FCC and internet regulation: “lobbyists on both sides are already shopping for new vacation houses in Aspen”

Michael Giberson

From Regulation 2.0:

Frustrated by a federal appeals court ruling that the FCC had no authority to second-guess Comcast’s treatment of customers and under pressure from the Obama Administration to impose a net neutrality regime (whatever that truly means) on the broadband industry, FCC Chair Julius Genachowski is now asserting the commission’s right to regulate Internet access providers under the ancient rules that govern telephone landlines.

We don’t know whether Congress will let the FCC get away with it – lobbyists on both sides are already shopping for new vacation houses in Aspen — or what the commission would actually do with the authority if it wins the political battle.   But we do know this is very bad news for those who fear that the uncertainty will slow both the expansion of Internet capacity and the pace of innovation.

Links in original, of which this is just an excerpt. The whole thing is short; read it to see why “the specifics of this issue make it especially troubling.”

Some economics of cable content bundling

Lynne Kiesling

Jim Surowiecki has a New Yorker column on cable bundling that does a good job of explaining some of the reasons why bundling benefits all interested parties in the transaction — the cable provider, the content provider, and the consumer. His analysis provides several examples of comparing a policy with the most likely counterfactual, as in this discussion of a la carte pricing:

So consumer advocates have been pushing for a system of so-called “à la carte” programming, expecting that this would drive down prices for consumers.

In fact, it probably wouldn’t. The simple argument for unbundling is: “If I pay sixty dollars for a hundred channels, I’d pay a fraction of that for sixteen channels.” But that’s not how à-la-carte pricing would work. Instead, the prices for individual channels would soar, and the providers, who wouldn’t be facing any more competition than before, would tweak prices, perhaps on a customer-by-customer basis, to maintain their revenue.

He then points out two consumer-focused reasons why the demand for a la carte options has never been sufficient to bring them to market. First, it’s very common for people to prefer bundles because they reduce transactions costs and search costs; second, bundles create option value for consumers (I don’t care about watching that channel right now, but I might in the future, so there’s a value to having it).

The appeal of bundling is partly that it reduces transaction costs: instead of having to figure out how much each part of a package is worth to you, you can make a blanket judgment. Bundling eliminates the problem of fretting about small expenditures, which may be one reason that flat-rate pricing is very common in the vacation industry (cruise ships, all-inclusive travel packages, and so on). It also offers what economists call option value: you may never watch those sixty other channels, but the fact that you could if you wanted to is worth something. Many consumers also perceive bundles as bargains; getting a bunch of things for one price feels like a deal, even when it’s not.

But in this era of disintermediation and ease of streaming TV and video, isn’t that likely to push consumers to want more a la carte options? Sure, and that’s why he argues that it is in the interest of cable providers and content providers to avoid the short-term profit-motivated bickering over fees (such as that between Scripps/HGTV-Feed Network and Cablevision) so they can maintain the long-term benefit of consumers who are interested in bundled goods.

Perennial gale of creative destruction, personal wireless division

Lynne Kiesling

Even if it doesn’t end up being the disruptive innovation that these articles suggest, Verizon’s MiFI personal wifi hotspot device makes my little Schumpeterian heart go pitter-pat. Released yesterday, the Verizon MiFi (device by Novatel) is a credit-card sized 3G wireless router that can provide wireless Internet connection for up to 5 devices. Battery powered, 4 hours of service when not plugged in, reviews suggest that it’s interoperable and easy to set up. Good reviews of the product are at Engadget Mobile and the New York Times.

There are two aspects to the potential commercial success of this product: the technical features of the device, and the service contract under which Verizon is willing to offer it. For now Verizon is offering it at two different capacity levels (250 MB and 5GB per month), and pricing it at somewhat more than contracts for other air card wireless services.

But for my part Derek Thompson at the Atlantic made what is the most intellectually interesting point in this new development:

It could signal the end of cell phones.

That’s a big statement, so let’s back up a second. Three weeks ago, I cited an argument that VoIP (“voice over internet protocol”) could replace cell phones because dialing over the internet is much cheaper than dialing through a national cell phone network. The problem was, if you need the Internet to make calls, you’re going rely on Cosi shops and other hotspots for service. Three weeks ago, you couldn’t live in a permanent wifi cloud. Two weeks from now, you can.

That means that you won’t need a cell phone — or at least a cell phone plan. As long as you have a device with a speaker and audio that can connect to the Internet, like an iPod Touch, you can use Skype to make all your calls because the service provider (the Internet) is always in your pocket. Verizon plans to charge $40 a month for basic service. Not a bad deal for all-you-can-eat browsing and calling over the Internet.

It’s interesting to think about whether or not Verizon’s got a long-run strategy here relating to whether or not this kind of device will make their mobile phone business obsolete. I don’t have a particular answer, but raising the question is important. One potential future path involves the growth of their MiFi contracts while their phone contracts fall, implying that the MiFi and the phone are substitutes. Another potential future path would be if their MiFi contracts grow while they sell devices for browsing and calling over the Internet; in this case their phone business could morph into a device business. And I’m sure there are other options beyond my imagination.

But here’s why I think that Verizon possibly sowing the seeds of their own creative destruction is interesting — the convergence of all different communication platforms to the Internet. Over the past 25 years we’ve been moving from an analog telephony platform based on copper wires to a combination of wires/wireless digital telephony separate from the Internet, and now we may be seeing the beginning of the convergence of our formerly separate communication platforms into an Internet-based digital platform. Verizon has been installing fiber optic cable for digital backbone and for consumer applications (such as their FIOS offerings in the mid-Atlantic). Thus I see Verizon’s long-term strategy as one based on their investment in fiber optic to create a single digital communication platform using Internet protocol, on which voice becomes just another application.

So if they are sowing the seeds of the creative destruction of their mobile phone business, I think it’s because they’ve already got another business model in their sights, in which their phone business transitions over to being another application on their fiber optic platform.

So We’re Finally Done Paying for the Spanish-American War!

Lynne Kiesling

I’ve been complaining about this for so long, what will I do with myself … ? The long-reviled excise tax to pay for the Spanish-American War will finally be eliminated:

The Treasury Department, conceding that it has no right to continue collecting a 108-year-old tax on long-distance telephone calls, announced yesterday that it will drop its legal battle for the tax and instead refund about $13 billion to callers who have paid the tax in the past three years.

The 3 percent tax, enacted in 1898 to help pay for the Spanish-American War and revised in 1965, has been declared illegal by five federal courts of appeal during the past year as the result of challenges brought by companies forced to pay it.

Gee, I wonder how much taxpayer money the Treasury Department has spent in legal and court prep time for those five challenges. Any chance we can get that back? Naaah, didn’t think so.