Wednesday, January 17, 2007


Notes on Verizon Official Position on Net Neutrality

Last night William Barr, Verizon's General Counsel, spoke at Fordham Law School. He gave what can only be considered the Verizon Official Position on Network Neutrality. (That is, he did NOT DISCLAIM that his remarks didn't represent his employer, and he is, after all, General Counsel.)

I was there. I took fairly close notes. I'm presenting this as a straight reading, that is, without editorial comment, just notes on what he said.

My notes warrant several disclaimers. First, I'm not very practised at, or good at "live blogging." Second, I am pretty sure I didn't characterize everything he said veridically (i.e., accurately). Third, I am sure I missed a few key points. (If you were there and can offer corrections or additions, please write to me.)

Fordham Law School, 1/16/07

Intro: Former atty general Barr, Columbia, GW, CIA (china), DOJ in first Bush Admin
Shaw-Pittman, GTE, then Atty General, then VZ, China Specialist

Barr's Speech:

Today we are seeing proposals to regulate the Internet in the name of net neutrality.

Internet is a system for the delivery of communications governed by stds, which are rules of the road for carriage and delivery.

Don't confuse system with facilities, post office trucks drive over hwys, do not confuse trucks with highways.

2 kinds of facilities, long-haul, (terminates at Hudson street), and local.
Local connections to backbone, VZ makes money by selling access

Internet users, there are 2 categories
1. Upstream -- amazon, itunes, youtube
2. Downstream, end user, for research, browsing, email

Today these categories have broken down,
distinction less sharp but still useful.

Choke point has been last mile, 56 kbit until recently.
Rules of road specifically limiting content --
Rule #1: "bits are bits" no bit is treated differently, none are given priority.
Interactive gaming? "sorry"

Rule #2: best effort,
inevitably bits are lost.
so if you need reliability, you do not rely on public internet.

For corporate traffic, "we guarantee reliability"
VPNs have different rules, like a courier service more than the PO.

Until recently these rules of road did not matter, because 56 kbit
access was the choke point, now access is not the choke point anymore.
(and users can do much more)

Recently FCC has acted to encourage investment.

Cablecos got backing of wall street -- $100 B dollars
Cable got ahead on access because of telco regulation
Telco regulations killed telco investment in broadband (DSL behind re Cable).

Now we're getting DSL, thx to innovation spurred by regulatory relief.
Verizon is spending $18B to 18 M customers for FIOS up to 100 mbit/s

AT&T spending $18B to 19M homes for FTTN.
Wireless, VZW laptops up to 2mbit/s.

[I missed some additional numbers he presented here.]

Wimax up to 100 mbit for 30 miles,
Clearwire, Powerstream, Sprint doing 2-4 mbit/s Wimax.

BPL is feasible, Google backs "Current Technology" up to 3 mbits

Massive progress of innovation and investment
VZ is the biggest CapEx spender in US

FIOS designed to carry mountains of data w
same reilability as phone system.

VZ has quadrupled speed from 600 mbit to 2.4 gbit per fiber

Video presentations can now be done with phone-based scanning laser.

Projects used to be done under guaranteed rates of return.
Now there is competition.
It costs VZ $1800 to pass home, $1800 more to connect home.

We don't know if customers passed are gonna use Comcast or Wimax or VZ,
there is no more guaranteed rate of return.

We only build networks in competitive environment if VZ has freedom to innovate.

Net Neutrality is a well funded campaign -- we detected it early.
Coalition of Internet giants, lots of lobbyists, lots of Google money.

Regulation used to be anathema to Internet companies.
Now Internet company segment says "regulate us."

What in mktplace has bought this about?
They want regulations based on hypothetical musings.

There is no consistent definition of NN.

Central premise of NN advocates is telcos and cablecos control last mile and they will limit content providers, block and interfere with them.

VZ will let us reach any lawful website, we will not block degrade or interfere.

1.5 Mbit is very fast, but if you are a FIOS customer, broadband pipes will do more,
allow new kinds of svcs that can't be provided over neutral network.

High end capabilities can now be brought to consumers
e.g., home health care Johns Hopkins Hospital infrastructure --
orthodox NN advocates say we can't do new enhanced services,
can't charge JH for this kind of delivery of end services.

Fortunately the FCC bias is to give mkt a chance to work
unless there is a market failure. If harm does not exist,
regs should not address putative harm.

No phone co has ability to injure competition among content providers (because no phone company has sufficient market power).

53% of zip codes have 5 or more bb providers.
DSL prices have fallen by 30% over 3 years.

Regulation advocates are doing sleight of hand.
Google addresses International Market, but VZ is sub-national
Nationwide VZ has 12% share of Internet users.
World wide VZ has 2-5%.

If VZ blocked Google who would lose?
Google would only lose 3% of customers.
No connection provider has ability to leverage apps providers.

There has been no episode of blocking.
Q (shouted from audience): Madison River blocked Vonage!
A: Vonage refused to pay termination charges, which is a legal dispute,
not a discrimination problem.

Premise of NN is to protect competition at app level,
but apps are already a competitive sector.
The problem is really scarcity at net level,
so government should encourage deployment of diverse networks.

Multi player gaming requires very low latency.
So this will require special infrastructure.
How will new infrastructure be built?

Regulation proponants assume network scarcity.
But regulations throttle building of new networks.
Govt needs to promote network diversity.

NN Dogma, connection charge has to be paid for by end user.
Why should upstream not be charged?

Yellow pages are push, 800 is pull. [I missed much of Barr's explication of "push markets" vs. "pull markets" here.]

Chicken - egg problem with apps and networks . . .
If end user pays, mkts not created at all.

Deals for network terms of service are complex, how can regulator possibly understand?
So it becomes regulatory morass, with competition-limiting tariffs etc.

We're in fiercely competitive market.

What is really going on here?
Internet companies (Google, etc.) like current rules.

Google doesn't want to compete.

Telcos want to compete with application providers, e.g. for advertising revenues, against existing interests.

Google is a behemoth with twice the market capitalization of VZ.

Broadband prices are going down.
In advertising, there is market concentration.
Ad prices and revenues are going up.
Google is creating a virtual network because it is a gateway to all Internet content.
Google charges advertisers, but Google is unhappy with "public Internet,"
so it has built its own network to enhance delivery to customers.
Google "bypasses the Internet."

If you have a rival search engine, who is your competitor?
Google is your big threat.

Google is the gateway on the Internet, because it stands between you and the stuff you want to find. It has more of a choke hold than VZ.

Can Google advantage advertizers and behave in non-neutral way?
Google's founders wrote in Stanford thesis,
We expect that advertising-funded search engines will be
inherently biased towards advertisers and away from consumers,
a subtle bias could be added undetectably, and this is crucial to having
a competitive search engine.

"My point is not to say that Google is biased."

My point is only this, if we are to engage in prophylactic rules in a circumstance where bias is not detectable and there's lots of mkt power, [we might be making big mistake].

Resort to enforcement only with demonstrated harm.
Go to FCC only when market fails.

Q: How to make money in land of no regulation?
How to answer to VZ shareholders?
A: Look to the successful model of the wireless industry. VZ will help make markets.

Q: Not clear to me that apps need anything more than speed.
A: Not just achievable speed, but rules of road in Internet are important.

Claim: "Average speed on the Internet" is 1.5 mbit.

Q: If VZ has agreement with JH, then competing hospital wants the same service, does VZ shut out competing hospital?
A: VZ has every incentive to take all comers.

Claim: Content and applications companies have all the leverage, not the network provider.

Q: Access v Backbone, many bkbone providers have dropped out, what is the availability of competition?
A: Percieved glut made them drop out.

Q: Conditions that AT&T agreed to for merger.
A: Conditions are for only two years, maybe extortion is too strong a word, conditions are vaguely worded with lot of roonm for dispute, AT&T is very concerned about what happens
after two years. Merger conditions make it difficult for AT&T to provide classes of service, e.g. video.

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Q: If VZ has agreement with JH, then competing hospital wants the same service, does VZ shut out competing hospital?

This was the wrong question. The question is, if another entity develops a competitive home healthcare product using contemporary public Internet service, does VZ shut out that competing product?

It is an excellent hypothetical, however. Suppose VZ's private healthcare service could gain a HIPAA mandate by virtue of some (trumped up) security benefit not achievable over the public Internet? Could competitive products be forced off the Internet in the name of HIPAA compliance?

A: VZ has every incentive to take all comers.

His response could be better phrased as "VZ has every incentive to bring all comers to our table".
For all the BS in his speech, the most revealing quote is right at the end: provide classes of service...

Q: How to make money off of an undifferentiated product?
A: Sell different classes of service

Q: Is consumer broadband an undifferentiated product?
A: Yes.
Don't confuse system with facilities, post office trucks drive over hwys, do not confuse trucks with highways.

At a glance, could this be related to Sen. Stevens' insistence that the Internet is not a truck?
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