We have recently heard a lot about “net neutrality” and what the FCC will do next. The issue is important. But to understand it, some background on how information was and now is transferred globally is in order.
How Information Was Transferred
Initially, humans communicated by speaking and gestures. That was supplemented by writing, along with smoke signals and drums. In the 6th Century BC, the first primitive mailing systems were developed. It was not until the 1800s that telegraph was used with the first telegraph cable laid across the Atlantic in 1858. Shortly thereafter, telephones were developed followed by wireless telegraphy, e.g. radio. But even into the 1970’s, the preferred form of international communications was the Telex. Telexes were initially sent through the airwaves by shortwave radio and other means.
While science historians trace the “information revolution” back to the ‘sixties, the significant communication adaptations did not start until the 1990’s. The time lag from discovery to adaptation occurs for most new technologies: It takes years to:
- Figure how to use them effectively; and
- Get people to use them, e.g., getting individuals to switch from letters and landline phones to cell phones and the Internet took a while.
But the recent technology developments have been fundamental. Consider one example – letters sent by the US Post Office. As Table 1 indicates, mail kept increasing until 1990, and from there on it has fallen off dramatically.
Table 1: US First Class Mailings
Source: US Post Office
As suggested in an earlier article, the future of the Post Office and other shipping services lies in delivering products from online purchases.
Table 2 provides data on what has happened. It is amazing to think how much has changed in a period of 13 years. Globally, cell phone subscribers are 7 times higher and Internet subscribers have grown 23 times. Cell phone use in Sub-Saharan Africa, the poorest world region, has really taken off (38 times higher). In contrast, landline phone subscriptions in the European Union and North America are fallen off. The developing world effectively skipped the landline phones technology and went directly to cells.
Table 2: Subscribers per 100 People
Source: World Bank
The Table 2 data on specific countries is also interesting. Cell phones in emerging market countries (Brazil, Saudi Arabia, and Singapore) have become “fashion items”. You need to have several for different occasions. Hong Kong now averages more than two cell phones per person while Macau has more than three.
It is important to look at the difference between cell phone subscribers and users. In Table 3, the subscriber/user data are provided for selected countries. Note the high user to subscription ration in Ghana. While the cable companies have been quite effective in limiting free WiFi coverage in developed nations, municipalities and companies in developing countries have been quite aggressive in providing low-cost WiFi for parts or all of their areas (see this site for listings of where free WiFi is available in the developing world).
Table 3: Internet Subscribers and Users
Source: World Bank
So we have three information entry/receiver “nodes” used by individuals, companies and governments – Landline and cell phones and the Internet. How does information get from sender to recipient? Via information “Carriers”. Landline phones use a lot of wires strung on poles and underground. But most information is now carried by underground or undersea cables with a smaller segment carried by the airwaves.
Cable is the primary carrier for the Internet. TeleGeography reports that just over two-thirds of international Internet capacity is intraregional, linking countries within a region, while 32 percent is interregional, linking countries in different world regions. The highest-capacity interregional route has long been Europe-U.S. & Canada. In 2013, it had the capacity to transmit 8.95 Terabytes per second (Tbps). The Latin American–US/Canadian route is growing more rapidly and can transmit 8.86 Tbps. The Asia–US/Canada route follows with 7.95 Tbps.
In addition to the Internet, the ocean cables are used to carry private network and telephone traffic. More than 75 percent of cable across the Atlantic is used to carry Internet traffic, with most of the rest for private networks. Telephone messages were responsible for just 0.2 percent of traffic.
TeleGeography also reports that worldwide cable demand grew at a 45% compound annual rate between 2009 and 2013. But capacity has grown even more rapidly. The result is that today, less than 25 percent of the potential capacity on every major submarine cable route is being used. For example, on the trans-Atlantic route, usable capacity increased 119% between 2009 and 2013. But technological advances and new investment increased potential capacity by 239%. As a result, the percentage of capacity used has decreased from 25 percent to 16 percent during the last five years. Even with large amounts of usable capacity on many submarine cables, the construction of new systems continues. New cables are built to improve route diversity, to reach new or underserved markets, to replace cables at the end of their projected lives and purely for competitive reasons.
How much underground (vs. submarine) cable is there? My guess (have not found data source) is there is much more underground cable than submarine. In addition to communications, a significant portion of it is used to transmit electrical power. Most Internet (including phone signals transmitted by the Internet) and TV are carried on cables. As with submarine cable, private demand for underground cables continues to grow. For example, high speed traders are installing their own cables because getting a few millionths of a second advantage in speed of transfer from stock exchanges can earn a company huge amounts.
As indicated earlier, markets that invested in land line phones are switching to cell phones. In other countries, the land line technology is being skipped over for cell phones. Cell phones only need an occasional cell phone for transmissions while land line investments are far more costly. Cell phones are used for direct calls but also provide connections to the Internet via Wi-Fi.
TeleGeography reports that over the past 20 years, international voice traffic has grown at a compounded rate of just over 13 percent annually. Growth was accelerated by a wave of market liberalization, the global proliferation of mobile phones, and the emergence of pre-paid phones and calling cards, all of which brought telecommunications services to billions of people in developing countries previously without. In 2012, land line calls grew 2 percent, to 326 billion minutes, while traffic carried as Voice over IP (VoIP) grew 21 percent, to 184 billion minutes.
Even greater challenges lie ahead: traffic growth is slowing, just as telecoms must come to grips with competition from software based computer and Smartphone applications, such as Skype and Google Voice, and make difficult. TeleGeography estimates that Skype’s on-net international traffic grew 36 percent in 2013, to 214 billion minutes versus 510 billion minutes for cell phones and land lines together. Skype added approximately 54 billion minutes of international traffic in 2013, 50 percent more than the combined volume growth of every carrier in the world, combined.
Most information providers have to rely on others to reach parts of the Internet not served by themselves. For example, I use Time Warner for Internet. This must be switched to other carriers for completion to recipients using other carriers. These secondary sources are referred wholesalers and the process is called IP transit. This is a big business with brokers involved. For example, Giglinx is a broker. It lists 26 carriers as partners.
TeleGeography reports that
“Although there is no such thing as a ubiquitous Internet backbone provider, Level 3’s network came closest. Level 3 was immediately upstream to a remarkable 41 percent of the world’s IP addresses. Hurricane Electric and AT&T followed, and are directly upstream to 34 percent and 32 percent of all IP addresses, respectively.”
TeleGeography also reports that wholesale prices are falling by more than 20% annually.
We think of cell phone transmissions running from tower to tower. But in fact, cell phone transmissions amount to more than half of wholesale transmissions, most of which are for cable. The wholesale carriers for voice are some of the same names as for the Internet. But unlike the Internet where the leading wholesaler is Level 1, Tata Communications is truly dominant. Telegraphy reports that with 51.8 billion minutes of traffic terminated in 2012, Tata has 80 percent more than its closest competitor. With low margins and falling revenues, many wholesale providers are pulling back. Verizon, for many years the largest voice carriers, is allowing volumes and gross revenues to decline in pursuit of higher margins.
Satellite transmissions are significant, but they trail cable by a wide margin. In a recent article, Valerie Coffey explained why. Cables offer advantages in terms of reliability, security, capacity and cost. And then there are the delays: microwave satellite signals take about 0.2 seconds to travel roundtrip from the ground to an orbiting satellite, while optical submarine cables can send data across the Atlantic in 1/20th of that time. In addition, the microwave spectrum available to satellites is limited. And wavelength division multiplexing technology increases the capacity carried by single fibers, thereby reduces the number of cables required. This means fewer cables have to be deployed versus the high cost of deploying and maintaining satellites. And as mentioned earlier, the newer cables can transmit 8.9 terabytes of content per second. In comparison, satellite transmissions of 30 megabytes per second are considered good.
Satellite systems are the choice for large, areas with low traffic/population densities. In addition, using satellites rather than cable gives TV companies more flexibility when talking to their correspondents in with little cable connectivity.
The US Defense Department pioneered the development of Satellite transmissions. Not surprisingly, it is interested for military reasons – such things as identifying troop movements and targets for drones. And as suggested elsewhere, many believe the future of warfare will depend on the control of space.
This very brief and very incomplete overview of the communications industry is intended to serve as a backdrop for the discussion of net neutrality that follows. The findings:
- Over the last decade, there has been a huge expansion in cell phone and Internet use;
- Internet transmissions are only part of the new information flows;
- This expansion has been financed and managed primarily by private firms;
- The information transmissions’ industry is large and complex with linkages that must be renegotiated frequently.
Stephanie Crets has written a nice summary of the net neutrality issues on the Singlehop site. “Net neutrality” has a nice ring to it, sort of like “energy self-sufficiency”. Energy self-sufficiency works until there is a windmill, solar panels, fracking, or a train carrying oil “in your back yard”.
Net neutrality means different things to different people. And for some, it has several meanings. The generally accepted definition is that all data transmitted on the Internet should be treated equally by Internet Service Providers (ISP). Other terms are frequently used to characterize what it means such as “a level playing field”, “open access”, “an open platform for innovation, investment, job creation, economic growth, competition, and free expression.” With all these definitions, it is understandable what the subject is hotly debated.
Michael Copps served as a commissioner on the Federal Communications Commission from May 2001 to December 2011 and was the FCC’s Acting Chairman from January to June 2009. His view:
“The time is now for the FCC to classify broadband as Title II [sic – common carrier]. Without this step, we are playing fast-and-loose with the most opportunity-creating technology in all of communications history. Without this step, we are guaranteeing an Internet future of toll-booths, gatekeepers and preferential carriage. Without this step, we stifle innovation, put consumers under the thumb of special interests, and pull the props from under the kind of rich civic dialogue that only open and non-discriminatory communications can provide.”
This somewhat emotional plea typifies the rhetoric being used in this area. It ignores the fact that the expansion of Internet and Cell Phone infrastructure and use that took place since 2000 was the direct result of large companies making huge investments worldwide. And these investments continue. The result is plenty of capacity for expansion and falling service prices worldwide.
Now, has this worked perfectly for US citizens? No. There are many countries with lower prices and more complete coverage. But before getting to solutions, let’s work through some of arguments supporters of net neutrality make.
Differential Pricing/Tiered Services and Support for New Ideas
The US economy is based on differential prices/tiered services. The underlying philosophic point is that if you are willing to pay more, you can get a better product. So autos are priced from $10,000 to more than $200,000. Netflix uses a lot of bandwidth and pays for it. So if it wants higher speed transmissions and is willing to pay for it, what is the objection? Netflix pays more for faster transmission speeds to provide a better product for its customers.
We are asked to take pity on small entrepreneurs with new ideas who can’t afford to pay much for Internet services. When I last checked, the US was the leader by far in connecting people with good ideas to capital. Venture capital and private equity companies are looking for good ideas in which to invest their money.
The communications industry is extremely complex. Good policy will recognize this complexity and take steps to promote the well-being of communications users. Elements to be recognized include:
- Lobbyists – Open Secrets reports that the communications/electronics industry spent $393 million on lobbying in 2013.
- Regulating the communications industry as a common carrier is no panacea. Christopher Yoo, a legal professor at the University of Pennsylvania, has argued that common carrier regulation has historically been poorly implemented, and similar rules should be avoided with respect to the Internet.
- Any attempt to regulate the industry as a common carrier would be fought by industry members and would not be approved.
I believe the best approach is to target in on specific issues and deal with them directly:
The entire country should have access to Internet services. And in areas where coverage is too thin for private carriers to invest, states can do what Massachusetts has done – put in their own cables and allow Internet providers to use them.
The best way to keep pries reasonable is to have competition – more than one provider to choose from. There has been tremendous consolidation in the industry and the FCC will soon make a decision on whether Comcast can buy Time Warner. The answer should be no. The FCC should focus its efforts on increasing completion. Beyond turning down this purchase, the FCC should take steps to promote more than one provider to choose from across the country. There are various ways this can be done – the experience of the Department of Transportation with to trying to insure that smaller airports are served might be useful here.
The Ultimate Competitive Threat – Wi-Fi for All
As mentioned earlier, Wi-Fi coverage is being provided for large areas in many countries of the world. If a Town believes it is not being served well by its ISP providers, it should be able to negotiate with a number of companies to provide Wi-Fi for its citizens and businesses.
- TeleGeography estimates mobile transmissions are 65% of wholesale traffic and 84% of revenues.