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Why Even Bells Need Net Neutrality

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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.

25 Responses to “Why Even Bells Need Net Neutrality”

  1. sagecast

    Readers of this comment thread should know that lessgov and pkp646 look to be part of a tag-team of industry shills who invade blog comments on net neutrality to argue against any government regulation of the Internet. Other names who run with this crowd are Paulaner01, John Rice, AJ Carey and oldhats. (Google any of these names in combination and you’ll see how their game works).

    By tag-teaming the blogs this small handful of individuals gives the false impression of broad popular support for an industry-friendly position.

    What they fail to point out is that Net Neutrality has been the rule that has governed access to the Internet since its inception. It’s the reason that the Internet has become such a dynamic force for new ideas, economic innovation and free speech. What they really want is for Congress to radically re-write our telecommunications laws so that companies like AT&T, Verizon and BellSouth can swoop in and become gatekeepers to Internet content — in a way that benefits no one except the largest ISPs.

    I’d like these people to tell us how it is that they appear together (usually one after the other) spouting identical industry talking points across the blogosphere.

    What gives fellas? Are you being paid? And by whom?

  2. Stevens33

    I know most of this post is on Net Neutrality, but what caught my attention was the section about cable franchises. I loathe cable franchises. They are terrible for the consumer as they are simple and true monopolies. Franchises only hurt consumers by preventing competition and degrading innovation in quality and content.

  3. pkp646

    I hope that I am not the only one who thinks that government involvement in the internet is a bad idea. Who thinks that regulation without direction is a good idea? Regulating the internet would open a huge can of worms.

  4. Peanut,

    Limiting “pipes” in areas with no competition makes
    complete sense.

    People will pay what the market will bear and the market
    may bear a whole lot more if only those that can afford
    to pay premium rates are connected.

    I believe there is a point in economics speak called
    diminishing returns…

    Of course those do not occur until some competition show
    up to kill off the “first to market” profits (monopoly
    profits), which should, in theory draw competitors.

    But we are essentially dealing with social & political
    issues as much as business issues in the “telecom”
    space. Telecom and internet are looking more and
    more the same…a “pipe” to the world.

  5. The BOCs’ ISP operation are not common carriers, never
    were, never will be (based on the BrandX ruling).

    The same arguments that we are making now were
    made at the outset of the ATT system…how many
    wires do you want running across town that refuse
    to connect to each other?

    On the other hand, wireless has an opportunity here,
    with the exception that the bulk of the wireless spectrum
    is owned by the BOCs.

    CableCos aren’t a saving grace. Right of Way fees are
    simply passed along by municipality (no common carriage
    rate averaging requirements here, no siree).

    Even our saviours, the VOIP players, pass along “regulatory
    fees”, trust the accountants, they will only pass along
    the fictitious fees as they determine them.

    Now let’s play with Video over the Net. The telco’s
    don’t like voice priced for “free”, but they wouldn’t
    mind the 25 bucks a month for “voice over ip – best
    effort” Get rid of Level 3 and Global in the Recip
    Comp space and get rid of Dial Up competitors in
    the bargain. Once they can stamp that out, it’s on to

    Video…no, it won’t the internet. Why surf the net
    and watch on the computer…it needs to be in the
    set top where we can click through 87 channels
    to find the one non-ad-infested show that is available..
    and that will likely be in the last 3 minutes of it.

    If we go the internet route for video on demand,
    the BOCs have stated their position…you want
    delivery…pay for QoS. How many web servers really
    have the bandwith to do streaming video without
    remote servers or hosted streaming (ahem..cached
    web content).

    And does anyone believe VOD over the internet will
    fly with the Cable Cos?

    Or do we all secretly hope that we have two major
    dumb pipe providers to the net?

    Last I recall, 3 major long distances companies killed
    themselves (2 of them always pricing a scant bit below

    Wireless as a strategy in a business plan will be a niche.
    As long as the wireless spectrum is free, it won’t be viable.
    If I recall correctly, big money is fighting small money
    when it comes to providing “free” Wireless internet,
    particularly airports/airlines.

    No competition, free spectrum works. In a dispute, it results
    in the same problem as multiple companies stringing wires,
    with the benefit that we can’t “see” the mess, but the same
    deficiency, useless.

    I wish I was as optimistic as many others.

    It is however an excellent time to ride the
    “web 2.0” bandwagon and sell out to the Cable
    or Telco folks (or one of our favorite big 3 portals).

    Yahoo is in Bed?
    MSN is in Bed ?
    How long until Google jumps in Bed?

    Which telco? Or Cable Co?

    Reminds me of the old adage…
    Democrat, Republican
    Same Shit, Different Constitution

    Yeesh, Usenet, Gopher and FTP used to be just
    fine once Archie and Veronica appeared.

    It all seems sorta the same but more clicks, passwords
    and ads…!

    In the meantime…cheaper internet access ;)

    As I look at the Ad below, there is irony…
    Verizon DSL 14.95, Vonage 24.95


    Long term … Unsustainable

    Am I missing something?

  6. Patrick Mullen

    Jesse, I can’t imagine limiting the value of those pipes in rural areas would encourage providers to offer service in rural areas.

    I say let the providers do what they want, open it up and let the fight begin. Grant national franchises, free up unused wireless, encourage companies to step up to offer rival service.

  7. peanut

    I trust the market far more than I trust legislators who by and large don’t understand the internet as a medium or as an industry. I sure don’t want the college kids working in their garage on the next big thing to be stymied by burdensome and cumbersome regulations…

  8. watcher

    Competition is the key to network neutrality, not regulation. Do I trust ISPs to use their ‘powers’ altruistically? No. But I do expect them to protect their bottom line. The first ISP to worsen the Internet experience will find its customer going to another provider. Instead of handing control of the Internet to a bureaucracy, why not find ways to encourage more competition and let the market protect the net?

  9. Jesse Kopelman

    Patrick, how many operators are offering broadband service in those rural areas now? I’ve never heard of a telco being the first to offer broadband in an area. Their pattern has always been to only do so in response to cable. This why they are so far behind the cable companies in penetration despite DSL being a more mature technology than DOCSIS.

  10. pkp646

    Until there is a real and serious problem where someone is actually violating or planning on violating net neutrality I must insist that the issue stay far away from Congress.

  11. Not sure about NYC or San Francisco, but where I live, in Los Angeles, I have one realistic choice for landline service: AT&T. There are a few other choices I suppose – three other no-name companies that pay AT&T for access and thus charge what AT&T charges plus their own costs which makes the price at least 50% more expensive while offering less of a service. Is that your idea of “choice”? I can pay to use Vonage or Skype too, but I still have to pay AT&T for the phone line plus pay again for the DSL service so they get me either way. Alternativly, I can subscribe to Time Warner’s broadband cable for about the same price as a phone line plus DSL, but there again I have but one choice. No matter how you slice it, I have one choice… every other option I end up paying around double to have a choice, which isn’t much of a choice at all in my opinion. All because AT&T owns the only phone line that connects to my house. I find it ironic how people try to argue that phone companies are not a monopoly anymore just because now, if you choose, you can move to another city and have a different phone company be the only one that connects to your house. That’s choice? That’s competition?

  12. lessgov

    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.

  13. Potter

    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.

  14. Patrick Mullen

    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.

  15. Jesse Kopelman

    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.

  16. Frank Bulk

    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).


  17. Bryan

    “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…

  18. 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.

  19. Frank Bulk

    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.


  20. 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?

  21. 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!