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Summary:

At many points in our life, we end up in relationships which are dysfunctional, and mutually destructive. We are well aware that we should put an end to it, but we still hope against hope, that things just might work out. But in real life they […]

At many points in our life, we end up in relationships which are dysfunctional, and mutually destructive. We are well aware that we should put an end to it, but we still hope against hope, that things just might work out. But in real life they don’t. Same is the case with the Brand-X case, and how little ISPs feel about their right to carriage on cable companies networks. They don’t want the status quo to end, but it must. The courts, as in life, decided to pull that trigger, and decided for once and all.

I know folks like Jeff Pulver are might upset at this decision, but lets take a saner view. If you are an American, you know strangely enough, the US Supreme Court did the right thing – they deferred to an agency, in this case FCC, which knows better about a specific industry. It has done so in the past, my legal friends tell me.

Carol Mattey, formerly of the Federal Communications Commission (where she served as deputy chief of the Wireline Competition Bureau) and now a director in the Deloitte & Touche Regulatory Consulting Practice pointed out that when FCC adopted the decision to label cable modem an information service, its intention was to accelerate the facilities based competition. What that means – if you want to sell high speed broadband, you better build your own networks.

But what about the competition and the greater consumer good? “I think there is hope on the part of the commission is that cable companies and phone companies will compete with each other,” she says. I thought about it, and well she does have a point. The two parties are like Kane and Abel, and hate each other. Perhaps they will do strange things, and competition will happen. “It basically means that companies will have to invest in broadband,” says Mattey.

The flip-side is that now companies will have to figure out a way to build their own networks. Fixed Wireless, will finally have a reason to live, and Earthlink, instead of being parasitic will end up owning its own networks, or helping munis build their networks. Entrepreneurial companies will, and must come up with a way to get around this. Hey who knows – maybe someone can finally see the hidden value in the work done by TowerStream and NextWeb. This is actually good news for Covad, which apparently is the only game in town when it comes to facilities based broadband compeittion. I can bet you that phone companies will get their own lobbying efforts going and get the small ISPs thrown off their wires as well.

Owning facilities is the way to go – Craig McCaw figured it out and that is why he is building Clearwire on his own spectrum. I think the Brand-X decision is really bad news for the television companies who I believe are spectrum squatters. They will and should be forced to vacate the spectrum which could be put to better use. Increasingly no one seems to care about the drivel they serve up day in day out. FCC, will fail us if it cannot get the citizens the spectrum they so desperately need to deploy wireless broadband.

But whatever happens in the future, the status quo of Brand-X is over. Lets move on!

  1. 60% of americans with broadband have it via cable; i think the cable guys got a pretty fair share of the market now, so equal rights for telcos and cables is due, the more so because they’ll both be offering 3-play services so both do telephone and both do information. The FCC is late and facing backwards…when you add Wireless into the equation is it information or telephoning or what?
    All network-owners will be Data providers and should have equal rights and rules.

    Capastorm

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  2. Laws aside (Jeff clearly know a lot more about it than I do) – I think it is rather common sense that sharing lines, or allowing other people to use your lines, is not competition. Rather, to me, this is akin to allowing Wendy’s to use McD’s grills to cook their burgers. It is an artificially created competition – not created out of a capitalist system but by a regulatory system.

    My problem with this is that it disincentivizes any company from building infrastructure. If I was phone company and had to share my FTTP with every other company out there, and, by the way, it had to be at a fixed cost that may or may not make up my operating and sunken costs, then why would I build that infrastructure? What is driving the phone companies to the FTTP upgrade? It wasn’t DSL competition – it was the cable companies that have put together a great offer for customers – the triple play – via their unregulated coax.

    Consumer groups may say that this was a blow for the consumer, but I disagree – I have seen broadband rates drop and the width of that pipe go up since the phone and cable companies have continued to lock horns. And around the corner are various forms of wireless that may, in fact, challenge them both – especially in areas outside of major cities.

    The sharing of DSL lines was a difficult and artifical construct. It seems to me to have more benefit for the consumer, at the end of the day, to have a true market with true price competition.

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  3. Jesse Kopelman Tuesday, June 28, 2005

    First, deferring to the FCC is ALWAYS a bad idea. The FCC is a microcosm of everything that is wrong with government. Second, the idea that “sharing” is a disincentive to build a network is a misconception based on oversimplification. Brand X is not about sharing, it is about wholesaling. Wholesaling is something that companies in truly competative companies are happy to do. A good example of this is wireless with the MVNO. Wireline companies do not want to compete in an open market, they want to operate like monopolies/oligopolies. In that model, it is not about maximizing revenues, it is about maximizing profit. That will never be consistent with the public best interest.

    Now if part of the Brand X decision were something that explicitedly prevented anti-municipal broadband legislation, there would be little need for this discussion. The problem here is that wireline companies want to have it both ways — they want regulation that protects them from competition but not regulation that cuts into their profit margin. If we are going to have regulation at all, it needs to cut both ways.

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  4. “Brand X is not about sharing, it is about wholesaling. Wholesaling is something that companies in truly competative companies are happy to do. A good example of this is wireless with the MVNO.”

    Couldn’t agree more – it is about wholesaling, but required wholesaling at pre-defined rates. Last time I checked, no one was telling any MVNO-provider how they could price their deals. Also, the MVNO-provider/wireless company has the right to not be a provider – they built the infrastructure, so they control it. Hence, a tier-2 player like T-Mobile or Sprint does MVNO deals to gain share, while a tier-1 player like Verizon says no.

    Do you think that Verizon would be building EV-DO services if they would have to lend them out, at preset rates, to Sprint?

    Again, the fed, in the case of DSL, was attempting to force the phone companies to share, and share at preset rates. Clearly this is an artifical sense of “competition” if there ever was one. My point is this: artifical competition will just about always fail because it is a forced construct. In order to have a real market dynamic, you need to have a true market.

    As for whether the phone company wants it both ways – well, I never saw a big business that didn’t want it all ways and then some…..

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  5. U.S. CableCos Rules the Roost

    I’m little late to the party but the U.S. court Brand X decision allowing cablecos to not share their networks could be a major blow to independent VOIP service providers such as Vonage and Lingo. It is not inconceivable to think cablecos offering the…

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  6. Jesse Kopelman Tuesday, June 28, 2005

    I don’t totally disagree with you Damian, forcing people to share is not the best way. That said, it is the only option given the current structure of the market. Your example of wireless is not correct. Verizon Wireless sells its service wholesale. They don’t mention MVNO, but you can do that if you want. I believe they have done a “public” MVNO deal with someone who has yet to launch, as well. Cingular, which has more subscribers than VZW and is thus just as tier 1, does public MVNO and sells its service wholesale. Things go (more) smoothly in the wireless realm because there has always been competition. The exact opposite is the case in the wireline world. You have to use regulation, or the complete lack thereof, to force competition into the wireline world first — then you can let the market take its course. The thing is, it is not in the FCC’s best interest to completely abandon regulation. Instead, it is in their best interest to regulate in a politically expediant manner. Since the wireline giants have a disproportionate amount of political influence, the FCC tends to see things their way. As a final note: you need to rethink this view of natural vs. artificial competition. Our economy relies heavily on what is clearly artificial comptetition. Case in point — antitrust regulation. This type of thing has long been a staple of telecom and cable with rules about what percent of the population a single carrier can have and in the wireless world how much spectrum in a given market. In the original cellular lottery, the FCC forced competition by decreeing that there would be 2 separate licenses in each market that could not be owned by the same company. The real world is full of inequity and the test of whether it should stand (or be created in the first place) is historically one of public interest.

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  7. Jesse — great discussion btw –

    1. “Your example of wireless is not correct. Verizon Wireless sells its service wholesale. They don’t mention MVNO, but you can do that if you want. I believe they have done a “publicâ€? MVNO deal with someone who has yet to launch, as well.”

    I may be wrong on Verizon and MVNOs, but it doesn’t really matter if they offer it or not – the point is that they are not required to by the government. Imagine a world where wireless services achieve a high enough speed to over TV, broadband, VOIP and then bundle it with a mobile phone solution. The government does not require that they share or wholesale their services or bandwidth – the company bid for the spectrum, installed infrastructure and has the right to determine who has access to it.

    2. “You have to use regulation, or the complete lack thereof, to force competition into the wireline world first — then you can let the market take its course.”

    And I think that is exactly what happened. Competition now exists – interesting that it wasn’t from the leasers of DSL lines who had little or competitive advantage in the marketplace (although I think there is a very valid argument to be made that the Bells moved so slow as to kill that competition). So the government said that it was time to treat data as data and let the players compete on a more level playing field.

    As a result of cable moving into voice, Verizon now feels they have no choice but to spend $5 billion on FTTP and start to deliver video services – even though TV is a relatively low-margin business and there are significant issues with them delivering video on a local level. I call that amount of serious investment a serious attempt at competing.

    3. “Instead, it is in their best interest to regulate in a politically expediant manner. Since the wireline giants have a disproportionate amount of political influence, the FCC tends to see things their way.”

    Not sure what you mean by regulate in a politically expediant manner – it is in their best interest to deregulate in a politically expediant manner. But maybe I’m not getting your point.

    Government should be letting competition go as long as it is truly a competitive environment – and I think what we saw was the realization that what we had wasn’t competition in any sense of the word, so the FCC changed their mind. The courts decided, roughly, that the world has changed and that competition is already naturally existing between landlines, cable and wireless. That may not be what the courts technically said, but that is the outcome.

    4. “As a final note: you need to rethink this view of natural vs. artificial competition. Our economy relies heavily on what is clearly artificial comptetition. Case in point — antitrust regulation. This type of thing has long been a staple of telecom and cable with rules about what percent of the population a single carrier can have and in the wireless world how much spectrum in a given market”

    Anti-trust regulation provides a competitive environment by limiting the companies from extending too far in such a way that gives other companies no ability to enter a market, or significantly disadvantages other entrants.

    In the case of this rule, however, we had the government realizing that they were limiting true competition by continuing to force the Bells to share/wholesale lines in an environment where there are clearly competitors, and most people regard the landline business as a declining business (although the numbers are mixed on whether or not it is actually still declining or stabilizing.)

    It is one thing to stop a large competitor from completely dominating a market – it is another to arbitrarily decide that cable companies deserve no regulation on their services but phone companies do.

    5. “The real world is full of inequity and the test of whether it should stand (or be created in the first place) is historically one of public interest.”

    Without a doubt – and I think it is in the public interest to let the phone companies invest in infrastructure and control that infrastructure as it will cause more competition with cable and wireless companies.

    And while I’m at it – they should do something about the baseball monopoly!

    Good conversation…..

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  8. Jesse Kopelman Wednesday, June 29, 2005

    Damian, you and I will not agree but I tip my hat to you for arguing your points in a thoughtful manner. To clarify my comments on the FCC: They will do whatever it takes to maintain their own fiefdom. If they give up one form of regulation they will take up another. The FCC, like many government organizations, is more concerned with maintaining its own importance than it is in serving the public good.

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  9. Lets remember who paid for those RBOC wires. It was paid for by the ratepayers under a regulated monopoly. Those ratepayers are paying for the fiber that the RBOCs are building (or at least acting as a guarantee for the loans).

    The Cable Cos are also efectively (barely) regulated (very much) monopolies. There is not more than one franchise given in each city for instance.

    If we really wanted a sane system, we would force horizontal divestiture on both the Cable Cos and the RBOCs. Create a regulated Layer 1 monopoly and a completly de-regulated upper layer competitive marketplace.

    Have the regulated monopoly (or Municipal utility) build and maintain conduit and dark fiber avaialbe at cost plus basis and capitalized with 10+ year bonds. Not high tech there, just men in trucks.

    The fiber is made available to a competitive market on a per strand basis to every home and office to a competitive marketplace in municipal colocation facilities.

    Note that wireless will not compete with fiber in terms of bandwidth any time soon. We are talking about 2 or 3 orders of magntiude difference in bandwidth with wireless tech that is on the horizon compared to fiber tech that is already being deployed.

    Wireless is great for creating ubiquitous and moble access, not replacing wires / fiber except in those cases where its just too expensive to lay fiber.

    Also note a duopoly does not create competition. It create collusion.

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  10. On a wholsale level, buying from the carrier that controls the network should not be a disadvantage as when the supplying carrier, e.g., sells the same product at almost half of what some of the wholesale customer’s are paying for the line itself, not includng other costs.

    I will agree completely with Robert’s structual seperation model. It’s been talked about for some time.

    The Cable CO’s have their fair share of regulations on the cable media side, (Howard and Janet come to mind) but not with their Broadband Internet service or Digital Voice. This is something most people forget, hence the RBOC’s wanting in on the IPTV at a reduced cost and time of entry.

    So parity between the two is not just about Broadband but, also about TV. Plus let’s look at the stronger quad play (now) the RBOC’s have in offernig a quad-service of voice, wireless, broadband and TV, if given quick entry to TV. Though I would have to bet we will see Cable-CO’s getting into more wireless plays, given the market as it is today.

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