Monday, August 07, 2006

Network Neutrality: AT&T, Verizon have failed this test before

Much like a decade ago, telecommunications reform legislation will await the new Congress that will be elected in the fall elections.

I've been involved in telecommunications issues for just about the entire decade since the passage of the Telecommunications Act of 1996. That act is a near-classic example of the law of unintended consequences, as well, as the ability of powerful corporations to bend the law to their will over time when they are committed to a strategy.

The Telecommunications Act of 1996 had as its intent the unleashing of competitive forces in the telecommunications industry. When it became law, the Internet was not widely used although it had crossed its tipping point and was well on its way to widespread adoption and use. Reed Hundt, who was FCC Chairman during the period when the bill was in its formative stages and finally became law, wrote a book about that era that is at once enlightening and familiar.

The fact that telecommunications reform is on the table again is at least partially the result of the phone and cable companies so successfully turning that attempt to promote competition into a law that instead secured their place as dual controllers of network access, that is, duopolists. As a result, network innovation has been stifled, prices for network access and services remain artificially high, and America has fallen from the global lead in broadband access to somewhere in the teens back in the pack.

With Republicans in control of both houses of Congress, it should come as no surprise that the bills that promise 'reform' actually constitute a spanking new round of corporate giveaways, this time to the phone giants AT&T and Verizon. One sticking point that appears to have prevented these bad pieces of legislation from becoming law has been the issue of network neutrality.

The fire storm was set off by AT&T Chairman Ed Whitacre when he said his company was going to charge companies who used AT&T's network a premium if they wanted their content to get preferential treatment. Whitacre's proposal would put control of consumer's Internet experience under the control of the network operator from which they bought their network services.

This issue had actually be bubbling in the background for a number of years as companies toyed with the idea of creating branded Internet appliances that only happened to work with their networks. I recall that at a community networking conference in Austin in 2000 that Gary Chapman of UT-Austin said that was one of his concerns about the course the Internet was taking as the broadband era emerged. Not surprisingly, SBC was the main phone company in Austin, Ed Whitacre was the CEO and the company was advertising a kitchen-top device as a dream appliance that would find utility on its new broadband network. SBC became AT&T in 2005 when it bought the former Ma Bell.

And while there have been all kinds of arguments laid our for and against the need for network neutrality legislation, one point that seems to have been missed is that the phone companies have had this test before and failed it miserably.

The test that they failed but that they claim they will pass this time is whether they can fairly run networks that are open to other providers that they intend to compete against. That is, can AT&T, Verizon and other network owners act as both wholesale network access sellers and network retail service providers. Their histories say that they cannot.

The philosophy that undergirds opposition to network neutrality legislation is that network owners (AT&T, Verizon and others) can abide by and meet the terms and conditions of the business arrangements they would make with content providers against which they would compete in the market place. That is, AT&T would enter into a contractual relationship with, say, Google to provide priority treatment for network packets carrying Google traffic.

As long as those packets contain, say, search results, the contract should be uncontroversial. Ah, but what if Google steps more boldly into video? What if Google created a movie and/or program download service that became hugely popular to the point that it was reducing viewing of cable offerings that were being carried over AT&T's Project Lightspeed fiber network? Would AT&T agree to those contractual terms at the expense of cannibalizing the revenues from its own IPTV service?

We have direct evidence that it would not abide by the terms of the contract and that evidence comes from the record of the Regional Bell Operating Companies (RBOCs) actions to drive the Competitive Local Exchange Companies (CLECs) off their networks and out of business.

The Telecommunications Act of 1996 set up a mechanism which was intended to create a means for service providers to compensate each other for allowing their respective customers to access those on other networks. It was called Reciprocal Compensation. The RBOCs (including the companies that will soon comprise AT&T: SBC, BellSouth, Pacific Telesys and Ameritech) agreed to this language, expecting full well that since they had all the customers, the CLECs would pay them money to connect their small based of customers to the RBOC customers.

The CLECs, who were sold access to RBOC networks on a wholesale basis, happened to become home to a lot of dial-up Internet Service Providers just as Internet usage was exploding. As a result, Reciprocal Compensation dollars were reversed; that is, the RBOCs owed the CLECs money because so many of their customers were making calls to local ISP numbers in order to gain access to the Internet.

Confronted with this reversal of revenues and the potential loss of still more, RBOCs began withholding Reciprocal Compensation payments from CLECs, thereby depriving the CLECs of critical revenue and then citing the CLEC's resulting inability to pay for network access as the basis to shut them out of the network.

This was a case where the RBOCs were network wholesale access providers. The CLECs were competing with the retail service provider side of the RBOCs. When the competition began to erode the networks on the retail side, the RBOCs moved to undermine access on the wholesale side.

With their network ownership secured through predatory practices sanctioned by Republican control of the Congress and the FCC, AT&T and Verizon would now have consumers and content providers believe that they will now reform their behavior and honor business deals with content providers even when the results of those deals endanger the business models that they've bet their respective fortunes on.

They couldn't do it less than a decade ago when the stakes were lower and their network investments were smaller.

These companies, their predecessors and their allies have poured millions of dollars into lobbying and political action committees (PACs) to convince regulators, the Congress and the public that all they are interested in is the ability to operate like the free-marketeers they claim to be.

The history of these companies tells another story. That story is that they cannot respond in an ethical way to the contradictory forces that work upon them when they assume the role of network owner and service content provider. Their history is that when the revenues from their retail operations are threatened (in the new era it will be video services), they turn to eliminate the threat (in the new era it will be in the form of Internet-based video providers like Google, or Apple, or YouTube, or DemocracyTV, etc.

The surest way to do that is to do what they did to the CLECs: remove those threats by denying them access to their networks.

So, network neutrality is not a philosophical discussion about some free enterprise fantasy land conjured up by the phone companies; it is a real world response to the anti-competitive instincts of companies that believe they can get their way if only they throw enough money at enough members of Congress. When Republicans control Congress this plan has succeeded more than it has failed, at the expense of American consumers and small businesses.

To bring the national down to the local level, Charles Boustany and the entire Louisiana delegation voted against network neutrality legislation in the current Congressional term.

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