Could new broadband reforms lead to a "fast lane" for Google and Yahoo?

Posted by Scott M. Fulton, III

Washington (DC) - In as little as two years' time, your broadband Internet service could change, perhaps dramatically, as you may be asked - some would say forced - to make new choices. Depending on those choices, some of the very fabric of the Internet itself could be redefined as well, depending on the outcome of a debate in the US Congress, which entered a new phase on 30 March.

"The more people learn about this, the more they'll understand we're heading toward a system of informational apartheid," Rep. Edward J. Markey (D - Mass.) told The San Francisco Chronicle yesterday.

Lawmakers on both sides of the debate claim to have consumers' interests at heart - innovated services, expanded reach, and lower rates. But the process that lawmakers entered into last week amounts to nothing less than open-heart surgery for the nation's Internet service, with the argument centering around how best to proceed, with the outcome of the procedure entirely uncertain, and with the fate of a multi-billion-dollar annual industry resting in their hands.

The event which triggered this debate last week was the formal trashing of bipartisan telecom reform legislation in the House of Representatives, and the introduction of a replacement bill by Joe Barton (R - Texas), chairman of the House Energy and Commerce Committee. Under the system that the new bill proposes, cable broadband Internet service providers - those whose services are used by consumers through cable modems - could obtain national franchises through the Federal Communications Commission, that would apply to any locality anywhere in the nation. Today, cable service providers (CATV) obtain local licenses to provide service to individual areas and municipalities - in some states, as small as square blocks and neighborhoods, though other states such as Texas have permitted statewide licenses. These state and local governments would be forced to recognize these national franchisees as their competitors, and make way for them in current cable lines regulated by municipalities.

[This bill gives] a green light...to a practice that I fear will undermine the openness and the accessibility of the Internet.

Rep. Rick Boucher
(D - Virginia)

 

Last week, TG Daily explored one possible outcome of this legislation: the ironic re-creation of a service tier for local- and long-distance "land line" voice communication nationwide, not seen since the 1984 breakup of the Bell System. But there's another possible outcome of the very same legislation, which analysts and others have made clear to us, and which could come about depending on the outcome of committee markup sessions this week, and in the weeks of debate to come: Current broadband service providers, such as Comcast, Time Warner Cable, and Cox Communications, with lesser investments in existing land lines, could be compelled to partner with Internet content companies such as Google and Yahoo, to provide co-branded service akin to the AT&T Yahoo DSL service available today in many areas. To make such partnerships rewarding to the content companies, CATV providers could enable "fast lane" access - otherwise known as "preferential treatment" - to Web sites and services offered by those content providers.

"The major shortcoming of the measure," said Rep. Rick Boucher (D - Virginia), an opponent of the Barton bill, in his opening remarks to the House Subcommittee on Telecommunications and the Internet last week, "is the green light that it gives to a practice that I fear will undermine the openness and the accessibility of the Internet - qualities that have made the Internet a major driving force in the nation's economy. Some last-mile broadband providers have announced an intention to create a fast lane into the home for content providers who will provide them for fast-lane access, and a slow lane for everyone else. In addition to limiting customer choice, I'm deeply concerned that this two-lane plan will have a dramatic adverse effect on innovation." Small content providers, such as Google once was, would not be able to pay the fees to service providers that would enable them to compete with fast-lane providers on the same level, Rep. Boucher argued.

What could make matters worse, Boucher continued, is if fast-lane measures are passed through early legislation, creating a business model that, once established, would be too difficult for successive legislation to undo. "Experience teaches us that, when companies begin deriving revenues from a business model," he remarked, "it is exceedingly difficult to outlaw that model. This is not something we're going to be able to take back. If we do nothing today, and five years from now, innovation has suffered, and last-mile providers are deriving revenues from this new business plan of a two-lane Internet - a fast lane and a slow lane - it's going to be too late to make repairs."

Deepa Iyer, an IPTV analyst with Parks Associates who followed last week's proceedings, believes in a kind of trickle-down theory with respect to costs. If content providers end up paying service providers for fast-lane access, she told TG Daily, those costs have to be distributed somewhere...and there's generally one group who qualifies as the "somewhere." While on the one hand, she said, the Barton bill creates "equal opportunity for the cable operators and the telecom operators to compete [head-on] for all these advanced services," she said, "on the other hand, I think by creating these tiered-type Internets, it's the consumer who is going to lose in the end. They have to pay for all the premiums that would be charged by these incumbents to all these small players who want to offer services over the Internet."

There's a completely different school of thought which says that large Internet content providers could conceivably subsidize broadband Internet, and in so doing, lower rates for consumers, the way cell phone carriers reduce the cost of phones for their customers. Already, the existing CATV providers - called the incumbents - continue to lose money, by continuing to charge customers far less than what they've actually invested in installing and rolling out lines, services, and technologies. But they made these investments happily, believing that the current locally-oriented franchising system would ensure, in most cases, limited monopoly coverage areas for cable broadband service. So in most of the country, each incumbent CATV broadband provider competes with DSL and satellite, both of whose technologies are generally perceived as slower.


A basic and premium logo program...for the Internet

As the Barton bill currently reads, incumbent local franchise holders would be forced, by law, to make way for competition in the form of national franchisees. Incumbents could relinquish their local franchises and apply for national ones instead, but only if another competitor is willing to share the market, either on the local or national level. For the incumbents to stay competitive in markets where their unimpeded presence is no longer ensured, they may see content provider subsidies as the only way to reap benefits from the investments they've already made. To make it worth the content providers' efforts, incumbents may pave the way for "preferred services," with guaranteed speed and QoS boosts, to be provided through special links in the incumbents' software...and you see where this is going.

American consumers will get an array of services and choices that were unimagined just a few years ago.

Rep. Joe Barton
(R - Texas)

 

Some point to the example of premium pay-TV services, such as HBO and Showtime, as examples of business models that either could conceivably be applied to broadband Internet. In such a case, "fast lane" access could conceivably be auctioned off by incumbents, and would probably, inevitably, fall to the larger content providers. While these providers' up-front investments would subsidize fast lanes, the incumbents themselves could impose measures that distinguish between "basic" and "premium" broadband Internet service, not just in terms of download speed but content and functionality as well.

In presenting his bill before the House Subcommittee, Rep. Barton remarked that the committee print then under discussion "offers an alternative, streamlined national franchise process. This will help expedite competitive cable entry, thereby promoting the deployment of advanced broadband networks that can offer new and exiting broadband video, voice, and data services."

The Barton bill would accomplish this goal by striking the language of the previous telecom reform bill, which would have created a new class of service provider dedicated to what it called Broadband Internet Transmission Service (BITS). A BITS provider could be a CATV provider, or a completely different kind of digital broadband provider altogether; and the national franchising system the prior bill proposed would have applied to BITS providers separately.

Referring to that previous draft, Rep. Barton stated, "Previous attempts at increasing innovation choice and lowering prices for consumers have focused on promoting competition within individual sectors of the communications industry. Time has shown, however, that the best way to promote competition and innovation is to encourage the deployment of advanced, facilities-based networks in competition across sectors. The right approach is going to invigorate the technical sector to produce jobs, growth, and opportunity for all of America. American consumers will get an array of services and choices that were unimagined just a few years ago."

In place of the BITS category of service providers, national franchises would be granted to what the Barton bill clearly identifies as "cable operators," relying on language of the existing Telecommunications Act of 1996. Although the new bill would, in almost everyone's opinion - including its own authors - redefine Internet service in the US, the first draft of the committee print only contains the word "Internet" three times in 34 pages.

So the key to the wide acceptance of this bill among lawmakers is whether they accept the notion of broadband service providers necessarily being "cable operators." Satellite and DSL providers would certainly disagree. But the notion of federalizing the franchising system for telecommunications is very popular among both Republicans and Democrats, and many would argue that the simplest and easiest way to accomplish this on a nationwide scale is simply by amending the current context of telecom service rather than replacing it altogether with a whole new acronym.

"Cable service is interstate in nature, as the Supreme Court has long recognized," Rep. Barton noted. "Most video programming carried on cable systems is produced by national networks, and distributed across state lines to a national audience. Cable systems are also carrying increasing amounts of Internet-based video, voice, and data services across state, as well as national, borders. Today, there are thousands of local franchising authorities, and each imposing disparate restrictions on the provision of cable services in its particular franchising area. The requirement to negotiate such local franchises, and the patchwork of obligations local franchising authorities impose, are hindering the deployment of advanced broadband networks that will bring increasingly innovative and competitive services to the consumers."

If companies like Google and Yahoo are willing to pay a premium to these incumbents...they're going to pay, and they're going to get a good response.

Deepa Iyer
IPTV analyst, Parks Associates

 

But just how innovative would these services be, opponents of the bill are asking, if cable operators are given exclusive authority to arbitrate just what those services are? "The owners of the broadband wires into our homes," argued Rep. Edward J. Markey (D - Mass.), ranking member of the Subcommittee, "want to artificially constrain the supply of Internet-based content and services to high-bandwidth consumers. This represents nothing more than the imposition of a broadband bottleneck tax on electronic commerce. Such a bottleneck tax for accessing consumers will undoubtedly have a chilling effect on investments and innovation.

"There are some out there who will inevitably ask the question, 'But why shouldn't Google pay?'" Rep. Markey continued. "Google certainly has a very large market cap, and presumably could afford to pay. But that is precisely the wrong question to ask. The question to ask is whether [Google founders] Larry Page and Sergei Brin could have afforded to pay around 1998; whether 'chief Yahoo' Jerry Yang could have afforded to pay a broadband behemoth around 1995; whether Mark Andreesen, the founder of Netscape, could have afforded to pay anyone anything around 1994. If there is an entrepreneur in some proverbial garage, somewhere today, whose idea is new, whose product is still in beta, their dreams are just as real and valid as Sergei's and Larry's and Jerry's and Mark's were an Internet generation ago."

Deepa Iyer believes Google might not have paid cable operators a premium fee in 1998, but they certainly would today. "If companies like Google and Yahoo are willing to pay a premium to these incumbents to get their services in front of consumers, they're going to pay that money," she told us, "and they're going to get a good response because Yahoo and Google have a good impact on consumers. They have a good brand presence, and they're going to come up with good services, and consumers are going to like them." As a result, a totally new market could come to fruition, with a premium tier and a basic tier, not unlike Windows Vista. When that market comes about, Iyer said, "[It won't] just be the incumbents offering these advanced services.

"But now, the question arises, what about these small, emerging companies that will want to come up with some kind of innovative offering to consumers?" Iyer continued. "It's those kinds of companies that are going to suffer."

With the current Republican US President's job approval rating at 35-37% in most polls, even Republicans in Congress are finding it easier to express some skepticism, even if it's guarded. Rep. Cliff Stearns (R - Florida) politely asked, once the current distribution lines for digital video are opened up to national competition, "Should other people have a right to offer voice, video, and data applications over these, and how do you work out that interconnection?" Referring to the obvious changes in the Barton bill's language, Rep. Stearns added, "Given the recent FCC decisions, and the ongoing debate over what constitutes an information service or telecom service, I want to ensure all parties have an opportunity to compete."


Who, in the end, has the right of way?

"A title of this hearing might be, 'A Funny Thing Happened on the Way to the Forum,'" quipped Rep. John Dingell (D - Michigan) last week. "We were well on the road to achieving a bill which could have had broad bipartisan support, could have addressed in a real way the concerns of the American people, had allowed the Bells [AT&T, Verizon, and Qwest] to enter into a national franchise, and to have achieved it in a way which would not only have been fair to American consumers, but which could have been broadly accepted throughout the industry [and] had support of members on both sides. It's interesting to note how close we were. Then all of a sudden, the wheels came off, and all of the lashings wrapped around the axle, and everything stopped."

The key problem which almost every lawmaker agrees must be solved, is the inherent incompatibility between the technological model of the Internet and the legal model of utilities regulation. Rep. Charles Pickering (R - Miss.) summed up the issue last week with these words: "When you are now talking about IP applications, it does not make sense to have a patchwork of thousands of localities, and 50 states, [each] regulating video in a different way."

Cable providers would be eligible to participate in the streamlined system, once they faced local competition.

Rep. Bobby L. Rush
(D - Illinois)

 

On the surface, the development of a national franchising system seems like the optimum solution, a way for the territorial boundaries of the broadband Internet to follow along with its technological boundlessness. But such a characterization often assumes that the Internet is an organic entity unto itself, whose nature is to expand like the flow of water or the free flow of information. Opponents are cautioning that the Internet will always be based on business models, and that its evolution, like the flow of water in a river, will always be toward the least path of resistance to the greatest body...of revenue.

"By failing to include a buildout provision to ensure service-area parity between a Bell company entering a franchise area and the incumbent cable operator," explained Rep. Ed Markey (D - Mass.) last week, "the [Barton] bill allows a national franchisee to use public rights of way in a community, but serve only select neighborhoods within that community. One does not need a business degree to have a hunch that they will focus deployment on the 30% of the town that has 70% of the revenue potential."

As the bill is currently written, there is nothing which mandates that a national franchisee must cover the entire nation, or that specifies which parts of the nation franchisees must be certain to cover. Such an omission could conceivably enable franchisees to pick and choose the areas they wish to serve...in a manner similar to the way national candidates pick and choose the cities they campaign in. "Under the proposal," explained Markey, "an incumbent cable operator may...seek a national franchise after the phone company arrives in a franchise area, even if the phone company is serving just one household in the franchise area. The lack of a service area requirement at the national level then means that the incumbent cable operator no longer has to serve the entire franchise area."

Markey foresees a situation where a local franchisee, currently bound