Net neutrality and Title II regulation of broadband

The Federal Communications Commission (FCC) voted 3-2 to regulate broadband internet yesterday (under Title II of the Communications Act of 1934). This move is being heralded as a big victory for the little guy. In reality, it is the victory of those with more political influence over those with less. In contrast to the way it is being portrayed, I see this as a loss for the little guy.

(Full disclosure: I and my clients own shares in companies that provide broadband internet).

Title II regulation gives the government sweeping powers to regulate broadband internet, which is the way people access the internet through their cable, copper or wireless connection. This is being portrayed as a benefit to consumers: so that there is no interference between the providers of online content and the users who want to see that content (a concept frequently referred to as net neutrality).

The fear has been that cable, DSL and cellphone companies would throttle and restrict access to the web in order to extract “a pound of flesh” from users and content providers. In this view, access to the internet is a public good granted by the government through franchise rights and wireless spectrum. As such, the government must intervene to protect users and content providers from mean-spirited content distributors

Content distributors have a right to their work and investment just as much as content producers and users. Buying cable franchises (that aren’t exclusive) and spectrum doesn’t bring broadband to our doors.  It takes massive investment in cables, people, equipment, digging, stringing poles, writing software, etc.). The stock and bond holders of those companies (which are mostly little guys) deserve a return on their investment just like everyone else. They should be able to determine how their assets are utilized as long as they aren’t violating anyone else’s rights. So far, they haven’t.

It is not content users that are crying foul and asking for government interference (except, perhaps, those selling pirated movies that don’t want to have to pay for their massive bandwidth usage). Instead it is content providers who don’t want to have to pay to access broadband distribution. It is Netflix and other broadband hogs which sometimes occupy 60% of broadband at a time that are crying foul and want government intervention, not users on the whole. 

This is a fight between big guys and big guys, not little guys, and the ones who can get the government on their side wins (the profits margins of content providers asking for Title II regulation are much higher than the content distributors, perhaps this is why they can gain more influence).

And, here, we can go back to a historical analog. The Federal Trade Commission (FTC) was created 101 years ago, partly to regulate railroads who were being accused of charging unfair rates. The complaints came mostly from businesses that didn’t want to have to pay so much for railroad service, not from consumers (sound familiar). 

The result was a labyrinthine regulatory structure that strangled the railroad industry in the United States for over 60 years. When railroads found it almost impossible to charge rates to justify investment in their railroad systems, the systems went into chronic disrepair. The railroad industry limped along for years under-investing in their tracks, engines and freight cars, thus killing passenger travel (which survives today only with government subsidies and regulation that forces railroad freight companies to let passenger trains use their track). Only recently, since the Staggers Act of 1980, has the railroad industry recovered, and one of the biggest reasons is that they can charge fees that justify investment.

Turning back to broadband, I believe the same thing will happen. At first, the regulation will be used as a light touch to nudge broadband providers to be “more fair” to users who complain loudest, or at least who have the most political influence. Over time, though, it will throttle investment in the industry, hurting the very content providers and users it is supposed to help (every phone and cable company I follow has said they will reduce their investment in broadband distribution if they can’t generate sufficient return).

To raise capital and build an industry, businesses need to be able to make money. As long as no one’s rights are being violated, the market best decides where assets should go and at what prices. In the absence of that productive situation, investment and progress will stagnate. In the long run, the little guy will be hurt most (but he won’t realize this, because he’ll never know what he could have had).

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Net neutrality and Title II regulation of broadband

The iPad is good–no GREAT!–for cable and phone companies.

I don’t own an Apple iPad, but I do own an iPod Touch, so I can well imagine how great the Apple iPad will be.

However, I strongly disagree with those who believe it’s the death-dell for cable and phone companies (full disclosure: I own Comcast and Verizon stock both for clients and myself). In fact, I believe the iPad, and other devices like it, will be a huge boon to phone and cable companies. Now, let me explain why.

First off, let me be clear: the iPhone, iPad and iPod Touch are revolutionary. If you’ve used any of these, you know what I’m talking about. Whether you use it to surf the net, play games, download apps, whatever, it’s amazing.

But, something new and amazing doesn’t necessarily mean the end of everything else. I don’t believe I’ll be eating dinner off an iPad in 5 years because plates will become obsolete (any more than I believed the Internet would change everything–EVERYTHING–10 years ago during the dot-com bubble).

Innovations are hard to predict, and their impact on other things is even more difficult to forecast. So, let’s all just take a deep breath…

Back to the subject at hand: I’ve read many articles over the past 5 years saying that cable and phone companies will go the way of the dodo because of Internet and wireless advances. Will cable and phone companies be impacted? You betcha! Will they become obsolete over night? No way. Is it possible they may adapt to this new landscape and thrive? Indeed, it is possible, maybe even likely.

I even read one article where the author claimed 50% of all video would be watched on phones. Perhaps that author knows something I don’t, but I’m having a hard time imagining a family watching a movie on a phone, or even the amazing iPad. I could be wrong…

The other problem I have with the “all land-lines are dead” vision of the future can be summed up in two words: reliable bandwidth. Does anyone really believe that wireless cell phones are currently capable of handling high-bandwidth video? Did dropped calls suddenly disappear and I didn’t get the memo? Will people really watch streaming video, like live sports, over such an unreliable service? At some point in time, yes, but not yet.

Let’s keep in mind, the phone company carrying iPhone can hardly handle people downloading apps and making phone calls, and somehow that same network is going to handle live sports videos? I’ll believe it when I see it. And, if I do, I doubt it will be within the next 3 years.

The iPad brilliantly illustrates my point. So far, it doesn’t work through cell phone coverage (although it will very soon). What does it work through? WiFi, or short range wireless. Which is connected to what? Oh, that’s right, a phone or cable line.

The secret to successful wireless technology is to get it on a land-line as soon as possible. Why? Because wireless is no where near as reliable and secure, nor does it have the same 2 way bandwidth, as wireline. And, guess what, that won’t change any time soon.

So, if you want to watch movies and live sports and downloads apps and whatnot, you’ll be doing it over a big fat land-line pipe. Guess who will provide that pipe? Phone and cable companies.

The usual reasoning I see from here is that cable and phone companies make their money with land-lines by selling us a bunch of channels we don’t want or need. Wrong.

Phone and cable companies have to pay an arm and a leg to buy content to put on their networks, and the margins they make on that business are much smaller than the margins they make bringing high bandwidth Internet access to your home or office.

When every home has 3 iPads, 4 wireless computers, movies sent to the TV over the Internet, etc., people will want higher bandwidth than 1.5 Mbps (Mega bits per second). They’ll want huge bandwidth. And, cable and phone companies will be happy to provide 50 Mbps, 100 Mbps, 1,000 Mbps! But, for a price. If people really want all that bandwidth, they’ll be happy to pay for it.

If the phone and cable companies were smart, they’d be more focused on bringing the highest bandwidth possible to the home and reducing their business expenses to the bone. That’s what they’re doing.

They know they can make more money with an all digital, high bandwidth network. They know that paying an arm and leg for content doesn’t make sense in the long run. They also know that many, if not most, of their customers will take several years to adapt to this new reality. They see the future, and probably better than I do.

The iPad is great for cable and phone companies because they can make more money selling customers high bandwidth Internet, and the best way to get there is to have millions of consumers realize they need more…More…MORE bandwidth to do what they want with their shiny new iPads.

I say, the more the merrier! Buy tons of iPads, use them to do everything you want over the net. But, realize, too, that you’ll be doing it all over a fat land-line, and that cable and phone companies will be bringing that to you.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.