Episode 10: The Internet Forecast: Cloudy with a Chance of Neutrality

The gatekeeper status of the largest cable and telephone companies seemed to hit a high point in 2005. By the second half of 2008, however, the internet’s future seems to be very much in flux. Telephone companies are losing 10% of residential land line subscribers per year to cell phone companies and cable companies offering VoIP services, while adding more DSL customers. Competition between cable and phone companies for bundled TV, Broadband, and VoIP telephone also intensified, as both began offering on-demand movies, digital voice recorders, and other premium services in 2004. Comcast partnered with Sprint to offer discounts for cellular, while AT&T and Verizon extended their discounts to former Cingular customers and Verizon Wireless, respectively. AT&T also partnered with Dish, while Verizon joined Direct TV to remain competitive in video.

Instability among the major competitors was intensified by the FCC’s auction of 700 MHz spectrum licenses early in 2008. These frequencies are to be returned by television broadcasters in the conversion from analog to digital signals scheduled in February 2009. The results from this auction could change the rules for the internet’s next generation.

Spectrum Wars

Unlike auctions intended for cellular and data services, the 2008 auction put into play 1,099 “blocks” in the upper spectrum bands that cover the continental United States and Hawaii. These frequencies are to be used for higher capacity wireless broadband services that could exceed the capabilities of wired internet services currently in use. The new wireless systems could also open the door to numerous applications that will meet an expected demand for mobile communications, providing a competitive advantage to the companies that obtain them. At least, that is the theory.

Expectations for the new frequencies are high. As FCC Chairman Kevin Martin stated in the New York Times,

“The spectrum that we are auctioning off is going to be the building blocks for the next generation of broadband services. It can carry lots of data, penetrates walls easily, travels far and allows for very good broadband wireless service. It will allow a wireless platform to be another competitor in the broadband space.”

Five “qualified” bidders, each putting up $1.3 billion in reserve funds, were allowed to participate: AT&T, Verizon, Echo Star Communications (owner of Dish satellite television), Cablevision Systems, a cable operator owned by the Dolan family, an industry pioneer, and Google. The presence of the major telephone companies, a satellite distributor, and a cable provider in the bidding were expected. The appearance of Google, on the other hand, was viewed as a shrewd gambit to advance a new policy objective that the internet company had recently adopted: Open Access, or as it has been called in the press, “Net Neutrality”.

In the months prior to the auction, Google joined a number of advocacy groups in lobbying the FCC and Congress to force companies that sell internet access to allow other operating systems and mobile devices not sold by those same companies. The atmosphere for such a change seemed particularly ripe in light of disclosures that AT&T, Verizon, Time Warner, and Comcast planned to charge higher fees for heavy internet users, and in some cases were already blocking legal file sharing of music and video with the explanation that too much bandwidth was used. It was also revealed that AT&T and Verizon prevented consumers from using other wireless devices on their systems, while sharing their customers’ personal information with national intelligence agencies.

Google, while not immune to information sharing outside the United States, argued that the domestic internet could not flourish unless the network was “neutral” to any device and operating system consumers choose. This would not only expand choices, the company stated, it would stimulate the development of software applications and new services that could help jump start the U.S. economy.

There are no illusions that Google’s motives are altruistic. Since the summer of 2005, the company has been developing an “open” operating system for mobile devices called “Android”, which it had tried unsuccessfully to introduce to Verizon. Initially thought to be a rival to Apple’s iPhone and the company’s mobile OS, Google instead announced in November 2007 that it had joined thirty-four companies, including Intel, Texas Instruments, T-Mobile, Sprint, and cable operators Comcast and Time Warner, to form the “Open Handset Alliance” to develop software based on “Android”. Shortly afterward, Google made available a free Android developers kit on its web site, and announced a $10 million “Developers Challenge” to anyone who could create applications using the new operating system.

Wired magazine’s assessment is testimony to the shockwaves that rocked the software world, and probably were felt in the offices of AT&T and Verizon.

“Those hoping for a new gadget to rival the iPhone finally understood that Google had something radically different in mind. Apple’s device was an end in itself – a self-contained, jewel-like masterpiece locked in a sleek protective shell. Android was a means, a seed intended to grow an entire new wireless family tree. Google was never in the hardware business. …- instead, there would be hundreds of gPhones.”

The impact: all “gPhones” and other handheld devices would be produced by Google’s partners, potentially more than AT&T, Verizon, or Apple combined. All those devices would be using “Android”, and all would point to Google’s already formidable group of search and advertising services. The introduction of “Android” and the strategy behind it seemed to signal Google’s emergence as a new player in the internet race.

Google on the New Frontier

Google’s emergence as a major internet competitor is not without risk. AT&T and Verizon were declared the big winners of the auction, accounting for most the $19.6 billion spent. Verizon fared particularly well, winning seven of twelve licenses in “C Block”, an area covering the entire land area of the United States and Hawaii. Google did not win any licenses in the auction, but its bid of $4.6 billion audaciously underscored the growing sentiment among many companies to open the network to more development. But as Tim Wu points out, Google may be gambling on its future by relying on other spectrum owners, like Sprint, to distribute its products. Also, AT&T and Verizon dominate two other important areas, retail and government lobbying. Google, Wu writes, could be pressured by the FCC, antitrust authorities, or other government bodies seeking answers to the “Android” riddle.

But Google’s entrance comes at a time when cracks are appearing in the defenses of the internet gatekeepers. AT&T and Verizon may be telephone companies, but they are not advocates of the same internet policy. AT&T continues to advocate a closed or “walled garden” philosophy, denying any other operating system and device that it has not approved. Verizon seems to be traveling a different path. In November 2007 Verizon Wireless announced a plan to open its network to other operating systems and devices, if they are tested by a third party. In an apparent concession to the FCC’s new open access sentiments, Verizon publicly acknowledged “Net Neutrality”, at least in theory, then formed its own wireless alliance with Qwest Communications, the country’s third largest telephone provider, and LG, Motorola, and Samsung, the top three mobile device manufacturers. The alliance also adopted its own mobile Linux operating system called “LiMo” to compete with Google and Microsoft.

AT&T has also been criticized for participating in domestic spying after 9/11. AT&T, Verizon, and others have been accused of duplicity for lobbying Congress to shield its executives from law suits brought by the clients it exposed to government scrutiny. To make matters worse, AT& T’s U-verse, the internet service at the base of its TV, broadband, and VoIP pyramid, has been exposed as less technically advanced than other services. AT&T customers on the U-Verse users discussion board even claim that “Uverse Internet Elite at 6/1 mbps is … barely faster than Elite DSL [at] 6/0.768 mbps”. This is compared to cable’s 50/20 mbps and FIOS’ 20/20 mbps, respectively. The difference is significant when an internet service is degraded by wireless duplication or when customers transmit digital music and video files. The discussion board also mentioned that periodic updates on Uverse may occasionally cause set top boxes to stop working.

Time Warner and Comcast have problems of their own. Following Time Warner CEO Richard Parsons’ resignation in 2007, his successor, Jeffrey Bewkes, announced plans to spin off Time Warner Cable, the #2 cable TV operator in the country. However, the cable unit is saddled with approximately $13.6 billion in debt and is still recovering from the consolidation of cable properties in California, which raised many customer service problems, in addition to commitments to upgrade the new systems.

Comcast, the nation’s largest cable operator, suffered a loss of over 57,000 video subscribers in the first half of 2008, but increased overall revenue by 10% in the same period. Competition with satellite operators Dish-Echo Star and Direct TV continues to whittle away at its television market. Add competition from telephone providers for bundled TV, broadband, and VoIP services, and the consensus is that Comcast’s business may be leveling off in the short term.

What does this mean for the Internet’s future?

Competition is now more likely, so the short term forecast could be called “cloudy”. Telephone and cable companies are giving up more market share to cellular, software, and search engines. There may be trouble brewing as traditional services, such as telephone land lines, are replaced by wireless services, and television moves outside home based sets. Internet browsing also is becoming more mobile, opening up the possibility of adding other services to numerous handheld devices that are about to be introduced.

In a broader sense, however, Google may well have opened Pandora’s box for content providers. By advocating open access and net neutrality, Google clearly meant “open first to our own operating system and devices”. But now all companies with large stakes in consumer markets must contend with the possibility that independently produced, unauthorized, and sometimes illegal, software applications, once they are widely available, may circumvent existing commercial services by offering better value to the customer. That is, after all, how the computer industry began, by taking risks, by trial and error. Consider the early histories of Apple, Microsoft, Napster, and MySpace.

By arguing for networks that accept any operating system, Google is essentially arguing for a return to a period when creating better content (in this case, software), rather than controlling internet distribution (access), was the priority, with all the consequences that may come. This marks a historic turning point for American media, and perhaps is the beginning of a period when content and distribution are equally important.

There is a growing consensus that this is exactly what the Internet needs to continue growing; fewer restrictions on access, more incentives to be creative, and above all, a renewed sense of risk. If openness, creativity, and ubiquitous access are what it takes, then the future course for the internet may be to “Roll the Dice”, or lose the initiative and energy that spawned the global network in the first place.

Copyright © 2008 R.E.Xavier