Communications Insights: Trends and Cool Stuff

Anyone who knows me for 2.5 seconds knows: 1) that I cannot leave well enough alone and 2) that I cannot stand Microsoft operating systems.  So, I am curious to see what happens when you run network neutrality full speed into 18th Century copyright law.

Network neutrality is a broad, sweeping concept intended to maintain the open and interconnected characteristics of the Internet.  One of the central principles of network neutrality is the freedom to attach any “legal” device which does not harm the network and run any application over it.  I am not quite sure what an illegal network device is, perhaps a digital Kalashnikov (though if the Supreme Court reinterprets the Second Amendment, even that might not apply).

Enter the Hackintosh.  A Hackintosh is a PC which, with a few a modifications, can run the Mac OS X (called OSx86 for the IBM/Intel 8086, 386, 486, 586, etc., architecture). This is apparently not hard to do since Apple started using Intel chipsets. Moreover, the modifications are made to the bios and harddrive of the underlying computer, and not to the Mac OS. However, it is Apple’s contention that it is violation of its copyrights to run OS X on anything but one of their machines.

So, if a computer is attached to the Internet, would Apple’s prohibition violate the principle of network neutrality?  Well, it turns on whether the Hackintosh is a legal device. I am not an expert in intellectual property law anymore, but to my mind it would be illegal tying and bundling to require that OS X could only be run on Apple machines. Can you imagine if Sony sold me a record (vinyl or shellac) and in the liner notes stated that I do not have permission to play it on a Victrola, only a Sony turntable?

Next, let’s consider the DMCA.  The Digital Millennium Copyright Act makes it a crime to circumvent technical prevention measures (TPM) in order to illegally copy copyrighted electronic materials. Running OS X on a machine other than a Mac does not necessitate an illegal duplication.  Under the first sale doctrine, one can buy a valid copy of OS X Tiger on eBay for about $75.FN Apple cannot say that it is an illegal copy to put the OS on a computer - that’s purpose the software was sold for.  Further, they cannot restrict the device with which you read the OS, back to the Victorla… could GE prevent you from reading a book published by NBC Universal under a Sylvania light bulb?

So, let assume that Apple does not sell their operating system (but they do), rather they license a complete device, called a Macintosh. Presumably, then the operating system is part of a useful article, and not a writing. It would therefore not be copyrightable. So, Apple would not have any valid copyrights to be violated by duplication and modification of the OS.  Further, since duplicating it is not illegal, the DMCA does not apply. Loading OS X on a machine other than an Apple might be breach of contract, but not a copyright violation.

Insight: I am not sure that Hackintosh is a legal device, but it probably is not an illegal device. I am curious to hear the opinions of the network neutrality and copyright experts. So, in this high speed collision between the broad, sweeping principles of network neutrality or arcane copyright law which survives?

Google’s Larry Page spoke at a recent New American Foundation event, calling for “Wi-Fi on steroids” for the TV White Spaces.  Every time I hear this, I cannot help but think, “Oh great, a radio that is hyper-aggressive, muscle-bound, and impotent.  Why would I want such a technology?!” All joking aside, I approve the sentiment, but a little more careful analysis is need.There is here a unique window of opportunity to allow new uses of the TV spectrum which is currently inefficiently used.  For the past 9 decades, the FCC has regulated high power uses of the radio spectrum, such as broadcasting.  The FCC has also for the past 7 decades permitted low power uses, with increasing success.  The TV White Space presents the opportunity to permit medium power uses of the spectrum - something between Wi-Fi and TV.  However, neither the high-power of low-power paradigms seems to fit.  Licensed approaches typically allocate use to a single entity which makes decisions about use.  As a result, much remains unused at any given time.  The rules created are hard to change and do not afford much flexibility in terms of decisions regarding use by the licensee.  In contrast, unlicensed approaches strictly limit the radio energy which a device can radiate into the ether.  By controlling the emissions, the rules limit the possibility of harmful interference.  These rules create a much more flexible set of permission, but due to the stringent power limitations ranges of the radio devices can be extremely short.  What is needed is a new form of coordinating spectrum uses for medium power applications, which holds the benefits of both approaches while minimizing the potential downsides.

Insight:  Fortunately, some of the FCC’s best and brightest have been working this issue.  In a previous Cool Stuff, I wrote about my FCC Working Paper, which lays out ideas for the implementation of economic congestion etiquettes which would allocate spectrum use in real time to its highest monetary value uses.  This approach could significantly improve the value society receives from the use of the radio spectrum, without the need for dangerous pharmaceuticals.

There is no generally agreed upon definition for Network Neutrality and deviations or violations against the principal.  Network neutrality is something of a catch-all phrase that has come to reflect a number of potential behaviours that some have considered to be anticompetitive.Network neutrality implies that all IP packets should be treated more-or-less the equally, and the debate reflects concerns that they might not be in the future - that a network operator might somehow apply different treatment to IP packets (or datagrams) associated with different services, applications, destinations or devices.

Insight:  The term network neutrality is a loaded one. It implies that any deviation from its principals is not neutral, and in some way unfair. In many instances, it is perfectly fair to provide preferential treatment to some network uses, say premium customers or emergency services. Well, the highly-paid lobbyists have returned with their own term to redraw the chalk lines on the level playing field. In recent discussions involving the US FCC, the term network management practices has come to take the place of the term network neutrality.  While the semantics of this term are more objective, it does not accurately describe the nature of the problem.  Network management refers to a much broader scope of activities including business practices, sales and marketing, security, fault tolerance, and capacity planning. Since the issues present in this debate represent only a narrow slice of network management, what term should be used?  How about false and deceptive advertising or anticompetitive practices?  Somehow that lacks the sexiness of Net Neutrality.

Telecommunications network operators have traditionally charged on a unit basis for messages sent and received. Dating back to the heyday of telegraphy, operators charged by the word. With the rise of the Bell System telephony was charged on a per minute basis. The 1984 Divesture of AT&T saw the rise of two part tariffs, to separate costs related to access and long lines networks. However, the basic premise was a per minute charge (oftentimes including a connection or first minute charge). This arrangement was simple and allowed for easy comparisons of unit charges, dividing total revenues by total minutes of use (MoUs). This price per minute is an easily comparable metric - a voice minute has changed little since Alexander Graham Bell famously whispered, “Watson, come here I need you.” Regulators could employ price per minute performance as a gauge on the efficacy of policies, and consumers could understand the value of what they are getting.

However, now, driven by competition in mobile telephony, communications carriers have offered an alternative set of arrangements (the same is now true for fixed line carriers and even some data networks). These have been variant of the flat rate plan, mixing flat rate and per unit pricing plans. Under such “buckets of minutes” plans, customers pay a flat rate for a huge number of minutes whether they use them or not. If their usage is over the allotted amount, then they pay on a per minute basis at a rate much higher. The per-minute charges are not intended to be used on a routine basis; rather, they are set at high or punitive levels, so as to enforce the need to upgrade to the next higher band as the customer’s usage increases over time. These plans are most appropriately viewed as representing banded flat rate arrangements. There are different bands, representing different numbers of total MoUs per month. In the United States, these banded flat rate plans have been well accepted by consumers and industry. They probably track underlying costs of mobile telephone service reasonably well, to the extent that usage-based average incremental costs in the United States are primarily a function of air time. Customers appreciate the predictability and the relative simplicity of the plans. So long as the consumer does not exceed the maximum number of minutes in the band, the consumer will tend to think of the plan as being purely flat rate.

The introduction of bucket plans, however, frustrates any calculation of per minute unit price. Plans of this type usually incorporate a per-minute charge for minutes, but it would be a mistake to analyse a banded flat rate plan as if it were a simple two-part tariff. In calculating per minute charges it is unclear whether to utilize actual minutes of use consumed or plan minutes sold, but not used. The results would be quite different. The former would yield a higher price, but would not indicate the value “left on the table” by the consumer. While the latter would tend to under represent the actual cost by making implicit the value of the option of further minutes of use at zero incremental price.

Insight: The appropriate way to regard bucket plans, and hence, to value per minute unit prices, is as a permutation of a financial call option. A call option affords the right, but not the obligation of use at a specified price, called the exercise or strike price, on or before a specified date. The intuition begins with a graphical analysis, see inserted figures. The graphic on the right displays the payoff of a financial option at various prices. The x-axis represents the price of the underlying security and the y-axis represents the potential profit or loss. The value of the option stays flat until the market price exceeds the strike price. At this point, its value increases and becomes positive once it exceeds the cost of the acquiring the option. Now consider the figure on the left. It shows the cost of two bucket plans. The x-axis is still the independent variable: minutes of use. The value (or price) of the plan is flat until exceeds the flat-rate portion of minutes. It then increases at a linear per minute rate, until at some point it is preferable for the customer to take the larger bucket. These two graphics look virtually identical, suggesting that the option valuation method holds promise as an effective metric.

The value of options can be captured by a complicated formula developed by Fischer Black and Myron Sholes in the early 1970s (the two shared the Nobel Prize for this observation). The option value is based, inter alia, on the current market price, the strike price, the variability of market price with regard to the strike price, the risk free cost of capital, and the maturity of the option. By finding equivalents for these variables in bucket plans, we can easily derive per minute values for under bucket plans.  I realize that this may be a bit of an oranges-to-tangerines comparison. There are certain items not present in the derivatives markets in these service plans. Nonetheless, such a calculus would allow for straight forward comparisons of the price of services plans across firms, countries and over time series where such plans might not exist.

My report on Public Safety and Security spectrum use in Europe publishes today. In the report, we marshal the policy and technological arguments for a reallocation of further dedicated spectrum for mission critical PSS communication from the transition to digital terrestrial television, the so called Digital Dividend. The website for the study is: http://www.public-safety-first.eu/. For the first time since I served on the FCC’s Hurricane Katrina response team, I have felt that my work has served a critical societal need. Yet, as an American who is used to being constantly bombarded with the need for homeland security, it was a bit surprising to me that PSS communications has received little attention in the discussion regarding how to redistribute this radio spectrum. So, it has been personally rewarding to influence the debate in at least some small way.

Insight: PSS service responders provide us with indispensable police, fire and other emergency services and the provision of emergency services extends beyond the social contract and invokes a moral obligation to protect life, welfare, and property. In order to enable the necessary broadband communications for next generation PSS communications, they will require two additional 15 MHz-wide blocks in the Digital Dividend bands. This allocation is on par with the 24 MHz which the US is reallocating from its DTV transition. A reallocation to PSS use cannot come soon enough since it may take more than ten years, to plan and deploy these networks.

Yes!  I have been waiting since 10th grade for the opportunity to use that joke.  Thank you, Raul.

Last week it was announced that Raul Castro is not only allowing Cubans to have cell phones, but computers and Internet connections as well.  This is so great for them!  Now they can suffer through that annoying guy’s ring tone or the MS Blue Screen of Death (Still comes bundled with XP).  What does this mean for us, now that we can have instant online access to communist chat buddies 90 miles to the south?

Insight:  This is an excellent learning opportunity.  How do we know when a policy has failed and it is time to change direction (ours, I mean)?  The US embargo against Cuba has raged (what, you don’t think it raged?!) since 7 February 1962.  In those just over 46 years what precisely has it accomplished?  Is another 46 years necessary?  Is Castro is going to fall any second?  Oh wait, what?!  He stepped down?!  If we want others to enjoy the fruits of liberty, the best way to share them is through the gains of trade.  Through fair and open commerce ideas are exchanged, and usually the best ones rise to the top.  Anyway, back to learn about how to evaluate when a policy is total washout.  What is it that makes us persist in the face of reality?  Why is it politically untenable to say we tried a policy and it did not work, so we are learning and improving?  Or better yet, the laws of the previous generation (or two generations ago) are no longer effective it is time to move on.

The Justice Department has approved the merger of Sirius and XM radio. DoJ reasons (and I use the term loosely) that retail prices are unlikely to rise, in part because of competition from other program sources (including hybrid digital radio [high definition, sic] and iPods), and in part because the two firms do not compete. The NY Times reported Thomas O. Barnett, assistant attorney general, as saying in announcing the decision, “In several important segments of their business, with or without the merger, the parties simply do not compete today and therefore the merger would not be eliminating any competition between them.”

Insight: To the underpaid, over worked judicial clerk reviewing the DoJ decision in some far off Circuit Court of Appeals who finds my blog on a good Google search someday, I say this: You can no doubt see the significant economies of scope and societal efficiencies generated by merging programming sources for Howard Stern, Snoop Dogg, and NPR. However, the reasoning from the DoJ is as irrelevant as it is illogical as it is factually wrong. In a two-to-one merger, the fact that there may be some areas where they DO NOT compete is utterly irrelevant. The analysis was supposed to focus on the areas in which they DO compete. Moreover, in which segments could XM and Sirius possibly not compete? They are Coke and Pepsi. It’s like saying Coke and Pepsi do not compete because if you drop Mentos into Pepsi, it does not explode. Ergo, they are in different market segments. Let’s rewind the tape for a minute and think about the alleged competition from other program sources. Imagine going into the ICC to lobby Anning S. Prall and saying that we no longer need spectrum policy since there is no longer any scarcity. After all, Mr. Edison’s Victrola competes with Mr. Marconi’s wireless apparatus.

Just because I have never read DoJ’s merger guidelines does not mean that they should not.

In hearing the Network Neutrality debate, does it strike you as odd when you hear the term ‘best efforts’? Most classes of Internet service are billed as being best efforts; however, if you want guaranteed delivery of your packets, you have to pay more. Why should you have to pay for something which is better than the best?! I know what it means colloquially, but this drives me crazy. Wiktonary defines effort as: noun, 1. The amount of work involved in performing an activity; exertion. 2. An endeavour. Since best is a superlative, you cannot have really something which is better than your best exertion. Can you? Well Okay, what about endeavor? Endeavor: noun, 1. A sincere attempt. A determined or assiduous effort towards a specific goal. Ah yes, always be sincere whether you mean it or not. If your best attempt doesn’t guarantee service what would more could you do?

Insight: Isn’t false advertising, if not a grammatical impossibility, to label a lower class as being “best”?

In a recent Cool Stuff, I lambasted Rep. Jerrold Nadler (D. NY) for a really stupid Op-Ed on the TV White Spaces he published in the Times.  Well, the OP-ED is still stupid, but now I have to commend Rep. Nadler for his courage and leadership.   Last week, Nadler defied Bush’s fear-mongering tactics and stood up for the rule of law by not providing retroactive immunity for the telecoms companies which helped the Administration to illegally spying on Americans.

Insight:  Kudos to Nadler, the “Bulwark of Democracy”.

I am very pleased to announce that the FCC has just published a suite of papers which I worked on while I was there. This work sought to tackle some of the intractable problems facing spectrum policy. For nearly a century, spectrum policy has focused on “scarcity” and resolving “harmful interference”. This was largely due to limits of the technology of the day. Now radios fueled by semi-conductor processing power, are enabling spectrum policy to evolve. We can now focus on a much more efficient principal of “use coordination”. The first paper in the series, OSP Working Paper #41, examines the Tragedy of the Commons and how economic protocols might be employed to alleviate this problem, while preserving the openness and innovation associated with unlicensed operation. It achieves this by coordinating competing demands on the spectrum. There are several different means for assigning priority to allocate use. However, allowing would-be users to express their willingness to pay seems to be the most economically efficient. Through an economic coordination protocol, usage at any given time is awarded to those with the highest value. OSP Working Paper #43, looks at how the set of rights which underlie this regime can be assigned through auctions.

Insight: Of all the work I have done in my professional career, this is the product of which I am most proud. The future of spectrum policy will be one of “use coordination”, where the “exclusiveness” of a license will be determined at an auction along with which entities are assigned the license. We are back to First Principles. This work holds the promise to wrestle the spectrum from the hands of a few powerful entities and put it back in our hands. In addition, it is likely to increase efficiency and hence the benefit we all receive from its use. The beauty of the system is that if the current spectrum arrangement is the most efficient, then it will emerge as such. At the very least, we will have exposed society to a huge upside with very little downside risk. It also would allow us to grant priorities to those whose ability to pay is diminished, such as public safety and financially disadvantaged users.

As a body of work, it has far reaching implications. At the recent FCC field hearing on network management (viz. Net Neutrality), there was much reasonable debate on what constitutes reasonable network management. There were many views as to how to handle competing demands on limited network resources. To my mind, the most efficient way will be some variation on willingness to pay, perhaps through an economic coordination protocol.