For more than a decade, cable companies have fought vigorously to avoid entanglement of their broadband IP networks with common carrier regulation.  Now, for less than a penny a minute, Comcast seems ready to say “the heck with all that.”  

In recent weeks, Comcast has proposed certain changes to the FCC’s rules that govern competitive local exchange carrier (CLEC) access charges.  In particular, Comcast has asked the FCC to eliminate a rule that prohibits CLECs from charging for functions that they don’t actually perform.  No, that’s not a typo.  Comcast wants the FCC to allow CLECs (and this includes Comcast’s own CLEC affiliates) to charge for access services whether they provide them or not. This request is surpassingly ironic in that VoIP providers have spent much of the last 10 years insisting that they should never have to pay access charges.  Today, we filed a letter with the Commission explaining why Comcast’s proposal is not only unlawful but also unwise.

In a nutshell, Comcast wants the FCC to make a rule saying that as long as a CLEC provides the telephone number listed in the number portability database, that CLEC should be able to charge the same amount as an incumbent local exchange carrier (ILEC) that terminates a call to an end user over its plain old telephone service (POTS) network. The implication of this proposal is that as long as a CLEC provides the telephone number, it’s safe to conclude that the CLEC provides a service equivalent to all of the other functions – and the associated costs – included in access charges. Nothing could be further from the truth.  And, here’s why.

There are many services where a CLEC may provide a telephone number but not perform any functions associated with the actual termination of a call to a local telephone customer. Here are just two examples:

1)      One such service is eFax. In this case the CLEC gives a telephone number to the eFax provider, who in turn gives it to an end user. When a fax is sent, this rule change would allow that CLEC to bill full access charges even though the call actually goes to a server and the end user ultimately retrieves the fax over the Internet. 

2)      Another example is a single-number service like Google Voice. Under the rule proposed by Comcast, when a call is placed to the Google Voice number but ultimately completed to the end user’s home or wireless phone, there could be two entirely distinct sets of terminating access charges applied to the same call.

Leaving aside these absurd results, Comcast’s support for this rule change casts a shadow over their advocacy against common carrier regulation of their broadband IP network. In effect, Comcast is arguing that it should be able to file a tariff that includes functionalities ultimately performed by their broadband IP network, which is not part of Comcast’s CLEC entity.  Again, they want to charge for services they do not actually perform.

Now, here’s some free regulatory/legal advice to my friends at Comcast.  This slope is so slippery that Comcast may never again be able to stand up a reasonable argument against regulation of their broadband IP network. If Comcast concedes that the FCC can subject packet-switching and IP signaling to tariff regulation, then how can Comcast consistently assert that the FCC lacks authority over Internet peering disputes, like theirs with Level 3?  Perhaps unsurprisingly, Level 3 agrees with Comcast on this issue and has already filed a tariff that incorporates this concept so they can start collecting for services they do not perform.

Under this proposal, not only would Comcast’s broadband IP network be entangled with common carrier regulation, but – and, yes, I recognize that I’ve buried the lede, here – access charges would actually be applied on the Internet (#rumorwon’tgoaway). When a CLEC provides a number to an Internet-based VoIP service, like Skype, that CLEC would be entitled to bill for the functionalities performed by every Internet service provider (ISP) needed to deliver the associated packets over the Internet.  It’s not clear, however, if those ISPs could sue the CLEC to recover their fair share of this revenue. 

I hope the FCC rejects this absurd call to reverse a longstanding rule based on the common-sense notion that carriers should not be able to charge for services unless they actually perform them. Comcast should hope for rejection as well as it stands to be the first victim of such a foolish reversal of policy.

Nonetheless, some parties have raised concerns about certain components of the plan. One issue that has drawn some criticism is the plan’s proposal for the treatment of traffic exchanged between telecom carriers that originates and/or terminates with a VoIP user. – The plan proposes that such traffic be treated like other traffic exchanged between telecom carriers, except that intrastate access charges would not be applied.

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Reform of these policies is the most significant thing the FCC can do to promote the objectives of the National Broadband Plan.  This is the point where people usually say something like, “these policies have done an excellent job of bringing about universal telephone service, but it’s now time to retool them for universal broadband.”  I’m not going to say that.  In my opinion, the high-cost universal service program has been a mess since its inception. And the intercarrier compensation “system,” has become a Rube Goldbergesque contraption optimized for little more than arbitrage and the generation of legal fees.

The principal failings of both USF and intercarrier compensation arises from the fact that they were grafted onto a system of public utility regulation that was originally built around local telephone monopolies. While USF and intercarrier compensation were both extended to certain competitive carriers, those extensions proved unstable and unsustainable.  Competitive USF subsidies were ultimately capped to prevent runaway growth, and competitive carrier access charges had to be subjected to a form of dominant carrier regulation. 

As the FCC now prepares for real reform of these vestiges of monopoly regulation, it must recognize that success depends upon making a clean break from the legacy regulatory monopoly model.  The way I think of it is that we must move from a universal service model built on monopoly public utility regulation to something that more closely resembles a procurement process.  By this I mean that the decision to accept universal service funding must be voluntary; that the obligations that go with it must be clearly defined and not subject to “post-contractual” modification; that the obligations must be for a defined period of time; and that there will be no universal service obligations except in those areas for which funding is provided.

If the FCC succeeds in making this transition from the regulatory “monopoly model” to the competitive “procurement model,” it just might be able to fulfill the promise of the National Broadband Plan.

In any case, this is a pretty remarkable call for regulation of Internet interconnection arrangements that have worked remarkably well without regulation. To try to justify this unprecedented regulatory intervention, Level 3 says that, absent regulation, ISPs can “coerce payments from broadband backbone and independent content providers” thanks to their “dominant control over access to their subscriber’s eyes and ears.”

Wait a minute. Up until now, last-mile ISPs have mostly been buyers rather than sellers of Internet interconnection services. If you ask me, there’s not much crazier in business than buying something that you could, according to Level 3, be selling. Apparently, ISPs have run up billions of dollars in unnecessary expenses that, in fact, could have been revenue. I understand how the buy/build dilemma works, but buy/sell seems like a no-brainer.

Unless, just maybe, Level 3 has left something out. What could it be? Here’s a thought. Perhaps Level 3 doesn’t think Comcast should be able to decide for itself, as every ISP always has, how to provision its transit needs. Up until now, the Internet has been a best effort environment, where no provider can guarantee performance on another provider’s network. Could it be that Level 3 has made a service level commitment to a customer (like Netflix) on the assumption that it could procure, at no charge, however much connectivity it might need from every ISP in the country to deliver on that commitment?

If that’s what’s going on here, Level 3 should come right out and say so. Without some explanation of why Level 3 does not simply require Comcast to access this content through Comcast’s transit arrangements, this controversy doesn’t make sense. And if Level 3 does need this connectivity to deliver on a commitment to its customer, why is it good public policy for the government to coerce other ISPs into providing it for free?

Today, I will try to tie these seemingly distinct modes of transportation together and, in so doing, explain how the FCC can finally put this industry on the road to rationality.

It is axiomatic that interconnection on the telephone network (a.k.a., the PSTN) has become an upside-down world of inefficiencies and arbitrage. This entire system is built on a series of arbitrary rules and assumptions that have long been overtaken by reality.

We have a system that entitles service providers to file tariffs pursuant to which they can unilaterally extract payments from other service providers for “terminating” calls from those other service providers’ customers. To make matters worse, and despite the fact that the functions performed in “terminating” all calls are identical, the applicable rates can vary greatly depending on whether a call is “local,” “intrastate long distance,” or “interstate long distance,” or dialed from a mobile smartphone, skyped from a laptop or placed from the dusty home “landline.”   

You may be wondering what it means to “terminate” a telephone call? Simply put, it’s opening a circuit between a trunk and a line so that the called party can talk to the calling party. The “theory” behind allowing carriers to unilaterally charge other carriers for this “service” via tariff is that: (a) network costs can accurately be “measured out with coffee spoons” to into individual minutes; and (b) the calling party has “caused” the called party’s service provider to incur “costs” in order to “terminate” the call. What a mound of malarkey!

In reality, both customers benefit from a phone call, until they don’t.  Which is why we retain the ability to hang up on or, as my six-year-old says, “turn off” the person at the other end.  In reality, network costs are almost entirely fixed and not divisible by regulators into “minutes of use.” In reality, consumers no longer recognize “local,” and “intrastate toll,” and “long distance” as separate services.  In fact, many of our customers are more concerned about needing to communicate something in 140 characters or less.

So, why do regulators so willingly suspend their disbelief when it comes to these fictions? They have wanted to maintain, at subsidized rates, the universal availability of “basic local exchange service.” To do so has required this vast apparatus of intercarrier compensation rates, as well as network interconnection on a local market-by-local market basis. Meanwhile, more and more consumers have voted with their wallets for all-distance voice services.

But there is a way out of this mess. If regulators were to take away the regulated intercarrier compensation meter and require providers to recover costs from their own customers (potentially including willing wholesale customers as in the broader IP transit market) or, when appropriate, from explicit subsidy mechanisms, the industry would be free to move to more rational, more competitive, and less confusing for consumers, business practices. This would not be a world without rules (despite the red herring assertions of some).

It would be a world without regulated rates for arbitrary “services.” In such a world, “long distance” would increasingly be a wholesale service purchased by local access providers in order to connect their customers to everyone else. “Local interconnection” would fade away as carriers interconnected at higher capacities and at fewer locations. And rate-driven arbitrage, like traffic pumping, would cease. The single biggest obstacle to getting there is the continued existence of regulated rates for intercarrier compensation.

Did I really just write “calling party network pays” in a blog? Well, yeah, I suppose I did.  So, unless you’re in the mood for some wonkery, now might be a good time to check out what’s going on with the Facebook-Google smackdown or check in on the discussion around whether cable-cutting is mainstream or just for dog food lovers.

But, if you are still with me…and are asking yourself, “Hank, what’s so wrong with imposing PSTN interconnection rules on IP networks?  I mean, after all, it’s just a technology change, right?  Did Major League Baseball get rid of the infield fly rule when lights, artificial turf, or those goofy relief pitcher cars were brought into the game?”

Well, no, but this isn’t “just a technology change.”  It’s about moving to broadband, digital IP networks where voice is a data application – and a relatively low bandwidth one at that.

There are two fundamental distinctions between the PSTN and IP networks that make COMPTEL’s proposal to bring 20^th century business practices to 21^st networks a very bad idea. The first is the problem I alluded to above.  Hardwired into PSTN interconnection is a concept known as “calling party network pays.”  Under this doctrine, the network provider of the party who places a phone call is obligated to pay the network provider of the recipient of that phone call.

While one might expect that the ratio of inbound to outbound calling would be generally balanced across networks, making this right to receive revenue for “terminating” a call unimportant, it turns out that entrepreneurs have found it quite easy to offer services in ways that produces significant imbalances in the ratio of inbound-to-outbound calling. Indeed, there are some providers out there with ZERO outbound calling (parents of college students can probably relate to this phenomenon).

In the world of IP interconnection, backbone providers have never cared a whit about which party initiates a flow of packets back and forth.  To the extent that they have concerns about “traffic ratios,” those focus on the relative volume of data being exchanged in each direction, and not which network pings the other first.  From an IP networking perspective, voice is a symmetric application which is likely to produce generally balanced traffic flows irrespective of who picks up the phone first. It makes no sense to require IP networks to change their practices to accommodate the arbitrary convention of calling party network pays.

The second distinction between the PSTN and IP networks has to do with where networks interconnect. Because of regulation on the PSTN, interconnection occurs way out in the local exchange.  IP networks interconnect much closer to the network core.  As a consequence, IP interconnection occurs at comparatively fewer points and at much higher capacities.

Needless to say, IP interconnection is far more efficient – and less litigious – than its PSTN step-cousin. Assuming that the FCC wants to keep it that way, it should firmly reject COMPTEL’s invitation to redesign the broadband autobahn in order to accommodate the PSTN Edsel.  In an upcoming blog, I will explain why the best way to promote IP-to-IP interconnection is to take the intercarrier compensation meter away.

That is why the FCC’s continued price regulation of the buggy whip, I mean consumer long distance market, is exceedingly…interesting.  Remember long distance? Well, to give you an idea of how “yesterday” long distance service has become, here are a few TV spots from the days of yore, when you couldn’t get past an episode of Seinfeld without seeing a few ads for long distance service.

And, despite the fact that the retail consumer long distance market has all but disappeared as a market distinct from the overall voice services market, the FCC still regulates the price structure for “long distance” with a heavy hand.

To further explain, I will take a brief detour into the world of intercarrier compensation….Basically, the FCC’s rules prohibit carriers from charging higher prices to the consumer for “long distance” calls, even though in some areas they incur significantly higher access charges from the local phone companies that “originate” or “terminate” those calls. Under both the FCC’s rules and the telecom act, retail long distance prices must be averaged. Indeed, the purpose of this price regulation is to prevent carriers from pricing their services in order to reflect more precisely the cost of doing business.

Now, one would think it has to be somewhat embarrassing for the FCC to be in the position of regulating pricing in an all-but non-existent market. Rather like having a detailed set of rules for unicorn owners. Nonetheless, the FCC has soldiered on, and even declined in 2007 to forbear from this absurd regulation.

At this point, any rational person has to ask why? The answer is that undoing this absurdity would risk unraveling the entire access charge system.

In other words, we have to keep regulating long distance (even though, technically speaking, it doesn’t really exist anymore) in order to preserve the underlying intercarrier compensation regime.

I don’t know if this is the tail wagging the dog, but it sure isn’t the dog wagging its tail. But, fear not, as I have an idea.  Since we don’t really have a distinct long distance market any more, why not prepare for the inevitable end of long distance access charges?

Sounds easy, right? In fact, people have been trying to reform this monstrosity for more than a decade.  And, this FCC’s National Broadband Plan has committed to begin its effort to reform this irrational system by the end of this year.

Reform has repeatedly foundered because the FCC has been unable to thread a difficult policy/politics needle. Opponents of reform have always been able to block attempts at progress.

My advice to the FCC is simple – stop trying to figure out first exactly what the reform path should look like. Just pick a date, say January 1, 2016. Adopt a rule that prohibits carriers from filing tariffs for switched access services, at both the federal and state levels, as of that date. Wireless carriers have long been subject to such a rule and as a consequence their business model does not depend on access revenues.

Once  a date is set for the elimination of access tariffs, the FCC and the industry will be in a much better position to work out the details of how to move from this dilapidated system of implicit subsidies for POTS, to a system that provides only explicit subsidies, and only when needed, for broadband.

Establishment of a date certain for the elimination of access tariffs will give all parties the necessary incentive to finally figure out how to stop regulating prices in the buggy whip market.

While many (ok, just a few) folks are focused on the fate of “House,” the medical TV drama on Fox, we here in Tech/Telecom Policy Land are watching a sea change in what the Fox/Cablevision drama is telling us about the net neutrality debate.

Earlier this year, we filed comments in the FCC’s Open Internet proceeding, explaining, at great length, exactly why  the “terminating monopoly” theory of net neutrality regulation (one of the policy justifications used for imposing rules on ISPs), just didn’t make sense in the Internet ecosystem.

Well, in a semi-controlled experiment still underway, Fox and Cablevision are doing a pretty good job proving that point.  Some would even say the (ISP) King is dead. Long live the (Content) King.  Fox and Cablevision are embroiled in a dispute over retransmission consent that has resulted in Cablevision customers losing access to Fox channels. Over the weekend, the dispute briefly escalated to the point where Fox was allegedly blocking Cablevision’s Internet customers from accessing Fox content on Hulu and Fox.com. 

Several prominent supporters of net neutrality regulation, including Representative Ed Markey and Public Knowledge rushed in to complain that such action was inconsistent with the FCC’s Open Internet principle that protects the right of users to access the lawful content of their choice – an irony given that many of those same folks insisted that the FCC’s net neutrality proposals should focus solely on ISPs not content providers like FOX.  By way of example, see this comment from Public Knowledge, remarking that the FCC’s Open Internet draft rules only apply to ISPS:  “The proposed Open Internet rules make no attempt to regulate broadband access providers in their role as content providers and editors. In fact, the Open Internet rules make no attempt to regulate anyone in their roles as content providers or editors.”

Parenthetically, I sincerely hope everyone’s enjoying irony #2 of this drama – Cablevision being denied access to programming, while it simultaneously refused to provide Verizon with access to a NY gubernatorial debate…IN THE MIDDLE of this dispute with Fox. While Cablevision has never shied away from taking an “aggressive” view of its rights to deny programming to its competitors, you gotta admire the chutzpah in this case.

So, how does Fox’s temporary blocking of Internet content to Cablevision customers show that there’s no terminating monopoly problem on the Internet?  Simple, here’s how.  As any telecom lawyer/policy wonk will tell you, the so-called terminating monopoly on the PSTN was created by the confluence of two factors that arose from common carrier regulation: the ability of local phone companies to file tariffs requiring long distance companies to pay them access charges and the INABILITY of long distance companies to block calls to those local phone companies.

On the unregulated Internet, we’ve got the opposite situation.  Cablevision (the local phone company in this analogy) has no tariffing power, and Fox and presumably other content providers (the long distance companies in this analogy) appear ready to block the transmission of content when they think it’s in their business interest to do so.  By the way, this same type of thing occurs every day when ESPN blocks certain premium content for Internet users whose ISPs don’t pay ESPN for the privilege of accessing that content.  Far from being the victims of a terminating monopoly as some pro-regulation advocates predicted, these content providers clearly see themselves as possessors of an “originating monopoly.”

The demise of the “terminating monopoly” school of thought has profound implications for the debate over net neutrality.  If content providers can collect “tolls” on the Internet and ISPs don’t have the unilateral power to force third parties to pay to “use their pipes,” then what is the point of the net neutrality debate anyway?

Additionally, many people are questioning whether the “Incident at Hulu Hill” represents a net neutrality violation or not?  We don’t know the answer for certain, but the question reminded us of a rather prescient statement by Commissioner Michael Copps that might just hint at the FCC’s ultimate answer:  “In particular, we need to recognize that the gatekeepers of today may not be the gatekeepers of tomorrow. Our job is not so much to mediate among giants as it is to protect consumers.”

Today, I’d like to focus on another curious incident. You may recall that a little over a year ago, AT&T and others brought to the attention of the FCC the fact that Google was blocking certain telephone calls to areas frequented by traffic-pumpers (i.e., companies with a business built on stimulating calling in order to collect terminating switched access charges). I was reminded of this curious incident yesterday when the FCC’s Chairman, Julius Genachowski, took some measure of credit for opening the iPhone to Skype simply by making inquiries.

The FCC made similar inquiries with respect to Google’s call-blocking practices, and Google responded by narrowing the scope of its call-blocking. But it has never stopped blocking calls to traffic-pumpers and the FCC has never again barked about this issue. To make matters worse, I have been told by rural carriers that some other IP-based providers have taken the FCC’s silence as license to block calls more generally to rural areas to which they are unable to complete calls at the rates they prefer. 

Here’s the question for the telecom detective in all of us: what is the meaning of the FCC’s silence? Does the FCC agree with Google that it has no jurisdiction to regulate application-based services? Or has the FCC concluded that it is simply good public policy to permit blocking of calls to these arbitrageurs?

Given the costs of traffic pumping, this would be an entirely justifiable conclusion, but it would seem at odds with the FCC’s well-publicized decision to prohibit companies like AT&T, Verizon, Sprint and others from blocking these same types of calls.

As long as the FCC stays silent, it is hard to know what the answer is.  And knowing the answer is really important to maintaining a fair and competitive environment.  By not barking, the FCC is favoring one part of the industry over another, and you don’t have to be Sherlock Holmes to figure out that’s just not good public policy.

Harold’s basic point was that the FCC might either permit or prohibit particular instances of “paid prioritization” based at least in part on decisions the FCC has made in the past. I agree completely on this point. Contrary to the title of Harold’s blog, I don’t think anyone at AT&T has said that Title II would “require” the FCC to permit any and all practices that include both payment and prioritization.  But, if someone has, then he or she should go back to common carrier school.

What I and others have said is that under Title II the FCC could not a priori (for some reason lawyers like Latin) ban all practices that may combine payment and prioritization, since in the past they have allowed some practices that do so. Under Title II, carriers would be free in the first instance to offer such services and concerned parties would be free to challenge them. At which point, the process Harold describes would kick in and the FCC would have to decide whether the service in question is “unreasonable,” or “unjustly and unreasonably discriminatory,” yadda, yadda, yadda (or blah, blah, blah, as Harold prefers).

Over time, a body of decisions might develop under which parties would understand roughly where the line is between “good” and “bad” paid prioritization. AT&T has long supported this type of iterative decision-making irrespective of whether it’s under Title I, Title II, or Title XVII.

Despite all the ink that has recently been spilled over paid prioritization, I don’t think there’s nearly so much disagreement as there might appear to be. If anyone thinks that prioritization done (for money) at the behest of ISP customers to enable them to get more satisfaction from real-time applications – like interactive gaming, VoIP, or video conferencing – is unacceptable, please raise your hand. If anyone thinks it would be acceptable for an ISP to try to extort payments from content providers by threatening to artificially slow their traffic, please raise your hand. Okay, all of you with your hands up please leave while the rest of us work on what should be an emerging consensus.