[A2k] Berninger: Even Bells Need Net Neutrality

[Seth Johnson]

> http://gigaom.com/2006/05/09/why-even-bells-need-net-neutrality/

Why Even Bells Need Net Neutrality
Posted in Wired
By Daniel Berninger, VP, Senior Analyst, Tier1 Research,
dan@tier1research.com

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.