Killing 7000 ISPs Created Net Neutrality

Killing Off 7000 Independent Internet Service (ISPs) Providers by the FCC Created Net Neutrality Problems — a 74% Drop in Companies Since 2000.The FCC Used Bad Data and Undue Corporate Influence to Destroy the Small ISPs, Violating Section 257 of the Telecom Act.
 November 11, 2007

FCC, FTC and DOJ Supported Actions that Blocked Small ISPs from Migrating Their Customers to Faster Services, Failed to Enforce Laws, Harming Choice and Increasing Duopoly Controls.

A Brief History of Internet Service Provisioning in the US.

Definitions:

  • Internet Service Provider (ISP): A company that helps connect a customer through a modem or other means to the World Wide Web and Internet, regardless of the speed of the connection. They can also offer web hosting, email, etc.
  • Dialup: A computer connected to a modem that allows a customer to use their normal phone line to connect to the Internet via an ISP.
  • Broadband, (also DSL, ISDN, Cable Modem, FiOS, U-Verse): A faster speed than “Dialup”.(This definition is for this discussion only.)
  • Line Sharing – Splitting the customer’s phone wire to be used for phone calls and faster Internet service through DSL.

In the US by the early 1990’s, a number of independent “bulletin boards” — a usually text-based online location that could be reached by a modem, as well as new self-enclosed online services, such as AOL or Prodigy, not to mention private university networks, had been proliferating. By 1995 there were over 15 million people online.

But it was in the mid-1990’s that the World Wide Web, a web browser, and a critical mass of customers with modems had come together so that they could go onto something most called the Internet. (It, too, has a longer history.)

A customer could go online by using a modem attached to a computer and dial a number over the regular phone line and connect to the “World Wide Web” via a company called an “Internet Service Provider” “ISP”. This online experience was NOT the same thing as local phone service, where the application was to supply voice service for America. This was a data service.

Thousands of small entrepreneurial companies came into being to bring America to the Internet. These innovative companies helped to develop and enhance most of the features we know today.

Neither Verizon, the new-AT&T, or any of the other local telcos of cablecos had any substantial role in this innovation explosion. It was small, independent, entrepreneurs that got customers to try and use this new service. By 2000, in fact, an estimated 9335 companies were in business. More to the point, none of the phone companies —not the new-AT&T, SBC or Verizon were even in the Top 10 of US Internet Service Providers.

The US Census data for the year 2000 showed 9,335 independent ISPs, mostly small businesses. By 2005 there was a drop of 6898 companies, 74%.

US Internet Service Providers (ISPs) Source: Census

1997 1998 1999 2000 2001 2002 2003 2004 2005
2,751 4,915 7,099 9,335 8,450 7,627 4,249 4,327 2,437

And there were other sources tracking this information. According to ISP Planet’s survey of ISPs in March 2001, there were 7,288 ISPs listed in their directory.

Most important: Over 50% of the US was using these small companies, NOT the big ones.

“54.2 percent of American’s accessing the Internet and the World Wide Web do so through thousands of independent ISPs scattered across the country, which totals some 77.5 million subscribers nationwide.”

The ISPs drove the US Internet economic engine, selling computers, servers, modems, and new services. They even helped SBC, Verizon and the other phone companies as they helped to sell millions of second lines. And all of this was a direct result of small independent companies, not the big companies.

The Laws Opening the PSTN — the Public Switched Telephone Networks.

Everyone seems to have forgotten that the Telecommunications Act of 1996 opened up the utility so that other, small companies could offer services. Section 257 of the Telecom Act required that the FCC actually care about and promote small businesses using the networks — by eliminating ‘barriers to entry”.

Section 257 of the Telecom Act; http://www.fcc.gov/telecom.html#text

“SEC. 257. MARKET ENTRY BARRIERS PROCEEDING.”a) ELIMINATION OF BARRIERS- Within 15 months after the date of enactment of the Telecommunications Act of 1996, the Commission shall complete a proceeding for the purpose of identifying and eliminating, by regulations pursuant to its authority under this Act (other than this section), market entry barriers for entrepreneurs and other small businesses in the provision and ownership of telecommunications services and information services, or in the provision of parts or services to providers of telecommunications services and information services.” `

“(b) NATIONAL POLICY- In carrying out subsection (a), the Commission shall seek to promote the policies and purposes of this Act favoring diversity of media voices, vigorous economic competition, technological advancement, and promotion of the public interest, convenience, and necessity.”

And everyone seems to have forgotten that “line sharing” was established — to lower cost and increase availability of broadband service:

http://www.fcc.gov/Bureaus/Common_Carrier/News_Releases/1999/nrcc9092.html

” ‘Line Sharing’ to Lower Cost and Increase Availability of Broadband Services Used for High Speed Access to the Internet.” Today, the Federal Communications Commission (FCC) adopted rules to promote competition for advanced services, by directing local telephone companies to share their telephone lines with providers of high speed Internet access and other data services. This Order is intended to ensure that as many companies as possible will be able to deploy new technologies on a faster, more cost-effective basis and should accelerate the ability of residential and small business customers to access competitive broadband services from their choice of providers.”

Remember, the phone companies were supposed to have upgraded the networks for faster connections with fiber optic services – but they didn’t do it. Instead, it was the competitors who started offering faster service.

DSL was actually a bait-and-switch. The companies couldn’t build their fiber optic services as their contracts stated — they submitted falsified documents about their actual costs. Since everyone was enamored with just going online, the phone companies used their old copper wiring to supply DSL, which was considered inferior in 1992. — But people wanted faster speeds, so they kludged together a service.

Screw The ISP: Screw The Customer. Screw America.

But here is where the story changes. Starting in 1996, the Telecommunications Act opened the networks to competitors and so these competitors could offer DSL, and the ISP would partner with these competitors to use their DSL or could be able to offer DSL through ‘resale” of the Bell companies’ DSL service.

However, what happened next was and out-and-out screwing on every small ISP and ever customer that used that ISP.

First, the FCC refused to investigate the anti-competitive behavior of the incumbents towards the Internet Service Providers. In thousands of documented cases, SBC, Verizon, Qwest etc. were essentially not showing up for installations, caused multiple problems (remember, the networks were not made to handle DSL over copper) so that 40% of all orders didn’t go through the first time. Imagine being a small company and not having orders not go through.

To top it off, the FCC failed to investigate the fact that the wholesale rates to these small companies were in fact higher than many of the retail rates offered by the incumbents.

Also, while Verizon, SBC and others could afford to lobby the FCC, etc., to change the laws, most of these independent companies didn’t have the resources to show up in Washington.

New Networks Institute’s survey work of ISPs documented these claims, as did other groups, such as the Texas ISP Association or the USISPA.

Second, Favoritism and Cross-subsidization went unchecked. Besides simply supplying competitors with substandard customer services, Verizon was supposed to have a separate subsidiary to deploy and market DSL, which was supposed to be a competitive product to other companies. However, as we will discuss in other parts of this series, there was massive cross-subsidization of the Bell companies’ DSL and Internet services. From advertising costs that were paid through local phone rates to simply not paying full fare back to the local provider for use of the networks, the favoritism of the phone companies’ own products gave these companies an improper marketing and cost advantage.

But third, it got a lot worse. The FCC started a series of proceedings known as the “Triennial Review”, which, at the end, closed down ALL of the ISPs’ use of line sharing as well as the resale of DSL and all access to any new services, such as services like FiOS and U-Verse. Ironically, during the Time Warner-AOL merger, the FCC granted the merger because cable companies were supposed to be opening up their networks for Internet Service providers as well.

SPEED MATTERS: How to Kill Off 7000 ISPs by Redefining the Word “Telecommunications”.

The way the FCC got rid of the ISPs was simple. It decided that anything that is faster than dial up would now be an “information service” and no longer a “telecommunications service”. The telecommunications service under the Telecom Act had a series of responsibilities — known as “common carrier” obligations. An “Information Service” has none of these obligations. It also defined these “Information Services” as “Interstate” –all interstate services are controlled by the FCC vs ‘in-state’, where the states’ have control over the service. And it allowed the “connection to the Internet”, as well as the network used for higher speed to now be considered one thing — an Interstate Information Service.

For the last 100 years, increasing the speed of a service did not change the service. For example, in business there is a service called a “T1” (pronounced “Tee One”) that handles the equivalent of 24 lines or can be used all together to create a faster speed. If you use this service with an Internet provider and go to the Internet, the T1 doesn’t become an ‘information service’ — it remains a telecommunications service with obligations.

So, the FCC, backed up by dubious legal decisions, decided it would kill off 7000 small businesses with the stroke of a pen, not through competition. If you want to use an independent ISP such as Bway.net, Panix, BrandX or Net Zero and use Verizon’s DSL service, you can’t, even though DSL service is on the exact same wire a T1 uses.

This redefinition and the failure to enforce the laws killed off 7000 companies who were essentially blocked from growing their current customer base. They were given a death sentence by regulatory fiat.

Erasing the ISPs from History With Bad Data

In 2004, Teletruth filed a Data Quality Act complaint against the FCC. In the Agencies’ “Regulatory Flexibility Act (RFA) Analysis” — an ‘impact’ study, which the FCC is required to do to see if their rulings will impact small businesses the FCC essentially failed to take their obligations seriously. The FCC used boilerplate information, failed to examine the impacts, and then claimed all was well — using 8-years old data from 1997.

In 2004, when there were really 4,327 ISPs, the FCC claimed there was 2,751. However, that is not the important part. Had the FCC actually used the timeline we present below as well as the data presented by those actually collecting the data, such as ISP Planet, it would have discovered that the ISPs were being put out of business by the problems with wholesale rates, anti-competitive behavior, and the eventually the removal of their rights under the Telecom Act.

The FCC would have found a drop of 5,086 companies by 2003 a drop of 54%, a 74% drop from 2000 to 2005.

US Internet Service Providers (ISPs) Source: Census

1997 1998 1999 2000 2001 2002 2003 2004 2005
2,751 4,915 7,099 9,335 8,450 7,627 4,249 4,327 2,437

The FCC is still playing with the numbers today. FCC is using 5 year old-data for current 2007 proceedings from 2002, even though we found more accurate data.

FCC Doesn’t Regulate ISPs: Poppycock.

More to the point, the FCC, claims that the FCC doesn’t regulate ISPs and therefore had no obligations to worry about this group.

The FCC http://www.teletruth.org/docs/TriennailFCC0336A1Teletruth.pdf

“734. Many of the complaints raised regarding the Commission’s IRFA hinge on the argument that in performing the analysis mandated by the RFA, an agency must analyze the effects its proposed rules will have on “customers” of the entities it regulates.2163 But as the courts have made clear time and again, this is not the case. Indeed, the D.C. Circuit “has consistently held that the RFA imposes no obligation to conduct a small entity impact analysis of effects on entities which [the agency conducting the analysis] does not regulate. Thus, we emphasize that the RFA imposes no independent obligation to examine the effects an agency’s action will have on the customers of the companies it regulates unless those customers are, themselves, subject to regulation by the agency.”

This is, of course, political poppycock. The FCC again misspoke as they specifically control the ISP’s networks, especially in resale of the telco’s DSL lines. If you block a companies’ ability to use a network that their business is based on, then you harm the company, thus regulating part of their business out of existence. The FCC simply wanted to clean off the PSTN – get rid of those pesky ISPs.

In their Order “FCC Eliminates Mandated Sharing Requirement On Incumbents’ Wireline Broadband Internet Access Services. 08/05/2005 http://www.fcc.gov/meetings/080505/sharing.pdf

Here it is in black and white: — The phone company can stop service to “unaffiliated ISPs”:

“To ensure a smooth transition, the Order requires that facilities-based wireline broadband Internet access service providers continue to provide existing wireline broadband Internet access transmission offerings, on a grandfathered basis, to unaffiliated ISPs for one year.”

Did the FCC miss that they are regulating the “unaffiliated ISPs”‘ network services – the very services they use for their business?

How many ISPs are left?

NOTE: We understand that some companies deserved to be put out of business because of bad business practices, some companies merged, got sold off, or actually went belly up because of fair competition.

But questions remain: How many companies were there, are there now, and why didn’t the FCC accurately track the companies or more importantly assess the harms through their own deregulatory policies, as required by law? While some groups have recently woken up to the fact that there is a paucity of accurate broadband statistics, this problem has been ongoing since the implementation of the Telecom Act in 1996.

ISP Planet’s Take on the ISP Market for 2007

“A warning about consolidation…The top five ISPs in our list (counting Time Warner twice) have a combined market share of 56.5 percent. The combined market share of ISPs ranked 6 through 21 is 19.4 percent.”

However, it is impossible to tell how many ISPs are now also the speed provider and whther the other ISPs are simply waiting to be put out of business because they can not migrate their customer base.

There is also another trend to the data – many newer firms are wireless ISPS, some of which were wireline ISPS who changed their business models, or started anew.

Creating Net Neutrality by Killing Off Independent ISPs

The FCC’s bad regulatory policies has allowed one company to control of local, long distance, ‘connection to the Internet’ and the speed of the connection (broadband). Known as vertical integration of products, if the customer had a choice of ISP and the ISP was NOT tied to the speed, then if the ISP blocks the customer, the customer could simply change their ISP or their broadband connection.

And if they were still ‘telecommunications’ services with ‘common carrier’ obligations, as separate businesses they would have no rights to examine the packets, massage the packets, snoop, block, degrade or anything else.

It is only when you can tie the services together that can you edit Pearl Jam, block VOIP, degrade Bit Torrent, or have the Verizon ‘homepage’ as a default. Without competition, ‘Terms of Agreement’ that gives complete control to the single source service provider can be enforced and not questioned or you lose what could be the only service available.

In a duopoly, it doesn’t matter that there are two companies offering service if they both are doing the same, anti-customer, anti-competitor behaviors.

Net Neutrality assumes that you’ve given ALL controls to one or two players that can act badly on ALL levels of the service offering. — This is monopoly power 101.

What we lost is our ability for choice, our ability to not have Big Brother control the networks by limiting access and players.

Bad Public Policy: Did America benefit from the killing off of these small businesses? Did customers’ lose valuable ‘choice’ in services, not to mention features? If America’s policy is to bring everyone to broadband, is the FCC’s plans to kill off the remaining ISPs and dialup customers? Is that the right policy for America – Screw the small competitors?

The FTC is also to blame. Their recent report on broadband concluded that Net Neutrality was not a problem, and calls the market “Broadband Internet” providers, tying the pipe and the application. Heavily quoting AT&T and Verizon sponsored ‘experts’, the FTC claimed that there were only ‘hundreds’ of providers, missing the 9000 that once existed.

To quote of a John Stewart, Comedy Central-like phrase “oops'”

To top this off, the FCC is currently contemplating the strip-mining of the remaining safeguards on something called “Special Access”, which is the ability of companies to rent parts of the networks for use in broadband and even wireless competition. Known as “forbearance”, this is just another term for removing the opening sections of the Telecom Act and once again harming the remaining small businesses. We will address this again, as the FCC’s decision is due December 5th, 2007. See:http://www.freetocompete.com/index.asp

We note that the recent Joint-Board for Universal Service outlining a plan for broadband only once mentions the words “INTERNET SERVICE PROVIDERS” — not once acknowledging their right to exist and receive money from the Universal Service Fund to deploy broadband.

Reading on this topic:

 

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