A Single Pipe to Rule Them All

The FCC is now seeking comment on the transition from the legacy circuit switched voice network to a future all-IP network. This announcement is the beginning of a long and arduous process that will have profound financial and regulatory implications for, if history is any guide, the next 50-100 years.

The elephant in the room in any discussion of upgrading or replacing the old publicly switched telephone network (PSTN) to an IP network is Universal Service. Universal telephone service has long been a political sacred cow for the simple reason that running telephone cables to rural areas is expensive and under basic economic principles the cost could not be recovered at the price for service. The Universal Service Fund (USF) was established to compensate rural telephone companies for their costs. If you pay a phone bill, you pay into the USF in addition to your carrier. Rural telcos can then keep the prices down, at levels deemed acceptable by state public utilities commissions. Since most Senators and many Representatives have rural constituencies, messing with the USF is political kryptonite.

Since IP networks carry digital data which may be used for voice services (VoIP), but are not dedicated to telephone service they do not currently qualify for Universal Service where an existing voice circuit currently exists. When we hear of the need for Universal Broadband, this is why we don't have it. The economic costs are too high for the price and the internet isn't covered under the USF. However, many rural carriers are providing IP services to their customers at sustainable costs. They can do this by running fiber optic cable subsidized by the USF as a telephony service to homes where they are the local exchange carrier. They can then provide these homes with broadband internet over fiber optic cable at market prices without losing money. However, once the data network is in place, the homeowner can use an phone service they want, not necessarily the local providers. They pay the provider for the broadband only.

The end game here is twofold.

1) Because of both the politics and the fact that data can be anything - a phone call, a TV show, a web page - the USF provision will need to be transferred from the telephone "pipe" to the "data" pipe.

2) Applying the USF to data pipes, will create a subsidy and subsequent price regulation for Universal Broadband, something that many policy makers have been hoping for, for a long time.

I agree. We can no longer view the wires (or wireless signals) that come in to our homes as service-specific. They are all just data and capable of being any of the services we might subscribe to. Just as at the beginning of the twentieth century, the cost of running cables to sparsely populated rural areas, can not be recovered in the prices charged for their usage. Therefore, these new data pipes should be built and regulated under the USF or similar newly constructed mechanism.

The FCC Starts Wondering What Granddad's Beach Cottage Might Be Worth...

Is the FCC ready to look at renovating the beachfront property? The folks at the CommLaw Blog think so. They are daring to ask the question "What is more in the public's interest? Using the beachfront spectrum for more broadband internet or for free over-the-air broadcasting?." Their vehicle for gauging the public interest is in the economic value to society in the form of jobs, growth and innovation. By casting their net in this manner, the FCC appears to have front-loaded the argument in favor of the innovation bringing broadband over the buggy-whip driven local television broadcasts.

Once this debate gets outside the walls of the FCC, expect the hand-wringing, flag-waving and the tea-partying to begin. Although, yet again we will undoubtedly find some strange bedfellows. After all, what would be more libertarian and free market driven than letting the use of these airwaves find their highest value on the open market?

Comcast/NBC is Good for Net Neutrality Because It's Bad for Net Neutrality

The Comcast/NBC partnership is good for Net Neutrality. Why? Because it provides the clearest possible example to the greatest number of people of the dangers of a walled internet without the neutrality principle. Owning NBC, Comcast now has a clear incentive to charge other internet providers like ATT and Verizon for the right to provide access to NBC/Universal content over the internet or simply to provide better, faster or higher definition content to Comcast subscribers, providing a switching incentive.

The high visibility of the NBC/Universal content in the public's eye will ensure that this does not happen. Acting as Congress's agent for the public interest, the FCC or FTC in conjunction with the Department of Justice will not permit this merger to move forward without a binding agreement that non-Comcast users will receive both the same full access and equal treatment as Comcast customers. With these conditions in place, it will set a clear precedent for the first time for internet video content, echoing the FCC's Madison River decision which protected VoIP content.

Perhaps, the clearest precedent to the current case, though, lies in the FTC's handling of Time-Warner's 1995 acquisition of CNN. As a condition of the merger, the FTC required Time-Warner to carry a second 24 hour news channel in order to provide competition to its own CNN. Time Warner chose to carry a fledgling joint venture between Microsoft and NBC - MSNBC. Rupert Murdoch took issue with this choice, made over his equally young 24 hour news channel - Fox News. Several lawsuits later Time Warner settled and agreed to carry Fox News in the New York City market. This event ultimately led to the prominence and reach that Fox News has today.

Comcast customers currently have equal and non-discriminatory access to content from NBC, Disney, Viacom and countless other providers. This merger will not occur unless Comcast agrees to preserve this status quo, which will provide the highest profile real world affirmation of the doctrine of Net Neutrality to date.

It is Immoral to Allow Wealth to be the Deciding Factor in the Provision of Medicine

Two areas of policy that I don't ordinarily touch are Education and Healthcare. I just don't know enough about the economics or deep underlying theories to have as informed opinions as I would like. However, with Healthcare reform once again in our leaders' crosshairs, I'm going to go out on a limb. Any national health care policy should follow this first principle:


It is immoral to allow personal wealth to be the deciding factor in the provision of timely life-saving medicine.

I don't know what single-payer health care means. Socialized medicine and European-style health care are just phrases that are meant to provoke feeling rather than describe an actual policy approach. So I don't have a policy solution to recommend. Paying for medical insurance, however it's carved out of my income (by my employer, by myself, through tax rebates), seems reasonable enough to me economically. However, it is probably more expensive than it should be, and for many people in our country, simply unaffordable when compared to the more immediate needs of food and shelter. So as our leaders once again try to reform the health care system, I hope that first principles are always foremost in their minds. We can not make the availability of medicine dependent on the ability to pay for it, nor can we saddle people with an immense financial burden after the medicine is provided.

A Worthy Joust for Google?

Henry Blodget boldly writes the obituary for the latest Google competitor, the Wolfram Alpha Computational Engine, this morning in the Business Insider. Blodget is absolutely right as is this commentator that Google has too much of a head start and has enough of the search problem solved that any incremental improvement a competitor provides will quickly be incorporated in their own product.

Google will find its match some day, and as the comment states it might be mobile, but I doubt it. Google has won the HTML platform search, which means that any web page that renders in a browser, including mobile browsers will still most easily be searched using Google. Search will not be all about HTML and browsers forever. The next web platform is where the innovator that beats Google will arise - the television. Specifically, the internet is coming to your TV, through devices like Tivo, Roku and the game consoles; through cable and satellite set top boxes; and through the TVs themselves. The TV UI does not automatically seem suited for browser based HTML documents. Rather the norm is likely to be a combination of transparent menus, scrolling tickers, sidebars, headers and footers. HTML pages may still be viewed as in the web, or there may be a completely new paradigm. This is where the Google competitor will have their day.

That said, Wolfram Alpha, does not index HTML web pages, it gathers, consolidates, organizes and displays information. So Blodget does not have this one precisely correct. While a Google competitor will not emerge in the HTML/Browser-verse, a better organizer of knowledge, that organizes information from multiple sources including web pages could. Wolfram Alpha is a step in that direction.

Is it News or is it Paper?

Lively post this morning on Tech Crunch about the coming debut of paper sized e-readers, including a new Kindle, and whether these devices will save newspapers. Internet journalists have their long knives out more than ever for print journalists. It has become axiomatic in online media that the ink-stained wretch is a dinosaur and should slowly slink back to their caves to be done in once and for all by the irresistible force of evolution and the withering gale of creative destruction.

Ok, so lets take it from the top. News as printed on paper, updated no later then 2:00 AM, distributed in the morning, with no updates until the next day, and no reader comments until at least the next day can not compete with news as published to a web site, which can be updated in real time, distributed world-wide immediately with insightful commentary from readers available for addition mere moments after publication. Thus the argument continues, replacing paper with a portable screen, no matter what size can not save the newspaper. Whither then the news?

Instant news of course has been around for 80 years. Radio and TV did not kill the newspaper. The internet may indeed kill the newspaper but like radio and TV before it, it will not kill the value of reading information vs. viewing or hearing information. The gathering, editing and distribution of written information is still a viable economic good and public good. The vast scope of the web saturates us with information. It becomes commoditized and cheapened. We access it all at our fingertips and become our own editors, filtering the data and making editorial judgments as to the importance of one story over another. The editor who used to feed us the story is looking for work. Is this what we really want? Of course not. We still rely on journalists and editors to gather and filter the information for us. Who has time to do it all themselves? As the market for printed paper slides down to the long tail, the same forces that made the great newspaper and magazine brands prevail, will make winners out of many online news sources. The brands of The NY Times, The Washington Post, The Wall Street Journal, Time and Newsweek can continue to have value and even prevail without a paper publication, and eventually they will be able to get readers to pay for their online distribution. It may take the deaths of many competitors before it happens, but good journalism will find a price and then can still be sold - even on the internet.

The Three Goals of the Web

With the internet economy clearly in only the strong survive mode, I think it is helpful to review the internet business model at its most basic. Those executing this plan well will make money and survive. Those executing it poorly will fail.

1) Get people to your site.

2) Keep people on your site.

3) Get paid for the people who visit.

The first two items require capital expenditure and labor in the form of ads, SEO, page design and content creation.

The revenues generated by #3 need to exceed the expenses incurred by #1 and #2 or you will fail. There are three ways to generate this revenue.

1) People buying something.

2) People leaving the site by a paid channel..

3) People watching something with an ad.

The third way is the hardest to achieve, but the most ideal in terms of revenue generation. If your content is so good that people will stay and view ads, advertisers may pay you regardless of the click action. This means you do not have to pepper the site with paid exits nor do you have to worry about surfing away. As long as people get to your site, you get paid regardless of whether they buy something or leave.. This model is the equivalent of TV advertising. Most internet sites don't harvest enough attention span to survive on this model. Sites with video content and the better magazine sites may be an exception.

The second way is the easiest to achieve, and the least ideal in terms of revenue vs. cost. If you can't make money by selling something and you can't make money just on ads viewed, then you need to make money whenever someone leaves your site. This means that they better not close their browser, enter a new address, or click a bookmark. They need to leave by clicking on your page. The eternal problem is that you can't get users to your page without some kind of quality unpaid content. Therefore you need to find the magic balance between paid and unpaid to make your site attractive and yet try to make sure that the bulk of the exits are paid. Search engines of all stripes use this model. The problem is the margins are so small and a small miscalculation in the mix of expenditure to attract people, the quality of the content and the paid exits will spell failure. The pure play here is the domain park. All click exits are paid and the cost of entry is buying a domain name that people will type or mistype into their browser off the top of their head. But domain parks suck and only pure arbitrageurs are really interested in that game.

The first way is just the old brick and mortar model. Build a better mousetrap, hire a better mousetrap marketing team, or sell all the best mousetraps in one place and people will pay you while they are on your site. The problem with this model is that the building and marketing require huge capital expenditures with high risk of failure. Selling other's products on the other hand is cheap to start but the revenues are only good at volume. The barriers to entry are so low that this business either gets diluted in the long tail or dominated by the volume players like Amazon. Companies that have overcome these obstacles and succeeded include Netflix and Zynga.

Making a little money on the internet is easy, making lots of money on the internet is hard and making money while creating something durable, beneficial and lasting is really hard. But first you have to remember the basics:

Get Them + Keep Them < Get Paid