Google and Verizon get down to business

Net  Neutrality Now that Google and Verizon have come semi-clean about their ex parte discussions regarding net neutrality some of the more intriguing outstanding questions have been answered, even as some new ones have been raised. In the latter category is the matter of how much of what’s in the Legislative Framework Proposal the two issued Monday genuinely predates the leak of their negotiations and how much was quickly “revised” over the weekend in response to the controversy triggered by the leak. My guess is some but not all, and some.

As for the questions now answered, one that has been puzzling me is was why the two companies went rogue in the first place. Both were active participants in FCC chairman Genachowski’s all-hands net-neutrality negotiations, and it’s generally considered politically unsound to stab the head of your major regulatory agency in the back while he’s trying to broker an industry-wide deal. For Verizon and Google to have risked being found out while working on a secret side deal suggests one or both found something pretty alarming in the general drift of those broader negotiations.

Now we know. The Google-Verizon framework specifies:

The FCC would enforce the consumer protection and nondiscrimination requirements through case-by-case adjudication, but would have no rulemaking authority with respect to those provisions… The FCC would have exclusive authority to oversee broadband Internet access service, but would not have any authority over Internet software applications, content or services. Regulatory authorities would not be permitted to regulate broadband Internet access service [emphasis mine].

Clearly, explicit FCC rulemaking authority — as opposed to oversight authority — was a deal-breaker for Verizon and/or Google (I’m guessing Verizon) and the FCC was  probably hanging tough in the negotiations on its own authority.  When the FCC wouldn’t budge, Verizon started thinking about having Congress — where the telecom companies have enormous influence — set the rules instead of the commission. Hence the “legislative” framework hammered out with Google.

How do we know FCC authority was the sticking point? From FCC commissioner Michael Copps one-paragraph statement on the Google-Verizon framework:

Some will claim this announcement moves the discussion forward. That’s one of its
many problems. It is time to move a decision [sic] forward — a decision to reassert FCC authority over broadband telecommunications, to guarantee an open Internet now and forever, and to put the interests of consumers in front of the interests of giant corporations.

Why is limiting the FCC’s authority over broadband so important to Verizon? Given the Federal Circuit Court’s ruling in the Comcast case the FCC could only assert rulemaking authority through Title II reclassification of broadband service.

By turning broadband networks into dumb pipe, reclassification is the great leveler of broadband, washing out operational differences between the shared-network architecture of cable ISPs, which by virtue of their design need a lot of active management to keep them from crashing, and Verizon’s point-to-point DSL and fiber optic networks, which do not.

Verizon believes it has the superior technology and does not wish to be bound by rules designed to check the abuses of cable ISPs — the likely result of any FCC rulemaking. That’s particularly critical when it comes to bandwidth-hogging web-based video content, which Verizon’s network is better able to handle than is Comcast’s.

Specifically, Verizon doesn’t want any rules that would preclude it from making business-to-business deals with content owners and distributors. It believes (probably correctly) that it is better positioned than its cable-based rivals to offer content owners guaranteed end-to-end QoS, for a price, without degrading other users’ experience (thus, the framework’s cheeky requirement that broadband providers “provide to application and content providers information about network management practices and any other information they need to ensure that they can reach consumers”). Leveraging that technology advantage is crucial to its long-term broadband business model. Reclassification could deny it that opportunity and thus is a non-starter as far as Verizon is concerned.

Online video is also where Google comes in. Though famously user-focused, Google is, fundamentally, a B2B company. Virtually all of its revenue comes from selling search ads to other companies. It derives almost no revenue directly from consumers. Over time, recognition of that arrangement increasingly has shaped Google’s strategy, from the taming of YouTube’s copyright abuses to its development of a mobile operating system. Both moves were designed to expand Google’s ability to sell ads to other businesses.

Google TV represents perhaps its boldest bid yet to expand its advertising reach. It’s goal is to establish search as a primary modality for video content discovery on connected devices and platforms. It can then leverage the ad-targeting technology of AdSense and AdWords to place search-based video ads in and around video content, a potentially huge new business for Google.

With that as its goal, Verizon could be a valuable partner for Google. It’s FiOS IPTV platform could be the perfect environment for Google to nurture its nascent video ambitions. The ability of FiOS to integrate standard linear video with IP-delivered content, seamlessly, makes it optimally fertile ground for search-driven content discovery.

Google TV, of course, is also based on Android, so it’s reasonable to assume that Google has mobile ambitions for the platform as well. Verizon is already a critical partner for Google in mobile so it’s reasonable to assume it shares those mobile ambitions for Google TV. Thus, the framework’s carve out of wireless broadband from any neutrality requirements.

In short, Google and Verizon have parallel and overlapping ambitions with respect to online and mobile video delivery. For  those ambitions to reach full flower, however, both sides need to ensure maximum flexibility for B2B commerce. No formal “business arrangement” or even evil conspiracy is required for them to be on the same page on that point.

That flexibility is threatened my some of the steps the FCC is considering with respect to net neutrality, particularly Title II reclassification. The trick,  for Google in particular, is to figure out how to preserve maximum B2B flexibility — for itself and its network partners — while nominally preserving neutrality and openness for Internet users.

Whether they’ve chosen the right approach, given the backlash, is an open question. But it’s no longer a mystery.

Further reading:

James Boyle: Is Google Naive, Crafty, or Stupid?

Google’s Deal on Open Internet Access Opens Door to New Clout

Google-Verizon Offer Cake-having, Eating “Policy”

Google-Verizon Pact: It Gets Worse

Google-Verizon NN Pact Riddled With Gaping Loopholes

AT&T to Expand TV Service to iPhone, BlackBerry