Reality Check: The “Julius Jolt” – It's not Comcastic

Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
That earthquake you felt last week – no, not the “Baja Bumper” (7.2 Richter scale) that hit Southern California late Sunday afternoon, and not the Sumatra earthquake on Tuesday that brought back tsunami memories (7.7 Richter scale), but the “Julius Jolt” that also hit on Tuesday, and which brings back the phrase “be careful what you ask for.”
In case you were bemoaning Butler’s loss to Duke this week, or only had eyes for the Apple iPhone 4.0 operating system announcement, a Washington, D.C. Circuit Appeals court unanimously ruled (3-0) on Tuesday that the Federal Communications Commission had no standing to tell Comcast how to manage their high-speed Internet network. The ruling was written by Judge David S. Tatel, generally acknowledged to be the most progressive member on the panel. The New York Times quotes former general counsel for the FCC, Sam Feder, as saying “that the opinion was written narrowly enough that it was unlikely to be successfully appealed.” The prospects for a freer Internet appear doomed.
Or do they? It was clear from Comcast’s comments that they were simply trying to clear their name and to make a point to the previous (Republican) FCC chairman, Kevin Martin, that the jurisdiction of the agency was governed by laws and not by individual vendettas. (I wanted to have the “Why Kevin Martin Joined Comcast’s Board” headline for an April Fools edition of The Sunday Brief, but it’s too absurd.) Comcast admits that they have developed new network practices that allow the application in question (BitTorrent) to freely continue to share files among their users. And, thanks to network expansion, there’s a lot more bandwidth to go around, thanks to Comcast’s network upgrades since the suit was filed. Next story, please.
As the saying goes in the south: “Hold your horses.” We’re not leaving net neutrality until the campaign promise has been delivered. Given the ruling this week, the FCC has two, and maybe three, options.
First, they could gain Congressional approval for regulatory authority over the Internet (broadband deregulation occurred in 2005). A derivative of this is that Congress could pass legislation making net neutrality the law of the land. Finally, as the Washington Post describes it: “But the FCC could work around the Tuesday ruling with a vote of the five FCC commissioners. Currently, Internet service providers fall under a lightly regulated area of the FCC. It would take only a 3-to-2 vote to move high-speed Internet into one of the FCC’s more heavily regulated areas, where the agency could set tough rules on companies such as Comcast.” Yes, changing definition of the regulated services could occur without the Congress.
It’s the prospect of this outcome that has both cable and traditional telco companies reeling. Besides cable’s historical aversion to regulation (their rights are still granted in most areas on a municipality-by-municipality basis), this would effectively limit the ability to generate above average returns on their broadband investments. By their own financial admission, Comcast’s gross margin on high-speed Internet is above 80% (perhaps lower in more rural territories). Cable’s market share in high-speed Internet is increasing vs. Verizon, AT&T, and Qwest. And the cash from these operations allow Comcast to fund competition in traditional residential voice, small business services, and wireless (Clearwire). Would the FCC abandon a more competitive marketplace for the mere prospect of traffic shaping or other Internet restrictions?
The short answer is yes, and it is bound to create uncertainty in the markets if the FCC votes to declare Internet access as a “Title II” service (and hence subject to increased regulation). This column has been relentless on the need for daily and local asset management (the “ground” or asset intensive industries do not do it enough). But placing additional regulatory weight on the shoulders of those who manage assets poorly will not produce higher returns, and will not drive better management for those who are efficiently managing assets today. In fact, more FCC regulation will lead to “Outcome-Based Broadband” which can best be defined as “everyone gets the same broadband options and you’ll like it!” It will drive a narrower range of choices, and result in a “lowest and least” state. Yes, another campaign promise will be met, but to what avail?
Think about how absurd this would look if the FCC decided to go after Google or Amazon and regulate the outcome of all searches (“search neutrality”). “We can’t restrict the needs of the masses for the money of a few” would be the argument, followed by “It would be in the best interests of consumers who are looking for more choices, not just those who could afford to pay ever increasing advertising fees.” Google would be a regulated entity, subject to rate-of-return parameters, and Amazon would be left to the taxation policies of the states. (Yikes – wake me up quick – both are bad nightmares!) A few consumers might be better served, but finding things would be harder than it is today. While I have taken Google to task for their manipulation of the result “net neutrality” during the Congressional debate, I could not wish “search neutrality” on any provider.
Alan Beckenstein, one of my professors at the University of Virginia, gave me some advice when I graduated (during the first term of the Clinton Administration): “Jim, beware of powers granted to few that substantially change the returns for many.” I wrote it down, was going through my files recently, and it hit me – “Alan was right!” We are one vote away from re-regulation that could (will) change the broadband landscape for decades.
The “Julius Jolt” approaches – do you care?
Thanks for all of the comments – they have been plentiful the past two weeks, and I apologize for not responding to them sooner.
Finally, if you are an “apps centric” user, a new business starting over the summer will be profiling individuals and their applications (kind of a “What’s in your iPod?” take on apps). If you would be willing to participate, please let me know.
Jim Patterson is CEO & co-founder of Mobile Symmetry, a start-up created for carriers to solve the problems of an increasingly mobile-only society. He was most recently President – Wholesale Services for Sprint and has a career that spans over eighteen years in telecom and technology. He welcomes your comments at jim@mobilesymmetry.com.