Bret Swanson

[Commentary] While there’s been a lot of talk about uncertainty hurting the economy, in fact, there’s been too little uncertainty in the economy.

One of the worst anti-innovation efforts is being fought out at the Federal Communications Commission, where extremist proponents of net neutrality are pushing the agency to apply the old “Title II” monopoly telephone regulations to the digital world.

The US invests more than anyone in broadband networks, cell towers, and data centers, and it generates and consumes twice as much Internet traffic per Internet user as Japan and three times that of Western Europe. Most of the world’s biggest Internet firms are American, and we’ve got most of the new upstarts, too, precisely because we’ve encouraged disruption in this sector.

One could hardly devise a more devastating blow to innovation than allowing Washington to wrap its regulatory arms around the Net.

[Swanson is president of Entropy Economics]

[Commentary] Netflix and Mozilla are leading the charge for the government to oversee the Internet as never before, however, it is important to understand -- and to refute, where warranted -- their positions.

Here we select and scrutinize just a few of the technical and economic arguments and assertions from their comments to the Federal Communications Commission.

[Swanson is president of Entropy Economics]

[Commentary] There is a subversive plan to slow the Internet, and it must be stopped. The new plan, now being contemplated by the Federal Communications Commission, could alter the Internet forever.

It could slow speeds, limit the content and applications consumers can access, and create a two-tier system that favors some companies over others. The plan even has a code name: it’s called “Title II.” For all of Title II’s potential for catastrophic harm, it offers no upside, even for its most hearty proponents. The bête noire of the neutrality fundamentalists is so called “paid priority,” where some bits (like high resolution videos that require fast and reliable delivery) are prioritized over mundane applications (like data backups or routine emails, where it doesn’t matter if the bits arrive now or a few milliseconds later).

But common carrier regulation of phones or trains (of which Title II is an example) explicitly allows service discrimination (paid priority) as long as all similarly situated customers get the same offer. Title II thus doesn’t even solve the supposed problem — but would cause new problems of its own. Far from a burden on small Web start-ups, paid priority could be an inexpensive and crucial tool. Behemoths like Google, Amazon, and Netflix have built out vast networks and content delivery systems of their own -- to speed the delivery of their own bits.

But small firms focusing on a first time product don’t have the wherewithal to match that physical infrastructure. They often use CDNs to deliver static content. But for other real-time services like gaming, or education, or health care, they may prefer to pay a network provider to move their bits and provide their customers with a first-rate experience. Prohibiting paid priority and other network services could thus harm start-ups and reinforce the big Web firms’ position of dominance.

[Swanson writes for Forbes]

[Commentary] Nearly 25 years ago, George Gilder wrote a book called “Life After Television.” Moore’s law of microchips and similarly powerful forces in fiber optics, digital storage, and wireless radio transmission, Gilder said, would enable the construction of new networks of computers that would end the stultifying era of mass media.

George famously got rid of the rarely used televisions in his home to support the thesis of his book -- that the coming “worldwide web of glass and light” would blow up the lowest-common-denominator world of dumb terminals, dumb content, and even dumber mass advertising and replace it with a network of choice, quality, interactivity, and intelligence.

So, is ours a life after television world? Whatever we call it, broadband computer networks have dramatically boosted choice and quality (better quality at the top end and overall, although there’s more worthless stuff, too). Instead of a mainframe, we’ve got 1.4 billion PCs, 5 billion mobile phones, 2 billion smartphones, and the immense resources of the cloud. We’ve got more networks -- broadcast, cable, broadband, mobile, satellite, Wi-Fi.

More distribution channels -- cable, telecommunications, mobile, satellite, Amazon, iTunes, Netflix, YouTube. More content aggregators. More content producers. And it’s often difficult to tell which is which. The upshot for policymakers is that choice and competition are proliferating, often at a dizzying pace. Every effort to regulate this space runs into the most basic definitional problems because no one knows what’s what, or what will happen next week. Better to let everyone keep enjoying this golden age of life after television.

[Swanson is president of Entropy Economics]

[Commentary] The substance of Title II common carrier regulation is very real, and it could deal a huge blow to the Internet economy.

Title II means price regulation. It means asking Washington and the state utility commissions for permission to launch new products, change existing ones, or deploy new technology, and to approve marketing and advertising programs. It means hundreds of other rules that were written for the monopoly telephone network 80 years ago but that would now apply to the vastly different Internet environment.

Title II would threaten the healthy system of Internet interconnection and peering that evolved without government oversight. Title II would bring back tariffs, intercarrier compensation, and a host of other bureaucratic do’s and don’ts. Meanwhile, because heavily regulated companies tend to be experts at operating in such a confusing environment, competition from new entrants would falter.

Quarantining the Internet from Title II was one of the best economic policies of the last generation. Unleashing Title II on the Internet could spread an epidemic of confusion and litigation across an Internet environment that over decades has developed millions of fruitful technical and commercial connections outside (and often oblivious to) the old Title II regime. In short, Title II would threaten Internet innovation at its very foundation.

[Swanson is president of Entropy Economics]

[Commentary] Federal Communications Commission Chairman Tom Wheeler spoke forcefully at the annual NCTA Cable Show in Los Angeles. Most observers focused on his Open Internet remarks, but Chairman Wheeler also made waves by asserting an FCC power to overrule state laws that limit the ability of cities and towns to build their own networks.

In recent years, at least 20 states, after witnessing a number of failures of such municipal networks, enacted limits on such government owned network (GON) ventures. This list failures or aborted launches is long, and growing -- Chicago, Seattle, Tacoma, Utah’s UTOPIA, Minnesota’s FiberNet, the Northern Florida Broadband Authority, Burlington, Vermont, and Philadelphia and Orlando’s abandoned Wi-Fi networks, to name a few. So the financial case for GONs is not a strong one.

The bottom line is that until the FCC, states, and localities do a lot more to remove the remaining barriers to broadband investment, we shouldn’t be using scarce tax dollars to build duplicative networks.

[Swanson is president of Entropy Economics]

[Commentary] The Federal Communications Commission’s apparent addition of another layer of complexity to its upcoming 600 megahertz spectrum auction is rather startling.

The new rules would restrict the amount of spectrum on which AT&T and Verizon could bid. If it looks like the spectrum available from the reverse auction is 60 megahertz, for example, the two firms might be able to bid on three of six blocks. If 70 megahertz is available, then four out of seven. Clear, right?

But it’s far worse than it appears because the new wireless technologies -- such as 4G LTE -- work best with wider spectrum bands. And the FCC’s proposed limitation would dramatically reduce the odds that AT&T or Verizon would actually get a wide enough band to make it worth their while to bid and spend scarce capital.

The FCC’s stated rationale for all this nano-management is to steer spectrum to non-AT&T-and-Verizon firms to compete with AT&T and Verizon in rural markets. But other recent policies, such as the mandated data roaming order that forces firms to share their networks at below market rates, have discouraged real facilities-based rural competition. And now the auction policy could reduce the available rural capacity of AT&T and Verizon upon whose networks the data roamers roam. There’s not even a guarantee -- far from it -- that the number three and four mobile firms, Softbank-Sprint and T-Mobile, will even make a bigger rural push. More likely the rural talk is a PR strategy designed simply to prevent their rivals from obtaining spectrum and to lower their own price of acquiring it -- likely to be used in urban and suburban areas.

[Swanson is president of Entropy Economics]

[Commentary] Humility is not a Washington strong suit, and so the Senate Commerce Committee questioned Comcast and Time Warner Cable, often skeptically, over the former’s proposed $45 billion acquisition of the latter.

Lawmakers want US broadband to be successful -- but not too successful. They want ever expanding networks of ever greater capability but don’t want the firms that build these expensive networks to prosper. They want lower prices for consumers but don’t like the economies of scale that can help deliver such value. Because Comcast and Time Warner Cable do not operate in the same geographic markets today, there will be no reduction in broadband provider competition.

But even that question misses the larger point, which is that this is a market where competitive products and technological innovations spring up unexpectedly, often overlap, and show no signs of stopping. Cable firms compete against satellite firms (DirectTV and Dish), telecommunications firms (Verizon FiOS and AT&T U-verse), and broadcast TV, with possible new challengers like Aereo. In broadband Internet services, the cable firms compete with the telecom, satellite, and wireless companies. For services like voice, they compete with the telecom and mobile firms, and also with applications like Skype and WhatsApp. Web content from Netflix, YouTube, Amazon, and many others, meanwhile, challenges the traditional cable TV model. Even traditional cable channels like HBO and ESPN are moving toward the Web.

We could also add the dimension of “interconnection” to the equation. Although cable gets only a tiny amount of revenue from interconnection deals, such as the recent Comcast-Netflix hook up, the DOJ and FCC are likely to scrutinize this arena.

Each of these dimensions overlaps with the others and is itself constantly shifting. The cable firms are adapting to all these changes, but no one knows what any part, or the whole, will look like just months from now. So it’s difficult to make the case that our general hands-off attitude toward regulation of the Net isn’t bearing fruit. And it’s unlikely that a merger of two entities who don’t compete will change the upward trajectory of the digital economy.

[Swanson is president of Entropy Economics]

[Commentary] The debate over international broadband comparisons goes on. There’s lots of evidence the US is doing well.

Those who want more government control of the Internet, however, aren’t always happy about this success. Good news makes a big change in policy -- from a relatively unregulated market to one of their preferred big government models -- less likely. Thus the increasingly creative attempts to characterize the US as a broadband backwater.

The unmistakable takeaway from a glance at a chart, “Countries with high-speed broadband,” which recently appeared on Twitter is that the US trails the world. Except the chart doesn’t say that at all. It took a lot of work to create such a misleading chart.

[Swanson is president of Entropy Economics LLC]

[Commentary] The WhatsApp story is a great one -- almost too good to be true. In 2009, Brian Acton, one of two WhatsApp co-founders, was turned down for a job by Facebook, the firm that just bought his company for billions.

Jan Koum, the other co-founder and a Ukrainian immigrant, signed the $19 billion deal on the door of the Mountain View (CA) welfare office where his mother used to get food stamps. Facebook is not paying for revenue or technology. Facebook is paying for scale. In large part because of its own vulnerabilities.

When firms, products, and user bases have the ability to grow (or shrink) this fast, they can completely change the nature of industries in no time at all. And this has profound implications for policy. Messaging, chat, Skype, Facetime, Xbox conversations -- these apps have completely changed the worlds of voice, email, and mobile. With further disruptions to come. This is what we call “dynamic competition.” And it’s this idea of very rapid change, unpredictability, and overlapping technologies and business models that policymakers need to keep in mind as they consider regulatory efforts like “net neutrality,” the IP Transition, and a possible update to the Communications Act.
[Swanson is president of Entropy Economics LLC, a strategic research firm]