Investors in Verizon Communications Inc. (NYSE:VZ) are once again pressing the company’s board of directors to report on the business risks arising from the company’s opposition to open Internet and network neutrality principles. A shareholder proposal which last year won 26.4% of the shareholder vote – representing $30.6 billion of Verizon shares – has been resubmitted for consideration at Verizon’s 2015 annual meeting.
Wireless America: Closed or Open?
On March 11, 2008, Open MIC and the Paley Center for Media hosted a forum on the future of wireless communications which examined the emerging business environment and rules of the mobile Internet, and the challenges involved in ensuring open access for all.
On this page, you'll find comprehensive transcripts of the event (edited for length and clarity) and select video highlights.
The forum's opening speaker was William C. Thompson, Jr., Comptroller of the City of New York. Comptroller Thompson was followed by a panel of industry experts which included:
Comptroller Thompson, who manages more than $110 billion in New York City Pension Funds, has been a leader among institutional investors in advancing corporate governance and corporate social responsibility reforms. He recently filed shareholder resolutions on behalf of the Pension Funds calling on Yahoo! and Google to establish policies protecting against the infringement of basic freedoms by countries currently doing business with the Internet search engines.
The panel covered a broad range of topics, from the definition of "closed" and "open" to the issue of net neutrality; from a discussion of civil rights and media to thoughts on how Wall Street views issues surrounding open media. Each of the panelists had an interesting perspective on hot button issues to look out for in the year ahead.
MICHAEL CONNOR: Our topic today is a big one—“Wireless America: Closed or Open?”—and, specifically, to what degree America’s wireless future will be closed or open. We are going to be discussing the shape of the mobile Internet and the future, and the business challenges and the social challenges involved in ensuring open access for all.
Watch the video...
I thought it might be help to provide some context for the discussion, just a few numbers. Here in the U.S., more than 200 million people—more than 80 percent of the population—are subscribers to cell phones. Globally, there are more than three billion people using mobile devices. That means there are more people using mobile devices than fixed Internet and telephony combined. That’s just a glimpse of the future.
Another example: some of you may have noticed this weekend in The New York Times there’s an article about young people and cell phones. The Times reported that among young people 8 to 12 years old, that number of cell phone users in the United States will grow by 31 million between the years 2005 and 2010. There are now new phones that allow children as young as five to speed dial their grandmothers and their grandfathers. Again, an indication of what’s coming.
And then the wireless industry itself is providing evidence of this growth. Some of you may know there’s an auction going on of a wireless radio spectrum, which broadcasters are giving up as they go from analog to digital, and that auction’s about to conclude. It’s been going on for, I think, about seven weeks now. It was expected that that auction would raise about 10 billion dollars, but instead of 10 billion dollars, the various telecom companies have now bid it up to 20 billion dollars, so that the federal government is going to make 10 billion dollars more, but that’s twice the projection. It gives you an indication of the level of interest in wireless in this country, and what the industry certainly thinks is the future.
So, the questions for us today are: “What will be the rules in this new wireless universe?” “Who is going to have all these new wireless devices, and on what terms?” “What are the ground rules?” “What will you be able to do on the mobile Internet and what won’t you be able to do?” And, maybe most important of all, “How do all of us as citizens, as consumers, as investors, engage with media and telecom companies?
The Definition of "Open" and "Closed"
BLAIR LEVIN: I’ll start by saying that one of the things that I learned when I was at the FCC with several folks in the audience is that everybody wants a level playing field in which they get to run downhill. That’s kind of open and closed as well. That is to say, everybody wants the other guys’ stuff open, but they want to have the ability to close off their own stuff…
Let me just point out: openness is sometimes thought of as simply allowing a device to attach—that’s the Carter Phone Rules—and we see it with phone service and we’re seeing it with television, we’re actually getting set-top boxes, and we’re moving toward that on the wireless side. It sometimes is about access to certain essential facilities in what might be a monopoly network which is kind of what happened in the 1996 Act. It could be to essential features such as 10 digit dialing or it could be, as AOL wanted, some kind of forced resale when somebody has what is an essential facility. In other words, openness is used to define all kinds of things.
Let me close this by saying fundamentally it’s about market power. That is to say, if we had six or seven national wireless carriers, we wouldn’t be having the debate. Regulators would say, “Hey, the market’s going to take care of it.” If we had one or two carriers, we wouldn’t be having the debate. There would be a policy of forced openness, and the government would step in.
What we have is kind of in the middle ground, and I think there is a perception that the wireless market is certainly more competitive than the fixed-wire side, but it may not be competitive enough to really allow for innovation and openness because the people with the networks always have an economic incentive to try to extend their market power into other areas that can provide more revenue and more profitability. So, that’s the basic picture: lots of different definitions, and I’ll let you take it from there.
MICHAEL CONNOR: Jason Devitt, you are an entrepreneur. Innovation is one of the keys to your success. Do you think it’s, as Blair said, half open and half closed? How do you see it?
BLAIR LEVIN: Just to be clear. I am just saying from a regulatory perspective, that’s the way the government—I don’t characterize things myself—I’m just saying the government would have a simple answer if there were six or seven and would have a simple answer if there were one or two and so the government is unclear what the answer is at this moment.
JASON DEVITT: I think it becomes a new definition of optimism versus pessimism, isn’t it? The network’s either half open or half closed depending on your perspective.
Here’s how I think about the issues with respect to wireless. The way the wireless carriers operate in the U.S. today is akin to what the Internet would be like if you had to buy your PC from AOL. Think about that for a second. What would the web be like? What kind of services would be available to you? What products would’ve been introduced over the last 10 or 15 years if you had to buy your PC from AOL? And, my view on that is simply that at this stage, AOL would probably have recently introduced pictures online in the last year or two, and search—they’d be boasting about the fact that search was down to 10 cents a pop. That’s what the Internet would be like, and that’s what the mobile phone networks are like today.
You, as a consumer, the overwhelming majority of consumers in the U.S. buy their handsets from one of the major wireless carriers. They get a substantial discount on the handset, although not as large as you think. They get a discount on a handset in return for buying it from the carrier, and the devil’s bargain is that you commit to a two-year contract, and the phone that you’ve bought is very much constrained to deliver a set of services that the carrier controls. So, there’s a variety of things that you suddenly find after you make the purchase that you are unable to do because you took the phone from the carrier.
From my perspective as an entrepreneur in the mobile market, there are a variety of services that I would like to be able to bring to market that might include new and innovative devices or new services that would be delivered entirely through the browser on your phone or applications that you might download to your handset, but I am unable to do so because the overwhelming majority of consumers have bought a phone that was designed by the carrier to only be useful with services that the carrier supplies and sells themselves.
MICHAEL CONNOR: What are some examples of those?
JASON DEVITT: Probably the best known example at the moment is the iPhone, although that’s changing in terms of they’ve responded to market pressure and are now allowing, for the first time, people to develop applications that will run on the iPhone.
But when the iPhone first came to market, it was exclusively available from AT&T, so you’re out of luck if you don’t have AT&T coverage in your area. But the iPhone does a have a great web browser to which you can browse any website; that’s great. Let’s say for a second that you’d like to use Skype on your phone. You’re out of luck. You’re still going to be out of luck, by the way, even with their new recent announcement about having an SDK. You might be able to use Skype in conjunction with your Wi-Fi network at home, but if you are outside the coverage of Wi-Fi, you’re not going to be allowed to use an application like that on the handset.
Can you buy MP3s from Amazon to load onto your iPhone? It would appear that that’s not going to be the case. If you have a Slingbox at home that you use for being able to playshift your TV viewing so that you can watch TV anywhere, it would appear that you are not going to be able to get a Sling client onto that handset because that competes with Apple’s business. You can’t have a real-time instant messaging client on the phone. You can have an IM client that’s open all of the time so that you communicate via instant messaging as opposed to text messaging. There’s some technical issues there, but the major issue is that, of course, if you have IM running over the data network, your messages are free because you have unlimited data access. But, if you’re using text messaging, well, it’s 20 cents or 30 cents a pop for a text message—or perhaps you buy a bundle [but] there isn’t an unlimited bundle of text messages available for the iPhone. Remember, the service plans vary from one handset to the next. So, if you buy an iPhone, the biggest bundle you can get is 200 text messages, and after that you’re on the hook for 20 or 30 cents a pop, and you’re not able to put an IM client onto the handset. So, those are a few examples that concern that particular phone.
If you buy a phone from Verizon, any phone from Verizon, they’re probably the worst offender in the market. You can’t put your own music on to that handset. You can’t put your own ringtones on to that handset. You can’t take your pictures off that handset without paying a toll to Verizon. Everything, everything is a charge. Ding, ding, ding. And, on the other hand, if it worked the way the Internet works, you’d be able to buy your own handset, bring it to Verizon’s network, pay Verizon for data access and for some bundle of voice minutes, and then do whatever the hell you liked. And in turn, an entrepreneur like me would be able to offer you a full range of services that were comparable to those that you can get on the web today.
MICHAEL CONNOR: But, you’re not. Your business now is not?
JASON DEVITT: My new business, Skydeck—I can’t say too much because we haven’t announced any products or services yet—but what I can say is that we’re delivering a service that is entirely on the web and aren’t planning to do anything on the phone in the immediate future because of these restrictions that exist. Our goal is to help consumers to make smarter decisions about wireless services, plans, and applications that they can use on their phone. So, that’s the area where we’re exploring, and yes, it’s very frustrating to us that we can’t do—that there isn’t more that we could do on the phone.
Let me give you the simplest, clearest example of all. Why can’t you have a dial on the home screen of your phone that shows you how many minutes you used this month? Hands up who’d like that? You know, it’s not technically possible to put that on the home screen of any phone on the market in the U.S. today, and some manufacturers have attempted to introduce an application like that. It’s always kicked off by the carrier when the final order is placed for the handsets because the handsets are bought by the carrier to sell to you. That’s a really, really simple thing that would be genuinely useful to many consumers, but for obvious reasons because of the lack of openness, it’s not possible to do that.
MICHAEL CONNOR: I should note that we attempted to have a representative of at least one of the wireless carriers here today. They declined our invitation.
Mark Lloyd, you were, until recently, at the Center for American Progress and your field is media, but you are now working on the Leadership Conference on Civil Rights. What’s the relationship between media, Civil Rights, and Open or Closed?
Media, Civil Rights and Open/Closed Networks
MARK LLOYD: The ability to communicate is fundamental in a democracy, and was fundamental actually to create a democracy. Those of us who also believe that free markets are of value also believe the communications and information is fundamental for markets to work in a way that actually solves the interests of investors and the interests of those that we modern folks think of as consumers. The founding fathers never even used the word consumer. Can you imagine? Imagine that.
The story that I tell about the relationship between civil rights and communications policy is not the story that you usually hear about, you know, all the brave reporters in the north reporting about all those terrible things happening in the south. The story that I tell is Martin Luther King met with a guy named Everett Parker in New York City about what it was that Parker at the United Church of Christ could actually do to help the Negro movement in the south.
And, King said, “Can you do something about the television stations?” Parker was a broadcaster. He knew something about broadcasting, and King who was at this time, this is the early 60s, one of the most visible people in America, was having a lot of problems because of the fact that there were segregationists running television stations and radio stations in the south who were not broadcasting his messages that were broadcasting the messages of the White Citizens Council and other places in the south. And when King would do an interview at NBC or CBS in New York, the broadcasters in the south would cut the signals to those interviews or documentaries and put up a sign saying, “Sorry, cable trouble.”
So, King understood that people, sort of, got their realities—particularly in the south and the white ministers and the white population—from watching television and seeing folks, from listening and reading and watching the editorials, and there must be a way to have an impact on what the television folks were doing. And so, what Parker did was [he] went around the country in the south—not the country—but went around the south watching TV, and decided that he was going to focus his efforts on Jackson, Mississippi. He found a station that was actually relatively typical in the south but in a really horrible place. And what he found was that this station was not referring positively or neutrally to the African American citizens in the south. He found that the station simply was not serving roughly 40 percent of their population in the community. And, so he took this evidence to the FCC, and the FCC said, “Well, this is really very interesting. We will give them a license for one year to continue to serve, and maybe they’ll improve,” and Parker says, “This doesn’t make any sense.” And, the FCC said, “You don’t have standing. You and the community don’t have the right to come to the FCC to complain about what your local television/radio stations were doing.”
What it was that Parker and the civil rights case did, was challenge the Federal Communications Commission and create for all Americans the right to complain about what about their local broadcasters that were licensed to serve them were doing. This was clear civil rights law, civil rights movement, civil right activity directed toward broadcasting—it’s the United Church of Christ versus v. FCC. This changed the way that the broadcasters were operating and established a wide variety of laws that were sort of eroded by the Reagan Administration. So this, for me, is really the connection between the communications policy issues and establishing equal rights in America.
MICHAEL CONNOR: And you’ve written and talked about a structural inequality in terms of broadband and wireless issues in America now, and that people who should have a voice, or should have access to some of these things, don’t now.
Watch the video...
MARK LLOYD: The same sort of challenges that King and Parker complained about are often apparent before the FCC or the Department of Justice or the NTIA [National Telecommunications and Information Administration] in various forms now, and they incur in much the same way.
One of the key problems, and one of the first things that really amazed me when I began practicing law at the FCC—it’s improved tremendously since I started practicing, and I started practicing before the FCC relatively late, in the early 1990s—was how hard it was to get information about what the hell was going on at the FCC. It takes a lawyer and it’s much, much better now, but it was next to impossible to find out just what was happening at the FCC—what it was that the local broadcasters were doing or what the local telephone companies were doing. It’s hard to get past just the language, the CLECs and the ILECs and the UNIS and I was like, “What are these guys talking about?”
Well, this presents a barrier to change. This presents a barrier to be able to work effectively, to understand where your interests lie at the FCC or at the National Telecommunications and Information Administration or at these other things. It’s not unlike this sort of barrier Parker faced. And then, how do you actually press your claim about the fact that you can’t download your music that you’ve purchased from a service that’s no longer available on the internet, but you’ve got all this music stored on your computer? Why can’t I download this on to my phone, and who’s responsible, where do I go for that? Who knows? Who really can answer?
It’s the same sort of problem. The lack of openness about public regulations, the lack of transparency about rules and regulations that your officials, that you pay, make that have a direct impact—not only on your ability to download music, but about your ability to communicate effectively if the levees break. About your ability to communicate effectively if some idiot decides to fly a plane into a skyscraper in New York City.
There are rules and regulations that are put in place that either limit or extend your ability to communicate effectively in public emergencies using wireless technologies, or not, and most of us just sort of want to trust in the market, just as we want to trust in democracy. We want to trust that the systems that we have in place—that we believe in that we’ve pledged allegiance to—that these systems actually work toward the public good. And, that trust is an extraordinarily important thing in public life in America.
What we call for in terms of openness is the same thing, frankly, that Ronald Reagan said, “Yes, trust, but verify.” Trust, but give us all the information that we need so that we can verify that we’ve got rules in place that actually serve our interest. And for me, that is a civil rights argument directed towards these sets of issues.
MICHAEL CONNOR: Blair, if we had an industry spokesman here right now, what would they be saying in relation to all of this? I hate to put you in a difficult position…
Watch the video...
BLAIR LEVIN: That’s alright. I do it all the time. Some of my best friends are and as a lawyer, I can take either side. Jason and I were on a panel with one of the industry folks, and I think I got this understanding.
First of all, they would say, “It’s is a competitive market” to the extent that consumers are going to want these things. I mean, the iPhone is a response to a certain [demand]—Apple cut an exclusive deal because by virtue of that exclusivity they were guaranteed certain things that gave them the incentive to invest in the development of that product. There are exclusives all over the place and in every sector, every competitive sector. Nothing’s wrong with that.
Secondly, these things require a great deal of investment. The more that the companies can look to a return by some certain application services, the more they’re going to invest in upgrading the network. You mention the auction, 20 billion dollars that the industry is putting in for more spectrum. It’s going to be great because you are going to have 4G instead of 3G. But you know, you’ve got to have services that return that because Wall Street’s going to want its money back and more. So, you have that.
And then third, I think they would point to the fact that openness is happening as a matter of markets. The most significant and interesting thing from an investor perspective, I think, in the last year was the change in attitude from the beginning of the year where the wireless companies were saying, “Openness doesn’t work. People who talk about Carter Phone don’t understand technology. Spectrum in the air is not like spectrum on a wire, blah, blah, blah, and the devices are different,” to the end of the year where Verizon was saying, “We’re going to open up all of our networks.” And AT&T was saying, “Hey, we’re already open.” Sprint’s talking about opening up the 2.5. So I think the core answer is all of those things that you are talking about, they are happening but better that they happen as a result of reactions to market forces and what the consumers want than by some government fiat, which always results in the law of unintended consequences. So that would their fundamental point.
I would say as an investor that there is a big question mark in my mind about what Verizon is really doing. But the combination of Verizon and Google with Project Android is a really interesting thing. And, the debate may well shift. The debate’s going to shift by virtue of what happens with the Sprint 2.5 network, and what happens in the election. But the big thing, I think, is the combination of what Verizon is really doing. Do they really want to create an open network? As well as what Project Android and others like that, the things like Jason is doing. It could well be. You know you mentioned AOL and the Internet, but of course, AOL in some sense tried the closed-guard and it didn’t work, and you know, reasonable minds can differ about that.
Net Neutrality and Wireless
MICHAEL CONNOR: Jason, Blair notes that Verizon has opened up its network to—
BLAIR: No. No. No. They said they’re opening up—
JASON DEVITT: Said they’re going to—
MICHAEL CONNOR: Well, that’s the question then. Do you believe them?
JASON DEVITT: Actually, I do. But, it raises a whole set of other issues, which are interesting. Blair is quite right that there are market forces that are driving the carriers in general towards openness. They’re independent and regulation. And from my perspective as an entrepreneur—well, I have no love of regulators.
I would prefer to see all of this happen organically, but you know, I’m 39, and average life expectancy in the U.S. is 72, and I want to build a successful business, so I’ll use all means at my disposal including campaigning for regulatory reform.
What Verizon is doing is—the market forces that you have to pay attention to include [the fact that] we’re at the point of near saturation in the U.S. Everybody in the U.S. who can get credit has a phone, and a lot of them have two. And if you are Verizon or AT&T and you want to expand your market at this point, you’ve only a few alternatives available to you. You start chasing the sub-prime end of the market—it’s becomes a new euphemism—and probably you introduce new prepaid products and services that are geared towards that end of the market. Then Wall Street hates you because that’s a very low-margin product. Or you find a way to sell everybody a second phone or specifically a second wireless subscription, and that’s what their new open network policy is about.
What they see is an opportunity to invite a lot of new consumer electronic manufactures into the market who build new devices with embedded wireless chips in them, that will then enable Verizon to sell you a second wireless subscription, a second contract, or a third contract for your laptop, first and foremost. The laptop is the most obvious case, and they are already aggressively selling broadband cards to do that. Your in-car navigation system—there’s a really compelling need to have wireless functionality in your in-car navigation system so that you could get mapping updates, real-time traffic information and local content that’s relevant to your destination.
Your digital camera—every phone has a camera in it, but there are lots of people with high-end digital cameras. You have your 15 megapixel SLR for the wedding or whatever. If you had wireless service in that or a wireless chip in that, you could upload your pictures on the fly to a website where people at the event could see it. Or if you are a photo journalist, there’d be a compelling need to have that.
Or, maybe, you don’t like having a phone and combined music player because you really do think that having a dedicated music player, you’re an audiophile, you want a pure music player. Well, it’s still compelling to have wireless access on that so you can download music on the fly. Those are all reasons to sell you and your kids a second, third, and fourth contract.
Verizon and AT&T are smart enough to know that while they can mandate the design of handsets, they can’t realistically hope to mandate the design of the next generation of laptops and car navigation systems and cameras and the like. So, they’re inviting in consumer electronic manufacturers to build devices on the network.
Verizon has specifically not said, but they allowed other people to also build phones for their network and consumers can go buy those phones, but Verizon is still taking the perspective that if you buy a Verizon phone from a Verizon store that’s still a Verizon walled garden. There’s not going to be any entitlement to consumers to put applications and services on that phone that Verizon doesn’t approve. So, in that sense, it’s just baby steps. But, it’s a very, very interesting development. It certainly shows the direction that the industry wants to go.
MICHAEL CONNOR: I’ll throw this out to all of you. There’s a debate about net neutrality, and it’s defined many different ways. One definition is that things should be allowed over the Internet regardless of the content and the source, and everything should be treated equally. Will that continue in the wireless arena? Will it get more intense, that debate? Will it go away in the wireless perspective as we move toward the mobile internet?
MARK LLOYD: Let me provide a couple of notes of disclosure here. One is I’m on the Open MIC Board, so I’ve sort of taken the Kool-aid. I also serve on the board of Verizon Consumer Affairs Board, so I sit in the room with the folks at Verizon on a regular basis, and they allow me to yell at them about the things they are doing…
They [Verizon] want to be viewed in a way that’s positive because they think that’s good for their business. So, when they do things like charge you extra money to download your music on the cell phone that you purchased and consumers complain about that, or we on the Consumer Advisory Board complain about that, they sort of scratch their heads and they go, “Maybe we ought to take a look at that again.” And the engine starts rolling. It’s one of the reasons that we are there.
Now, I write things that Verizon gets very upset about and they call me up and ask “How can you write this about ‘we don’t care about America’ or this and that?” And, I say, “It’s not you. It’s the corporation. Your job—and as an investor, to some extent I want you to do your job—your job is to make money for your investors. Part of my job, both as an advocate is to create pressure so that people see the things you are doing that they may not like in order to change your behavior.”
The short answer to the question about net neutrality is that whether it’s wired or whether it’s wireless, the folks who control the networks have a strong incentive to manage their network…financial incentives, incentives to determine the level of traffic to allow others on, to make sure that they can extend their infrastructure without investing in new infrastructure. So it’s fine to be able to deliver one to two megabits per second instead of, you know, 10 or 20, and you’re only going to be able to do that if you are able to manage the old pipes that you got. They have very, very strong incentives to manage the network.
That’s not the vision that many of us had about the digital age. The promise of the digital age suggested a promise of openness. All these commercials about all the things that were going to be connected—that everything that we had in our homes that we wanted to be connected was going to be connected. But again, all the other promises about privacy, the promises about being charged reasonable fees for accessing that network, all those other promises didn’t go away. So, the promises of the Internet are really just wonderful American dreams that are in confrontation, to some extent, with the American reality of managing the networks and the services. And part of the role that we play as advocates or folks who are fighting on behalf of consumers in conversation with corporations is, “How can we make sure that we preserve some measure of that dream? How can we make sure that we get closer to that vision of the promise of the digital age while continuing to hope for competition and a wide variety of other things that we think might result in that?” And it’s a conversation. It’s a conversation that’s ages old; it’s not going to go away.
BLAIR LEVIN: What’s interesting about the net neutrality debate is that, to date, it has been largely about a hypothetical harm versus a hypothetical business model. That is to say, if you go to the net neutrality proponents and say, “What’s happening in the market today that you don’t like?” other than the Comcast thing, there really isn’t anything, there really isn’t any kind of activity. It’s what they might do in the future. But if you go to the network providers and you say, “Well, you say you are providing nondiscriminatory access today, why would you object to a rule that requires that?” and they go, “Well, in the future, we might want to prioritize, etc.” So, there’s always the possibility of some actual action changing that debate, but going back to your question about what happens, the debate is fundamentally—neither side can win right now. The election may change that.
MICHAEL CONNOR: How so?
BLAIR LEVIN: Well, if the Democrats win, I mean, the two democratic presidential candidates have said, “We want network neutrality.” I think they have different meanings to it, but I’m not sure it’s that fully developed. So, presumably, an FCC Chair appointed by one of those two folks would go in and say, “Somehow we’re going to get network neutrality,” whereas I don’t think McCain has come out in favor of it. That is a very clear partisan divide.
But, having said that, there are some other things that will affect it too. If we wake up sometime this week and discover that Google actually bought the so-called C Block, which by the way, they didn’t…well, at least I’m guessing they didn’t. But if I’m wrong and they actually bought it, the pressure for net neutrality really starts to diminish. If you have a new entrant, it starts to diminish. If Sprint actually builds out its 2.5 network and starts getting a lot of customers with a real open platform, the pressure for a regulatory intervention diminishes. On the other hand, if Sprint collapses, and it’s having a significant amount of problems, if it turns out the winners of the auction, as we suspect—almost all of that 20 billion dollars is basically being spent by incumbents to strengthen their own networks—then you have a different kind of political calculus coming up with looking toward February of 2009. So the debate gets real again in some sense in 2009.
JASON DEVITT: As you said, there are multiple definitions of this, and they get very thorny. Let me try to put it as simply as possible. If what we want, if what we are considering is what’s the best way to price Internet access to the consumer, wireless or broadband, there are basically three choices: you overbuild the network, or you offer people unlimited flat-rate pricing, which is what we’ve grown used to on broadband. That requires, in turn, that the network provider has overbuilt the network, which is a massive, massive investment that has been made on the broadband side and has not been made yet on the wireless side. It’s simply not feasible to ask the wireless carriers today to offer us all unlimited data plans for one flat rate.
So, you have two choices. You could have tiered piercing, where I’m going to pay this rate for one megabit per second, this rate for 2 megabit per second or perhaps, I pay this rate for this amount, and then I pay an overage charge for data over that, which is the model that we’re all familiar with from the way they price for voice. Or, you can have this complex network management regime where a bit for a text message is priced differently from a bit that’s online video or a bit that’s web browsing, and some services are allowed and some services are not allowed at all. And, even if you take the time to study all the policies—oh, and by the way, the network providers don’t actually disclose what their policies are, they don’t tell you in advance what they do and do not block—and if you do read it all, you still have the problem that you sign up for two-year contract and some other service comes to market, some new service is launched, that they subsequently decide to block [and] you are out of luck until the end of your contract. I find that as a consumer unacceptable for a whole range of issues. It’s just grossly inconvenient. It requires me to pay too much close attention to terms and conditions and to fine print, and it could leave me with a nasty surprise after I make one purchase and then discover the primary reason that I bought the service no longer applies.
So, given those two choices, as a consumer, I’d go for tiered pricing any day of the week. You know, give me two megabits per second, give me five megabits per second, give me eight megabits per second—whatever you can afford to give me—but let me download anything I like at that rate and for that price, and that still gives the network provider every incentive they need in order generate the profits necessary to reinvest back in the network. And, by the way, where we ultimately get to in that course is that everybody overbuilds their network and starts moving toward flat-rate pricing.
MICHAEL CONNOR: We have a few minutes for questions…
Wall Street's Take
FARNUM BROWN (Trillium Asset Management): I was reading a report that was put out by ISI, International Strategy and Investment, and as far as I know they don’t care about media and democracy. They were putting out a report from their telecom technology analysts that basically just had a graph that said the revenue future for telecoms would be directly dependent upon the pace at which they opened up their networks because while they would be getting a smaller piece of the pie, the pie would be growing a lot faster. Why would a straight up Wall Street investment house, have that sort of view, very hard, you know, bottom-line perspective, and yet, it would be resisted so much by the owners of those networks? Why do they see it differently?
BLAIR LEVIN: I grew up in Los Angeles, and the most famous thing ever said about Hollywood was “nobody knows nothing.” Why do some movies make it and other movies don’t?
Verizon, this spring—and maybe you weren’t in on these debates, I wasn’t but I was kind of watching it from the outside—had a huge debate about this, a business debate. There were some people who were saying, “You know, we open it up.” Suddenly all these new devices which are selling, as Jason said, more subscriptions. Other people say, “No, the device is going to be made. Skype’s going to make a device, and the next thing we know, instead of buying both a data service and a voice service from us, they are just buying the data service, and they’re using Skype for all their wireless calls.” You know, I assure there are people on Wall Street that will tell you ISI is a very reputable, smart place, but you know, this is how markets work, and you don’t really know how the consumer’s going to react. You don’t really know whether Skype is going to be able sell a service or something like that. There’s a lot of unpredictability to it. And, from a board perspective, if you have a solid revenue stream, and someone comes to you and says, “We have an idea for maybe increasing our revenue by 30 percent. There’s a slight little risk that we could kill 100 percent of our revenue…” what do you do if you’re on the board? I think it’s a big problem.
JASON DEVITT: There’s this mythology within the major telcos, the wireless telcos, that their wireless brethren somehow missed the boat. You know, they should have owned Amazon and eBay and Google and all of those companies should have been created internally, from Bell Labs, I guess. And it was only because of regulators that they were denied that opportunity. Now, I don’t believe that frankly. I don’t understand where those companies would’ve gotten the ideas, or how they would’ve justified that capital to their investors, or exactly how they would’ve successfully built Amazon and eBay and Google while avoiding losing a few hundred billion dollars as other companies that didn’t make it. But, nevertheless, there are some people in the boardroom who think that.
So, their approach to the wireless market is the same way. You know, “we’ve got to own location based services, and we’ve got to own the content industry, and we’ve got to build the TV networks ourselves and lock everybody else out because otherwise, we’re just going to be handing the revenue to someone else.”
Another example, very simple one, [is] text messaging. Text messaging is now an extraordinarily popular phenomenon in the U.S., as it is everywhere else in the world, but it took a long time for it to catch on in the U.S. When I started out in the industry in 1999, there was a general perspective that there are all sorts of people coming up with cultural explanations for why text messaging would never be successful in the U.S. The best was one I heard from a senior telco executive who said to me “Americans have larger thumbs than Europeans.” And for that reason, text message would never be successful. Yet, the bottom line was that you couldn’t send a text message from Sprint to Verizon, and that wasn’t cleared up until 2003. And the reason, in turn, for that was there was this business view within the carriers, within Cingular say, “We don’t need to allow our customers to send text messages to other carriers. We’ve got 60 million customers who can talk to each other.”
This is a great example of how once they did open the pipes, and they created kind of open standards, and said, “Yes, everybody can communicate with everybody else,” they suddenly created and turned on this extraordinary new revenue stream for them, which for the U.S. carriers is now 10 percent of their revenue. But again, prior to doing that there was a very heated debate right up until the last minute in the boardroom about whether that was a sensible idea or not to open up the networks just for text messaging, and we’re seeing the same thing today.
Hot Topics in 2008-2009
MICHAEL CONNOR: Let me ask each of you a final question… in the next year or two, Jason, you first, what are the kinds of headlines people will be reading about wireless and some of the issues we’ve been talking about today? What do you think the hot button—whether it be new products, new developments, new issues, new controversies— what will they be?
JASON DEVITT: I suspect we’re going to see things come to a head with respect to basic political speech over wireless devices. One of the things that didn’t come up today was that last year, we actually had an incident where NARAL Pro-Choice America wanted to launch a text messaging campaign to deliver information to consumers who opted in to receive those text messages themselves, and Verizon said that the content was too controversial, so they weren’t going to carry it over their network. The New York Times published a story, and Verizon reversed their position the following day, said it was a mistake, said that it was an old policy—refused to say what the old policy was, refused to say what the new policy was, and reserved the right to do it again. And, so I think, we’re going to—that’s now as an issue before the FCC. I think we’re going to see more issues along those lines.
MARK LLOYD: I think folks will be surprised at the lack of privacy that they actually have over the networks that they are using. They’ll be surprised at the amount of information that will be captured from the packets that they don’t even know were in the packets. They don’t even know what packets are. All they know is they are communicating over the Internet, over these wireless networks, and that folks are going to find these mysterious packets that are being transferred from one place to the other, capture and download that information, and find all sorts of fascinating ways to use it. And then, folks will begin to think that maybe we need something in addition to the market to protect some of those fundamental rights.
BLAIR LEVIN: Number one, the end of the auction and discovering that the incumbents won it all, and number two, the auction for the Sprint 2.5 involving Sprint, Clearwire, Best Buy, DBS, cable—a bunch of different folks who aren’t in the wireless game trying to figure out whether this spectrum should be invested in to create a new, the nation’s first, 4G network. Number three, a wild card, a big foreign investment by Sovereign wealth fund bailing out Sprint or something, or China creating a whole new debate about foreign investment in American wireless. Number four, the FCC issues a ruling in June against Comcast on the network neutrality issue defining somewhat—it’ll be a little bit vague—but defining reasonable network management services, and then the way they do that will play back into the wireless. [Finally], September the 1st, the first Android product hits and people start to see the kind of thing that Jason knows extremely well, the reality. Once the reality of what an open network can be [hits], I think it very much changes the debate. As Machiavelli once said, “The hardest thing is change because the people who are hurt by change know precisely what their interests are. The people who benefit from change have no real idea.” But if there are devices that really capture the imagination, I think, that’s a big game changer. And then, in November we have the election.
MICHAEL CONNOR: Good note to leave it on. Blair Levin, Mark Lloyd, Jason Devitt, thank you so much for joining us, and I thank all of you.
This Open MIC policy forum was the first of a series designed to explore specific aspects of media and their importance to both business and society. If you have feedback on this forum or suggestions for future topics, contact us at: firstname.lastname@example.org.
The Open MIC Blog
A group of investment firms and foundations with widely-diversified investment portfolios today called upon the Federal Communications Commission (FCC) to adopt network neutrality rules that would protect an open Internet. They recommended reclassification of broadband Internet service under Title II of the Communications Act, giving the FCC clear regulatory authority over the Internet network infrastructure that serves millions of individuals, entrepreneurs and established businesses throughout the U.S
The Federal Communications Commission should move quickly to embrace President Obama’s recommendation to protect network neutrality by reclassifying Internet broadband under Title II of the Telecommunications Act, an investor group said today.