By Daniel Berninger Definition: Net Neutrality – Internet access without discrimination by use or user except as required for network management purposes. The FCC’s decision to relieve AT&T and Verizon of net neutrality requirements in August 2005 definitively broke the chain of events the companies use […]

By Daniel Berninger
Definition: Net Neutrality – Internet access without discrimination by use or user except as required for network management purposes.

The FCC’s decision to relieve AT&T and Verizon of net neutrality requirements in August 2005 definitively broke the chain of events the companies use to assert right-of-way privileges. The Bells claim privileges based on over 100 years of practice that may or may not coincide with the intent and limits of the original deals, but the resulting laws explicitly require a public purpose in exchange for the right-of-way concessions.

The obligations established on a state by state basis sometimes include build-out requirements or other compensation, but they all specify that access to state right-of-way at largely no cost or limit requires common carrier status (aka net neutrality.) The loss of common carrier status invalidates the contracts. The Bell companies have no access to state right-of-way for deployment of private, closed, non-neutral, non-common carrier network deployments.

There may exist many unfulfilled obligations in the century old details of these arrangements, but there exists no doubt right-of-way access requires common carrier status. Maryland represents a typical case. The terms of right-of-way obtained by the Chesapeake and Potomac Telephone Company (now a unit of Verizon) after its founding in 1883 persist in the Maryland Code section covering public utility companies. Title 1-101 defines a telephone company as “a public service company that owns telephone lines to receive or transmit telephone communications.”

The same section defines a public service company as a “common carrier” company. Title 8-103 “Construction of lines and fixtures” defines the right-of-way available to the public service telephone company. The authority of Maryland to regulate telephone companies shows up in the Maryland Constitution Article 12 titled “Public Works” noting among other things that “the Directors of all said Public Works guard the public interest, and prevent the establishment of tolls which shall discriminate against the interest of the citizens or products of this State.”

Another interpretation to the plain language requiring a public purpose for right-of-way concessions does not exist. Does anyone believe government should grant public assets to private entities for private purposes? The loss of net neutrality changes the terms under which the Bells enjoy access to right-of-way. The non-neutral private network deployments associated with the Bell company broadband offers look like the non-common carrier networks of the cable companies.

Cable companies do not enjoy the same no cost access to right-of-way and pay franchise fees that typically equal 5% of gross revenues or $30 billion over the last ten years. The assertion that property rights convey an ability to leverage any business model regarding the Internet seems ironic given the telephone companies own less than 2% of the property where they deploy infrastructure. The real estate Verizon owns directly represents less than 3% of the value claimed for equipment and infrastructure.

The exposure to litigation for private use of public right-of-ways already exists. Verizon deployed FiOS as a entirely non-common carrier private network. Scrutiny of right-of-way arrangements could change the balance of power in the battle between the Bells and municipal wireless projects. Ed Whitacre and Ivan Seidenberg might regret their push to remove government oversight.

The regulatory sphere offers cozy warmth compared the to risks that await their plans to extract increasing private returns from public assets and government granted monopoly. Regulation has proven a potent defense from antitrust litigation while still allowing price increases, industry consolidation, and the use of the risk free returns from local telephone monopoly to subsidize expansion in new markets like wireless and broadband. The tariffed rate doctrine has long protected the Bells from pricing litigation. Verizon does not report R&D as a separate expense on income statements like Intel, Microsoft, or Google, because lobbying and litigation rather than technology dominates spending.

The Bells want Congress to believe ignoring net neutrality requirements will incent investment in broadband networks, but their idea of return on investment means monopoly rents. The Bells only invest in more monoply which usually means buying each other. The track record shows steadily lower spending on networks to increase free cash flow for acquisitions. The $140 billion SBC spent acquiring Ameritech, PacBell, SNET, AT&T Wireless, and AT&T lifted the company’s market cap by only $40 billion. The fact that $100 billion disappeared might suggest the need for a different strategy, but the new AT&T seeks government approval to spend $67 billion to acquire BellSouth. SBC missed an opportunity as $140 billion happens to be about what it would cost to run fiber to every home in America.

The Bells fund think tanks to explain why private organizations need to privatize a public asset, but the decision process in Congress should consider the public’s return on investment from the previous 100 years of access to right-of-way. It hardly qualifies as a public good that the Bells trimmed the number of people they employ by 40% and doubled the price of local service since 1984. The $200 billion in profit generated by Bells over the period did not even benefit investors as their chosen investments left equity values relatively unchanged.

Ed Whitacre might want to pay fair value for the public and private property utilized by the telephone network, before asking “…why should they be allowed to use my pipes…” when explaining to a Business Week reporter why Google, Yahoo, and Vonage should pay new usage based fees. There will be arguments Internet access represents an “incidental use” allowed by state laws, but these arguments will succeed only at the cost of the Bell’s much promised transformation plans. The desire to extinguish net neutrality does not arise from worries about incidental use.

The Bell companies need to stop the neutral Internet from erasing the legacy telephone network’s voice revenues. Price discrimination enables metering of Internet access by keeping per bit price of low bandwidth voice relatively high while offering relatively lower per bit prices to initiate a video revenue stream. Net neutrality stands in the way of their becoming digital economy toll collectors.

Daniel Berninger is a senior analyst at at Tier1 Research.

  1. sorry , I got to disagree that we need to ”protect” the RBOC’s…consumers are VOTING with their pocketbooks and CABLE is going to CRUSH RBOC’s…while Verizon touts its FIBER to the Home, CABLE is signing up Customers left and right…RBOC’s had their chance but decided to hire lawyers and let the courts protect them with thier Utility Monopoly positions…SBC buying ATT and BLS is just rearranging the deck chairs on the TITANTIC…Cable Triple Play is the voting machine of the Consumers and CABLE is winning bigtime as Voice is bundled by CABLES…Cablevision numbers of 137% Voice Growth is good example of let the markets determine the Winners and Losers! Level3 carries 13 of 14 largest CABLES! Consumers DEMAND Cable Video on Demand…YouTube, MySpace, Flickr…the RBOC’s knew this was coming and decided to circle the WAGONS and ignore the Video Gattling Gun!

  2. I wonder if the telcos would be willing to accept the liability loss of common carrier status would result in if they either drop net neutrality entirely or create a privileged class of traffic. They have been able to use common carrier status to avoid being held accountable for various ills of the internet. If they treat MySpace as a privileged traffic generator, do they then have to ensure that their under-age customers are protected from whatever the trendy danger d’jour is?

  3. A couple of thoughts arise from this:
    – how did the common carrier requirements for voice translate into common carrier requirements for data? I know it’s the same physical infrastructure but it’s a different service. If changes to USF do translate into subsidies for broadband services than the argument by net neutrality advocates strengthens.
    – I’m not sure what Daniel means when he writes “Cable companies do not enjoy the same no cost access to right-of-way and pay franchise fees”. To the best of my knowledge the telcos pay property taxes and are also taxed at the state and federal level. Deploying infrastructure also costs money, even if the initial right-of-way access comes free. In any case, wireless services enjoy access to the customer without a built-out plant past every home or business.
    – “doubled the price of local service since 1984″. That’s because long-distance was subsidizing local service. One that cross-subsidization was removed the local service prices more accurately reflected costs.


  4. Net neutrality seems to be a type of common carriage regulation. But it is not a type that U.S. regulators have ever required. Neither cable, the RBOCs nor any other U.S. ISPs have ever been obligated to treat all packets to or from the Internet in a non-discriminatory manner. Previously, the RBOCs were required to sell a layer 2 access service on a common carriage basis. Now they are not required to do so. This has nothing directly to do with net neutrality.

    Contrary to what Daniel has said, the FCC’s decision to treat DSL bundled with Internet access as an information service has no impact on the telcos’ rights to access public rights of way. The telcos do not access those rights of way to provide only one service. They continue to provide a host of common carrier services over the same network infrastructure on which they also provide high-speed internet access. Even in states that condition access to public rights of way on providing common carrier services, the telcos will continue to be entitled to such access. Only in the unlikely event that they cease providing all common carrier services, will their rights to access public rights of way under existing statutes be in danger.

  5. “Deploying infrastructure also costs money, even if the initial right-of-way access comes free.”

    You are correct sir, but you seem to forget that we (the US tax payers) also paid for the deployment of all that copper over the last 50 years through subsidies & tax breaks. Ma Bell was only out of pocket for pennies on the dollar that was spent.

    The bells have had a long history of getting a free ride (well, better than free really.) We have paid them to build an infrastructure (including infrastructure that has long since been paid for, and has never been built), and continue to pay them for the privilige of using what we paid for. Hell, even if you dont use it, if you are a US taxpayer, you are still paying for it.

    Time to get the baby bells off the tit…

  6. No one is disputing that telephone users all around the country have been helping to subsidize the deployment of copper. Over the decades the general social consensus has been that all citizens, whether in NYC or rural Montana, should have affordable access to dial-tone. And it’s not been tax payers, it’s been telephone subscribers, both residential and business, that have generated the funds for the subsidies. The tax breaks aspect of things I am admittedly not up to speed on.

    And let’s not confuse the subsidies from USF & inter-carrier compensation, common carriage requirements, and access to right-of-way with internet neutrality. Do common carriage requirements for POTS and layer-2 translate into equal access obligations on the layer 3 and up side? If so, I think the argument needs to be made a bit more pointedly with an explanation on how to level the playing field with the MSOs, who have no common carriage requirement (though they minimal build-out requirements, much less than telcos).


  7. Jesse Kopelman Tuesday, May 9, 2006

    POTS is a service, hence the S, not the physical lines themselves. However, it is the physical lines that rely on the right of ways. Either you provide nondiscriminatory access to the physical lines (for any purpose) or you should lose your free access to the right of ways. Simple enough choice for the Bells; start paying for your right of ways or provide nondiscriminatory access to your physical network. Higher layers cannot be considered separately from Layer 2 and Layer 1, as routing effects which parts of the physical network you have access to and is thus discriminatory unless done on a neutral basis.

  8. Patrick Mullen Tuesday, May 9, 2006

    Get off it, if you revoke free access to right of ways, how many providers will be offering service in rual areas? I know its trendy to live in NYC or San Francisco and know that you have many options, but great parts of the country are not attractive markets for service, and without incentives, these areas would not have any service.

  9. For the record, cableco’s were the pioneers of ‘traffic shaping’, not the RBOCs. Instead of talking about Net Neutrality, they went ahead and deployed the technology to ‘manage’ incoming and outgoing traffic.

  10. I think the issue is not whether we want net neutrality. Ultimately, we can decide that with our pocketbooks. Rather, for me, the question is whether I want government to decide winners and losers in this debate. That is a dangerous precedent to establish for an industry that has thrived primarily without regulatory intervention.


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