How to engage the regulator

About fifteen years ago I worked for a local government agency that was responsible for regulating basic cable rates and managing the franchise agreement the county had with two cable providers.  One day I received a call from a Bear Sterns analyst. He wanted some information on the probability that the county would approve a cable company’s new franchise, if I recall correctly.  While we did not get too many calls from investment bank analysts, I was not completely surprised that an investment bank would take interest in a regulatory matter, especially one that would impact the cable company’s revenue.

What does surprise me, however, is how little the investment community appears to know about how people in government think.  This lack of knowledge may start as far back as business school.  Take a cursory review of an MBA program’s curriculum and there is a dearth of coursework on how government operates or the impact of policy making on private sector revenues.

I don’t know the specific reason for this gap in knowledge.  I can hazard the guess that the investment sector like the general public sees government as that inconvenience, that necessary institutional evil comprised of soulless rules and laws and unaware bureaucrats that slows down innovation while imposing undue tax burdens.  The cynic in me would agree with this overall assessment, but I would caution that any member of the investment community engaging a regulator stop short at viewing the staff member or ultimate decision maker in a government agency as “soulless” or “inconvenient.”  That approach won’t get you far, especially when trying to either anticipate an event, understand a policy, or influence an agency’s proposed regulatory action.

Government and politics is a people business. With all the talk of artificial intelligence and machine learning, government decision making is a human endeavor, with agency heads and staffs taking into account the positions of various stakeholders, all of whom are human as well.  While being “best friends” with a government analyst is not necessary to effectively extract information or exercise influence, understanding an agency’s mission and its decision making methodology or mechanism is important.  Knowledge of a staffer or decision maker’s educational background can also help. Being a fellow alum can be an icebreaker.  Also, understanding past decisions and the rationale behind them can help in anticipating future outcomes.

Also, keep in mind that the agency staffer or decision maker is interested in the private sector as well.  The staffer may have an interest in the evolution of the product she regulates. For example, while a staffer at the Florida Public Service Commission I found the emergence of the internet fascinating. Watching telephone companies and cable companies position themselves and develop the technology that would later power what is today called broadband was a great experience.

If that interest on the part of a staffer is recognized by a private sector player, an opportunity is created to make more robust, detailed presentations because an interested staffer is one that has done her homework about the service being regulated.

Bottom line, engage the regulator as more than someone presenting a legal or regulatory barrier or espousing rules.

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Should Comcast and Verizon be allowed to enter the information mining game? Yes.

Overview

Proponents of the implementation by the Federal Communications Commission of net neutrality rules have been expressing outwardly that by ensuring no throttling of traffic from websites; no blocking access to favored and lawful websites; transparency when it comes to terms and conditions of service or network management; and the prohibition of favored treatment of one content provider’s traffic over another, that consumers of broadband services will be treated fairly and that edge providers will be able to innovate on the edge of the internet while competing with core providers.

While proponents have successfully convinced millions of Americans that net neutrality is about the consumer’s ability to democratize the web or have their voices equally heard among other, especially larger corporate voices, the real issue is whether core providers should be allowed to participate in the information markets or be kept out by making an 85-year old statute a barrier to their entry.

Battle in the Information Market

The statutory approach recommended by edge providers such as Facebook and Google to ensure that core providers such as Comcast and Verizon are reigned in is to apply Title II of the Communications Act of 1934. Edge providers make their bread and butter by mining information from visitors to or users of their website services and packaging that information into advertising products that they sell to businesses that are trying to get their services before as many eyeballs on the internet as possible.

The concern that the edge provider has with the core provider is that given the core provider’s “gateway” service and the core provider’s alleged monopoly or near monopoly control of the access to the internet, the core provider will then be able to capture consumer behavioral information that the edge provider has less access to.

The core provider, the edge provider will argue, is gathering this information from its telecommunications infrastructure; therefore, to ensure fairness, the core provider should not be allowed to call the telecommunications portion of his service an information service just so that they can skirt the information or data collection requirements under Title II.

By creating a net neutrality rule that says that core providers should treat access as a telecommunications service, the edge provider gets the government to apply a barrier to entry to the information market, a barrier that the edge provider has no confidence its superior information services can erect itself.

The Content Endgame: What Would Title II Do and Not Do

If Verizon wanted to use information “that relates to the quantity, technical configuration, type, destination, location, and amount of telecommunications service used by a consumer of a telecommunications service, that information, in general, would be limited in use to services related to the provision of telecommunications services. Verizon would not be able to use information related to the provision of telecommunications services to predict consumer demand for Verizon’s video streaming services.

Interpreting and applying Title II in this manner would help Hulu and Netflix keep Comcast and Verizon at bay. What it may also do is expose Hulu and Netflix’s pricing and cost structures during any public hearing resulting from Hulu and Netflix’s new roles as consumers of telecommunications services. Sections 204 and 205 of Title II provide the Federal Communications Commission the authority to set just and reasonable charges and to have hearings on those charges or on complaints regarding charges and price schedules. What Hulu and Netflix may not understand is that regulation of a market means scrutiny of both of its sides, and challenges to rates charged by a core provider means rebuttal that could include discovery of what economic rationale underlies an edge provider’s assertions. In short, Title II opens the Pandora’s Box for edge providers, too.

What Title II doesn’t do is tell Comcast or Verizon that they couldn’t collect consumer behavioral information from their websites or information portals. This “oversight” is further evidence of how arcane Title II is. A declaration by the courts that a core provider’s services are information services, from end user through a core provider’s entire network would be indication that the State recognizes that core and edge providers equally play in the information markets. Avoiding a balkanized, bifurcated view of broadband service provision would make regulation of advanced communications more efficient because of less time spent having to look at two separated pieces of internet service versus one.

The FCC’s Constitutional Quandry

But even if regulators continued down the two-prong path of regulating core providers, the end game would still be how to treat the content portions of their services. The Federal Communications Commission should not want to be in the position where it would take a hands-off approach to Facebook’s information mining techniques while taking a heavy handed approach to Verizon’s emerging content play. It would cause a constitutional dust up were the Commission to regulate the content of one service provider but not the content of another.

Conclusion

Core providers have the technical knowledge and desire to enter information markets and for that reason alone they should be allowed to profit from the development of content and the extraction and packaging of data that drives a modern economy. Core providers shouldn’t be punished because their basic business model includes the conveyor belts that information is placed on when being extracted. Imagine telling a coal miner that in order to foster competition, they will have to forego their conveyor belt and, like a firm that entered the market late and poorly capitalized, will have to use their hands and wheel barrel to move coal out of the mine. That is not competition but favoritism.