguably necessary since these industries have marginal costs below average costs), the challenge is that the consequence of this (bandwidth limitation, in this case) affects the business of content providers (in this case BBC).

What is interesting about this is that there is a problem of joint action by parties with competing interests. BT has to make substantial investments to enable access to broadband content, so it is hard to argue against their right to earn a reasonable return on this investment. At the same time, BT needs content providers (like the BBC) to develop compelling programming so that users will find it worthwhile to pay for the investment. The BBC wants to have its programming available to as many viewers as possible (to maximize their returns) at the highest quality level possible.

So, BT wants broadband prices on the higher side to maximize its benefits whereas BBC wants them on the lower side to maximize theirs. It appears that BT has set its lowest tier such that viewers can see the BBC content at its basic level of quality. Higher quality levels (which require more bandwidth) require a higher monthly fee

While I am not an economist, this seems to be a bargaining problem of the kind discussed by Oliver Williamson (and Ronald Coase, for that matter). Thus, either we see an allocation of rights and costs that is socially efficent (Coase, in the absence of transaction costs) or we see vertical integration (Williamson, in the presence of high transaction costs) or government intervention (to reduce transaction costs).

Bandwidth caps

For the past several months, there has been much discussion about carriers such as Comcast imposing bandwidth caps on their users. The stated motivation for this is to rein in the highest bandwidth users, and perhaps to set the stage for price discrimination, where users would pay more for higher caps. To this end, there are a few items that I would like to bring to your attention.

This item over at BusinessWeek takes a look at the rationale for bandwidth caps. Dispite the claims of congestion, the article does not find evidence of the feared growth in traffic.

Secondly, this item over at GigaOm points to a recent white paper on the subject. It then points to some possible unintended consequences of this approach. By the way this is a critique of the cited paper over at the Tech Liberation Front. Tim Lee is a fan of metered usage.

Comcast

In an earlier post, I pointed to the report of Comcast "managing" BitTorrent traffic. Well, things have gotten a bit more interesting since then. As this article in BusinessWeek reports, Comcast is now the object of complaints filed at the FCC as well as a lawsuit that is seeking class action status. You might also find this item useful to add a bit of dimension to your thinking.

Should the FCC set guidelines for acceptable "network management" practices, as Vuze is requesting in its petition?

Update (2007-11-29): There have been a few new developments and insights for your consideration:

1. The Electronic Frontier Foundation released a report documenting the AP's findings in more detail. They also are offering tools for users to test their ISP, though the test method seems focussed on more technically astute people. To that end, the NNSquad has been discussing how one might build tools to test ISP behavior.
   
2. For additional background on ISP motivations (yes, there are some that make sense), you might visit this site, which includes a pointer to a report from Sandvine.
   

Network Neutrality (again)

You can probably figure out that I am skeptical about the appropriateness and efficacy of ex ante internet regulation. At the same time, I believe that the Internet should not subject users to undue restrictions. So, I think the approach that the NNSquad is terrific. This group has no regulatory powers, but can discover and report incidents, like the recent Comcast/BitTorrent incident (see this for an analysis/discussion). This kind of "regulation by information" may just be the most effective approach, especially as we reason through what "reasonable" user expectations are (or should be) and what "reasonable" provider behavior is (or should be) as the market evolves and as application requirements evolve. (By the way, here is another opinion on this group.)

Do you think that regulation by information is strong enough? Do you think that ex ante regulation (or even functional separation) is necessary anyway?

Tiered Internet pricing in Germany?

You might find this article of interest (I tried to find the source materials, but was unable to ... the URLs in the article point to a discussion of their VDSL network, not their pricing plans).

This is one of the items that gets to the heart of the "network neutrality" discussion ... should ISPs be able to offer tiered pricing? There is already a tradeoff between price and quality ... if you want more bandwidth, you pay more. If you want better quality, you can build an MPLS network (assuming you know the endpoints).

If you extend the analogy to non-telecom services, you can purchase mail with different delivery times at different rates ... so why should you be able to do this for internet services as well?

Comcast and BitTorrent

Articles like this one are showing up on the net ... I chose to refer to this one from Ars Technica because it is the most technical that I have seen thus far. Quoting the article:

Comcast has been "caught" blocking BitTorrent traffic in some areas, according to tests performed by the Associated Press. The news organization claims to have confirmed that Comcast is blocking—or at least seriously slowing down—BitTorrent transfers, regardless of whether the content is legal or not. If true, Comcast's actions have serious implications for sharing information online, and by proxy, Net Neutrality.

The AP was tipped off to the possible P2P blockage by a reader who had noticed serious slowdowns on his Comcast connection. The organization then proceeded to perform a number of tests—three, to be exact—on two computers in cities on both the east and west coasts. AP chose to download a copy of the King James Bible through BitTorrent (because it is an uncopyrighted work) and went to work. In two out of its three tests, the downloads were blocked altogether, while in the remaining test, the download started after a 10-minute delay.

Assuming this report is correct, do you believe that Comcast has the right to "manage" traffic on their network in this way? Could you imagine AT&T or Verizon offering a "BitTorrent-friendly" package to compete with Comcast?

ISP blocking of email traffic

The tiff about Verizon Wireless and text messages that I blogged about earlier that raised question of net neut in the eyes of some observers. In similar fashion, political advocacy groups occasionally complain about being blocked by their ISPs. As this item points out, there may be technical reasons that are non-political.

I conclude that there may be less to these stories than is being alleged ...

Operational Separation of Telecom in New Zealand

You might find this item of interest. This kind of separation has been proposed as a possible solution to the "net neut" concerns, and BT in the UK is proposing to do this voluntarily. Forbes has reported on this as well (see this). New Zealand will (once again) be a laboratory for advanced ideas in telecom policy.

Verizon and content control

This article in today's NY Times illustrates the deeper linkage between content and carriage that is occurring in today's networks. This is a feature of walled gardens of any sort ... here Verizon chooses to control content and elsewhere Apple chooses to control applications on the iPhone.

What do I think?

• Verizon is on a slippery slope, just as the FCC was under its "fairness doctrine". I am guessing that they will reverse this policy once they realize this.
  
• This issue will become the "poster child" for the network neutrality folks, even if Verizon ends up reversing its decision.
  
• Verizon, whose opposition to network neutrality is on record, made a really boneheaded decision in what is basically a political issue.
  

Do you think that this is a harbinger of things to come? I build an equivalence between Apple and Verizon ... is this appropriate? If not, what are the differences that are notable?

UPDATE 2007-09-27: On they Cybertelecom Mailing List, Sean Donelan had this to say, which I think adds a bit of nuance:

he article [sic] briefly mentions, but doesn't really explain the difference between standard user-to-user SMS texting and SMS short code campaigns.

For whatever historical reasons, subscribers seem to view user-to-user SMS texting as the wireless company acting as a "common carrier" but subscribers seem to view SMS short code compaigns as the wireless company acting as the "information service" responsible for those messages even those created by third-parties.

Members of the Klu Klux Klan buy wireless phone service and send standard SMS messages to each other; but none of the wireless phone companies will operate SMS short code campaigns on behalf of the Klu Klux Klan.

For example, consider this link to Google's content policy for Google Adwords, which is different than the content policy for Google's basic search index. https://adwords.google.com/select/contentpolicy.html

Here is a link to several SMS carrier policies for SMS short code campaigns, as opposed to standard user-to-user SMS.
http://www.emexus.com/Corp/media/downloads/20060424125933_Emexus%20Carrier%20Requirements%20FAQ.pdf

Update (2007-09-27): According to this article, Verizon reversed its policy (as I expected they would). Still, from their perspective, I believe that the damage is already done.

Google as a telecom carrier

This item is most interesting, and adds weight to some speculation I blogged about earlier (see this, for example). If this happens as reported, Google begins becoming both a service provider and a transport provider. If Google does bid on (and win) spectrum in the upcoming auction, they have the ability to move further in this direction.

How does this play in the structural separation model?

Update (2007-09-24): Nicholas Carr posted this item on his blog, which raises some interesting questions, not so much for Google, but for the kinds of industry trends posited by John Hagel and others.

Structural Separation

There has been a bit of a debate going on that argues, in essence, since network neutrality seems infeasible, let's separate transport from services. BT in the UK has taken this approach, which has apparently been hailed by EU Commissioner Viviane Reding. I have a few questions about this idea:

• We have tried structural separation in the past in the US ... some of us remember Computer I and Computer II. Is this proposal different? Why? How?
  
• While structural separation, in theory, does remove incentives on the part of network operators to discriminate, to what extent would infrastructure investments be inefficient? That is, can transport providers make more efficient investments if they know (and can confidently predict) upcoming services and their deployment? Part of this is a problem of opportunism and asset specificity that Williamson predicted would result in increased transaction costs (and hierarchy).
  
• Assuming that the above questions are resolved, how would this be implemented? Do you think it could happen voluntarily (as it did in the UK)?
  

Internet regulation news

The US Department of Justice filed this in response to the FCC's Notice of Inquiry on broadband competition. The filing has been picked up by the media (see this in Forbes and this on the BBC website). Forbes summarizes the filing as follows:

The Justice Department on Thursday said Internet service providers should be allowed to charge a fee for priority Web traffic.

The agency told the Federal Communications Commission, which is reviewing high-speed Internet practices, that it is opposed to "Net neutrality," the principle that all Internet sites should be equally accessible to any Web user.

**snip**

The Justice Department said imposing a Net neutrality regulation could hamper development of the Internet and prevent service providers from upgrading or expanding their networks. It could also shift the "entire burden of implementing costly network expansions and improvements onto consumers," the agency said in its filing.

Such a result could diminish or delay network expansion and improvement, it added.

The agency said providing different levels of service is common, efficient and could satisfy consumers. As an example, it cited that the U.S. Postal Service charges customers different guarantees and speeds for package delivery, ranging from bulk mail to overnight delivery.

I tend to agree with the idea that users ought to be able to pay for various levels of service as a matter of principle. On the other hand, I am concerned with the incentive that carriers have to "starve" a best effort tier to drive users to higher service levels. How would you go about managing this incentive in a way that is enforceable, economically efficient and technologically feasible?

Update (2007-09-10): I found this article from CNET interesting and helpful. Did you?

Update (2007-18-09): This article takes a look at the international aspects of this debate. Also, this article raises the possibility of further Congressional action in the US