Will FCC Experiment Delays Hurt Networking?

AT&T has joined Verizon in spinning off some rural phone lines/customers that didn’t present a profit/revenue profile that matched their future requirements.  This trend, and others, is what has motivated the FCC to take up the issue of “transition”, and the outcome of the FCC’s review could have major impacts.  I noted the FCC’s intentions in a prior blog, and some of those intentions have now been made into concrete steps.  We just don’t know where those steps might be taking us.

The FCC had established a Technology Transitions Task Force to evaluate the impact of technology changes, obviously, but the fact is that it’s the business changes that demand attention.  Over the roughly twenty years since the Telecom Act of 1996 created our current framework of regulations, we’ve seen the price per bit of capacity drop by 50% per year.  That has made low-bandwidth services like voice something that could be offered over the Internet for literally nothing, and you can’t sell stuff in competition with things that are free.

The immediate result of the declining capacity cost has been to shift expensive calls off the bill, either by shifting them online or to unlimited-call plans.  Both these have capped and eventually pushed down ARPU on voice services.  At the same time the cost of providing baseline voice services has grown because of higher labor costs and because rural geographies are increasingly seeing growth of off-grid vacation homes and other low-density development that’s inherently more expensive to serve with wireline.

The TTTF report, issued December 12th, recommended experiments on the way that consumers could be served by advanced technology options.  What this is really about is answering a single question—what can we do to transition TDM voice to something less expensive without creating any consumer risks along the way.  The option that operators would like is to transition it to mobile service because that could eliminate the whole issue of wireline voice, and move users to something that’s (at this point at least) still profitable.  Another option is to decide how you could provide VoIP to users who don’t have Internet access today because they don’t want it or can’t afford it.

Experiments will provide some comfort in saying that wireline voice and wireline voice carrier-of-last-resort obligations can be eliminated, and the fact is that they have to be.  We made a decision in 1996 to deregulate the industry, to eliminate the regulatory-monopoly model that was (some said) limiting innovation but (some said) was also protecting the investment in infrastructure.  Now we have a big chunk of telco budgets spent providing a service that almost everyone thinks is a dinosaur—POTS.

The larger question that the FCC has to answer is relating to the rest of the transitional issues, and I don’t mean the simple wireline/wireless or copper/fiber issues.  Those aren’t issues at all, they’re simply market shifts that are really out of policy-makers’ control.  The real issues relate to whether you can have an industry that’s half-regulated.  The Telecom Act didn’t repeal the Communications Act of 1934, it simply amended it.  There are still universal service obligations, E911 obligations, wholesale obligations, and other silly holdovers.  Most recently we initiated net neutrality regulations that go beyond guarantees of access to guarantee neutral network behavior under all kinds of conditions—guarantees that have kept QoS and settlement out of the Internet and limited the incentive to invest.  In the US and in Europe, operators are looking for other ways to make profits, and if they can’t do that in their home countries and core industries, they step outside one or both.  In Europe, many operators have their premier service experiments running in some other country, even continent.

But I think that the real issue for the FCC isn’t whether we can regulate an industry we deregulated at least in a titular sense.  We can’t and keep it healthy.  We need TTTFs not because technology changes are unusual and need special actions to deal with, but because we have created a rigid framework for an industry in one area and demanded it be flexible in another.  We have to regulate or deregulate.  I think that many in the FCC know this, and know that the experiments that are going to be run in 2014 are really aimed at defining the boundaries of “minimum regulation”, the level needed to protect consumers while letting the technology of the future drive the network of the future.

What is sad is that it’s taken us this long.  When we look back on FCC policies and FCC chairmen, I don’t think that the last Chairman we had will get high marks.  Genachowski was an activist at a time when networking needed a minimalist, and worse his activism was biased strongly against those who build the networks, not just build things that generate traffic like the OTTs do.  We need both business types to protect consumers, and we should never have taken regulatory positions that ended up favoring one type—particularly when without infrastructure there’s no services of any sort.

My fear is that this whole “experiment” thing will be another delay.  We already see the signs, in moves by players like AT&T and Verizon to spin off lines that aren’t going to be profitable, that the industry is developing serious structural problems.  Vendors like Cisco say that “macro” conditions are hurting their sales, but one of those conditions is that operators aren’t able to earn the same return on investment as OTTs do, and yet both operators and OTTs sell stock in the same markets and have the same shareholder concerns about growth.  We could have changed this industry three or four years ago by simply doing the right thing—either creating a true regulated monopoly again and regulating the outcomes we wanted, or letting the market do what comes naturally.  Markets divided against themselves can’t stand either, and we could fritter away the health of the industry taking baby steps now.

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