Testing the Limits of Net Neutrality Rules

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In the past few weeks we’ve seen both a wireless and wireline carrier launch new “zero rating” video streaming services that test the boundaries of the FCC’s net neutrality policy: T-Mobile’s Binge On and Comcast’s Stream TV.

According to published reports, FCC chairman Tom Wheeler has praised Binge On as “highly innovative” and “highly competitive,” while also noting that the Commission will continue to monitor the service under its “general conduct” rule. According to Ars Technica, an FCC spokesperson declined comment on Comcast’s Stream TV, which does not count against the company’s data caps.

The FCC’s reported response to the two services is not too surprising. While they share some similarities, they are also different in key respects. Among the differences that come initially to mind are:

In a blog post, Public Knowledge senior staff attorney John Bergmayer argues that Stream TV is subject to and violates the FCC’s Open Internet order as well as the consent decree Comcast agreed to as part of its NBC Universal acquisition. I’d recommend reading the post in full for anyone wanting a preview of legal arguments to be made in more formal channels by Public Knowledge and others likely to challenge Stream TV before the FCC and the courts.

According to Bergmayer:

Comcast maintains that “Stream TV is a cable streaming service delivered over Comcast’s cable system, not over the Internet.” But Stream TV is being delivered to Comcast broadband customers over their broadband connections, and is accessible on Internet-connected devices (that is, not just through a cable box). From a user’s perspective, it is identical to any other Internet service. Comcast’s argument is that if it offers its service only to Comcast customers and locates the servers that provide Stream TV on its own property, connected to its own network, that this exempts it from the Open Internet rules. This is an absurd position that would permit Comcast to discriminate in favor of any of its own services, and flies in the face of the Open Internet rules…

[I]t does not appear that Stream TV is an IP service like facilities-based VoIP. It is not available standalone; you need a broadband Internet access connection to access it. It is thus readily distinguishable from services like facilities-based VoIP. If Comcast offered Stream TV separately from broadband there would be a better case that it was more like traditional cable TV or a specialized service–but it does not.

Bergmayer also reviews some relevant language from Comcast’s NBC Universal consent decree, including:

“Comcast shall not offer a Specialized Service that is substantially or entirely comprised of Defendants’ affiliated content,” and…”[if] Comcast offers any Specialized Service that makes content from one or more third parties available … [it] shall allow any other comparable Person to be included in a similar Specialized Service on a nondiscriminatory basis.”

In an article in Multichannel News, Jeff Baumgartner previews what may be a core element of Comcast’s legal argument defending Stream TV:

“Stream TV is an in-home IP-cable service delivered over Comcast’s cable network, not over the public Internet,” Comcast said in a statement issued Thursday, the same day it launched Stream TV to its second market – Chicago. “IP-cable is not an ‘over-the-top’ streaming video service. Stream enables customers to enjoy their cable TV service on mobile devices in the home delivered over the managed cable network, without the need for additional equipment, like a traditional set-top-box.”

The FCC does address the idea in rules released in December 2014, which explain that “an entity that delivers cable services via IP is a cable operator to the extent it delivers those services as managed video services over its own facilities and within its footprint…IP-based service provided by a cable operator over its facilities and within its footprint must be regulated as a cable service not only because it is compelled by the statutory definitions; it is also good policy, as it ensures that cable operators will continue to be subject to the pro-competitive, consumer-focused regulations that apply to cable even if they provide their services via IP.”

In his blog post Bergmayer cites language from the Commission’s Open Internet order related to the provision of “Non-Broadband Internet Access Service Data Services.” In my view, a key sentence in that section of the order is “The Commission expressly reserves the authority to take action if a service is, in fact, providing the functional equivalent of broadband Internet access service or is being used to evade the open Internet rules.” On the face of it, I’m inclined to agree with Bergmayer that this appears to be the case with Comcast’s Stream TV, when coupled with its data cap policies and the reality of Comcast’s multifaceted market power in both distribution and content.

And, more generally, I think Bergmayer is correct that “Comcast’s program raises a host of issues under the Open Internet rules, the consent decree, and—most importantly—general principles of competition.”

The fact that Comcast is testing the bounds of the Commission’s new rules is not surprising, given its focus on maximizing shareholder value within a set of interrelated and dynamic markets in which it enjoys substantial market power, but faces significant challenges to its traditional revenue streams and growth prospects. In fact, I view it as helpful that Comcast is moving fairly quickly in this direction, since it is likely to force the FCC and the Courts to revisit yet again the question of how to craft communication policy that serves the public interest in the Internet age.

And, with the Commission having classified broadband access as a Title II service, my hope is that any court review of FCC action responding to Stream TV or similar services will consider substantive policy arguments (e.g., related to competition and the public interest) rather than simply ruling that the Commission cannot impose net neutrality rules absent a Title II classification of broadband access (which seemed to be the central message of the most recent DC Circuit Court ruling).

We are clearly moving into a world where the central element of our once heavily (and often clumsily) siloed communication infrastructure and policy (and arguably our economy and society as a whole) is IP connectivity. Though some believe the FCC has outlived its usefulness in that world, my own preference—at least for now—is that the Commission retain sufficient tools and authority to continue serving as the specialized regulatory agency responsible for setting ground rules that help ensure that the public interest is well served during and after this historic and vitally important transition from yesterday’s communication technology and industry structure to tomorrow’s.

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Shareholder value, the public interest & the Comcast/TWC deal

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Over the past several days I’ve seen a number of post-mortems on the decision by Comcast to drop its bid to acquire Time Warner Cable after it became clear regulators weren’t going to approve the deal. Two items in particular caught my attention over the weekend: a piece  by Eric Lipton in the New York Times discussing Comcast’s not-so-successful lobbying effort in Congress, and an interview with Comcast Chairman and CEO Brian Roberts on Squawk Box, a program carried on CNBC, a cable network owned by Comcast since it acquired NBCUniversal roughly two years ago.

One of the things that struck me about the CNBC interview is that it clearly illustrates one perspective on the deal and Comcast’s impressive growth, and on the net value of regulation. I’d call this the “investor” perspective.  From this perspective, the key metrics for evaluating Comcast, its actions and external factors impacting the company (e.g., regulation) are tied directly to the company’s ability to “maximize shareholder value,” something Brian Roberts and his team have been very good at over the years.

In contrast, the focus of the Times piece was concerns about the merger’s likely impact on the public interest rather than on shareholder value.

Market power skews shareholder value away from public interest

While some (perhaps some libertarian-leaning economists and CNBC commentators) might equate these two values, I suspect most people (experts and non-experts alike) would agree they are not the same, nor always positively correlated.

In fact, I’d argue that shareholder value and the public interest are likely to be inversely correlated when the company in question wields extensive market (and political) power and has a history of using it aggressively to gain competitive advantage and additional market power.  All the more so when First Amendment issues are part of the equation, as is very much the case with regard to Comcast.

In a market with healthy competition and low barriers to entry, companies can only succeed if they satisfy their customers. In such markets I wouldn’t be surprised to find a meaningful correlation between shareholder value and the provision of high-quality service.

But, as FCC data (see graph on pg. 12) makes clear, many customers seeking high-speed Internet connections lack an attractive (or any) competitive option to cable-delivered broadband service.  And the cost of market entry into this very capital-intensive sector remains very high.

And, as someone who has been both a Comcast and AT&T Internet customer, and has visited many an online user forum, my view is that, even when there is a choice between these two industry giants (or their peers), switching from one to the other is akin to jumping from the frying pan into the fire. And even if you’re eager to make that jump, the transition may involve a series of frustrating interactions with the CSRs, IVRs, techs, wait-times, billing mistakes and equipment returns/pickups of not one, but two companies.  For an extreme—and hopefully rare—example of this type of experience, spend a few minutes listening to this recording of a Comcast customer attempting to drop his service.

This lack of attractive options and reluctance to jump through the hoops needed to switch between them may help explain why providers of Internet and bundled services often offer big rebates and steep short-term discounts to get customers to switch. Perhaps they’re hoping that, this time, a customer will stick around after the discount expires, since they’ll know that their only option at that point would be to jump back into the same frying pan they left a short while ago. Switching back and forth may be a game some consumers are willing to continue playing, but I suspect it’s too time-consuming and frustrating for most (at least it would be for me).  Most, I suspect, simply want fast and reliable speeds, and responsive customer service and tech support.  Unfortunately, providing that may cost a bit more than offering switching rebates and discounts (or so it seems based on companies’ actions).

An admirable focus on the public interest

To their credit, the FCC and Justice Department took seriously their responsibilities related to determining the competitive and public interest impacts of the proposed deal. And though Congress had no direct say in these decisions, it seems that many of its members also remained unconvinced that “what’s good for Comcast is good for the country,” even after months of heavy lobbying.  As Lipton reports in the Times.

Despite the distribution of $5.9 million in campaign contributions by the two companies during the 2014 election cycle, and the expenditure of an extraordinary $25 million on lobbying last year, no more than a handful of lawmakers signed letters endorsing the deal…Congress has no direct power to approve or disapprove any merger, but endorsements, particularly if they come from black and Hispanic leaders, can send a subtle but important message to regulators that the deal is in the public interest and should be cleared…

Lawmakers cited a variety of reasons as to why Comcast’s elaborate pitch failed to gain traction this time: The miserable customer service ratings the company earns, for instance, made politicians leery of helping it out. In addition, there were much more substantial antitrust concerns associated with this deal, and some members of Congress said they thought Comcast had failed to live up to its promises in the NBCUniversal deal, and so could not be trusted this time.

Other lawmakers and staff members on Capitol Hill, in interviews Friday, cited Comcast’s swagger in trying to promote this deal. They said they felt that Comcast was so convinced in the early stages that the deal would be approved that it was dismissing concerns about the transaction, or simply taking the conversation in a different direction when asked about them…

“They talked a lot about the benefits, and how much they were going to invest in Time Warner Cable and improve the service it provided,” said one senior Senate staff aide…“But every time you talked about industry consolidation and the incentive they would have to leverage their market power to hurt competition, they gave us unsatisfactory answers.”

Together, the CNBC interview and NYT article highlight the difference between a thoughtful and holistic perspective on communication policy and public policy in general, and what I’d call the CNBC/libertarian/Wall Street perspective (for an extreme example of the latter, see Rick Santelli’s infamous trading floor rant attacking “losers” seeking mortgage modifications while ignoring trillion dollar bank bailouts and Wall Street criminality)

Having observed Brian Roberts’ career since its early days, my sense is that he is an extremely capable strategist, manager and dealmaker, and also a person of integrity.  And he has plenty of reason to be proud of the company his father and he have built.  It’s been impressive to watch.

But I also believe that he sees his primary role as maximizing shareholder value, and his primary constituency as being Wall Street analysts and investors, not Comcast’s customers. This perspective might not trigger regulatory problems if his company didn’t enjoy high levels of market power in key bottlenecks sectors of the communications industry. But, as the FCC and DOJ rightly concluded, Comcast does wield such market power and was seeking to augment it significantly with the TWC deal.

Customer satisfaction as a key indicator

As one longstanding piece of evidence to support my view of Comcast’s priorities, I’d point to its history of being consistently among the lowest-ranked companies in its industry (and among all U.S. companies) in terms of customer satisfaction.

Though I can understand Squawkbox hosts choosing not to confront their “boss” with tough questions, I would have liked to see one of them ask him about why this prolonged history of poor customer service has not yet been remedied, and how much Comcast planned to spend to address this issue in the future. Instead, we see the discussion about what’s next for the company leading to Roberts’ comment that:

The deal was going to slightly increase our leverage. That is now not happening. So that opens up room for further stock buybacks. And I think that’s an area that certainly we’re open to thinking about and talking about with the board.

I would have liked to see Roberts instead (or at least also) say that investing heavily to improve customer service was something he was going to discuss with the board, and that he was seriously committed to turning his company into a leader rather than a laggard in satisfying its customers, as measured by independent surveys.

But, just as the hiker only had to outrun his fellow hiker, not the bear, Comcast, to augment its shareholder value, need only leverage the fact that its local access pipe is much faster than most of its telco competitors, and invest just enough to ensure that the poor quality of its customer service doesn’t outweigh its speed advantage for too many customers.

And even if Roberts actually did announce a seriously-funded customer service initiative (or a large scale commitment to all-fiber networks), Wall Street analysts would most likely respond with downgrades of its stock, and pressure to direct cash flow to buybacks and dividends rather than to improved customer service and investments that could yield positive externalities with great social value but uncertain prospects for monetization by the company.

This speaks to the difference between what Marjorie Kelly calls “generative” and “extractive” business and ownership models, which I wrote about in relation to Internet access here and here (and may write about on the Quello Center blog in the future).

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WiFi, User Interfaces and “The New Comcast for the Internet”

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In an earlier post in this series I discussed business issues and opportunities related to a potential launch by Comcast of a WiFi-based service that could:

  1. further monetize the company’s investments in millions of in-home dual-SSID WiFi gateway devices;
  2. provide it with a relatively low-cost, high-margin entry into the wireless market space;
  3. give it a powerful position in the emerging market for nomadic, multiscreen multimedia services and;
  4. strengthen its overall market power in the communication sector as a whole.

In this two-part post I’m considering this same topic, but from a public policy perspective.

Viewed in very broad strokes, we have on one hand the potential benefits from what could be a new and attractively priced competitive option in the wireless sector. On the other hand, we have a range of complex and intertwined public policy issues related to the continued expansion of Comcast’s market power across multiple sectors of the communications industry, and the prospects for anti-competitive impacts of that expansion.

In Part 1 I focused on Comcast’s use of dual-SSID in-home gateways to deploy a network of millions of public access hotspots while:  1) charging customers $10 per month to lease these dual-use devices, which also provide them with a private in-home WiFi network; 2) using these customers’ electricity to power gateway devices that are also used as public-access hotspots; 3) activating the gateway’s public hotspot capability with an opt-out (vs. an opt-in) approach that has been criticized as “difficult to use or broken.”

Here in Part 2 I’m going to consider the competitive and public interest impacts of this strategy in the broader context of Comcast’s unique and synergistic mix of market power.

Who controls our “window on the world?”

As suggested in an earlier post, one emerging and important arena for competition is services that make it easier for customers to manage their media consumption across multiple fixed and portable devices, including large screen TVs, computer monitors, tablets and smartphones.

As the dominant provider of both wireline Internet access and traditional multichannel video, Comcast is well positioned to expand the scope of that dominance into this emerging “nomadic multiscreen multimedia” market.  This is especially true if it can successfully integrate wireless connectivity and provide customers with a combination of connectivity, content and user-interface that can’t be matched by other companies that lack Comcast’s broad set of competitive tools and assets.

As public comments by Comcast executives have suggested, the company’s deployment of more than 8 million WiFi hotspots is a big step toward achieving the threshold level of wireless connectivity needed to support this kind of strategy (as discussed in an earlier post, ubiquitous coverage and seamless handoff capabilities are less necessary for this type of “nomadic” service).

The multisource, multiscreen user interface arena has attracted a range of large and small companies from related sectors, including tech giants like Apple, GoogleAmazon and Sony, as well as Dish Network’s Sling TV, smaller players like Roku, and online content distributors like Netflix and Hulu.  But, so far, none has been able to achieve a position as the dominant gateway to the widening world of online media (this recent Wall Street Journal article provides some perspective on the challenges in this arena for both companies and consumers).

Can Apple become “the new Comcast for the Internet?”

With Apple once again in negotiations with major TV content providers, the Washington Post’s Cecilia Kang raises the question of whether the creator of the iPod, iTunes, iPhone and iPad, which fundamentally transformed the music and mobile communications industries, might finally be ready to work similar magic in the TV business.

Television viewers have long yearned for the day they could get their favorite programs streamed online without having to pay a huge cable bill each month. That day has arrived — and it’s confusing…

Enter one big company — Apple — that wants to clear up all the confusion. If it succeeds, Apple could become the biggest gateway to online video — the new Comcast for the Internet. And it has more cash on hand than any of its rivals to secure the most-desired shows.

As others have done before, Kang is speculating that perhaps Apple’s expertise in user interface and product design, coupled with its extremely deep pockets, passionate user base and experience transforming other media and communication industries, may finally be a powerful enough combination to enable the company to become “the new Comcast for the Internet.”

In a Backchannel column, Harvard professor Susan Crawford expresses a different view of this issue, suggesting that, if regulators are not proactive, Comcast itself may become an even more dominant version of “the Comcast for the Internet.”

(more…)

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Unlicensed Spectrum: Comcast Uses In-Home Gateways to Deploy Millions of WiFi Hotspots

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The focus of my last post in this series was business issues and opportunities related to a potential launch by Comcast of a WiFi-based service that could:

  1. further monetize the company’s investments in millions of in-home dual-SSID WiFi gateway devices;
  2. provide it with a relatively low-cost, high-margin entry into the wireless market space;
  3. give it a powerful position in the emerging market for nomadic, multiscreen multimedia services and;
  4. strengthen its overall market power in the communication sector as a whole.

In this two-part post I’m going to consider this same topic, but from a public policy perspective.

Viewed in very broad strokes, we have on one hand the potential benefits from what could be a new and attractively priced competitive option in the wireless sector. On the other hand, we have a range of complex and intertwined public policy issues related to the continued expansion of Comcast’s market power across multiple sectors of the communications industry, and the prospects for anti-competitive impacts of that expansion.

Here in Part 1 I’m going to focus on Comcast’s use of dual-SSID in-home gateways to deploy a network of millions of public access hotspots while:

1) charging customers $10 per month to lease gateway devices that provide them with a private in-home WiFi network while also being used by Comcast as a public-access hotspot;

2) using these customers’ electricity to power these dual-use gateway devices;

3) activating the gateway’s public hotspot capability with an opt-out (vs. an opt-in) option that has been criticized as “difficult to use or broken.”

In Part 2 I’ll consider the competitive impacts of this strategy in the broader context of Comcast’s unique mix of market power in both the distribution and content sectors.

*****

In my earlier post I noted that, in Comcast’s yearend earnings call, CFO Michael Angelakis told Wall Street analysts that Comcast’s investments in dual-SSID in-home WiFi gateway devices offers “great returns on their own and…seed us for different businesses that are attractive going forward.”

While clearly good for Comcast (as Angelakis’s comment suggests), a separate set of policy-related questions concerns whether the company’s approach to deploying, utilizing and paying for dual-SSID gateways provides net benefits to Comcast customers and the public interest.

According to a lawsuit filed by two Comcast customers (and complaints posted on various user forums), the answer to this question is “No.” As Jon Brodkin explains at arstechnica:

Plaintiff Toyer Grear and daughter Joycelyn Harris of Alameda County, California, filed the suit on December 4…in US District Court in Northern California, seeking class action status on behalf of all Comcast customers who lease wireless routers that broadcast Xfinity Wi-Fi hotspots. “Without authorization to do so, Comcast uses the wireless routers it supplies to its customers to generate additional, public Wi-Fi networks for its own benefit,” the complaint states.

Grear and Harris allege that Comcast violated the US Computer Fraud and Abuse Act as well as California laws on unfair competition and computer data access and fraud. They claim that the public hotspots, broadcast from the same equipment used for subscribers’ private Wi-Fi networks, raise customers’ electricity costs and harm network performance…The lawsuit [also] claims that “unauthorized broadcasting of a secondary, public Wi-Fi network from the customer’s wireless router subjects the customer to potential security risks”…

While Comcast says the public hotspots use different bandwidth than is allocated to a customer’s home Internet service, the lawsuit argues that they can create wireless congestion in areas with many Wi-Fi networks.

Comcast acknowledges that there could be a performance hit because the Wi-Fi networks use shared spectrum, but it says it designed the system “to support robust usage” and that there should be only “minimal impact.”

Brodkin also cites complaints at online user forums that Comcast’s home hotspot opt-out functionality is “difficult to use or broken.” But he also notes that Comcast customers retain the option of purchasing their own modem and router to avoid having to deal with this issue.

I’d add to this my own recent experience when I raised this issue with a Comcast technician who came out to deal with problems I was having with my Internet service (mainly very slow and erratic speeds, especially when using the WiFi connection to Comcast’s dual-SSID gateway device).

(more…)

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Unlicensed Spectrum: Comcast Considers its WiFi Strategy Options

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The last post in this series discussed Cablevision’s recently launched WiFi-only service called Freewheel. It ended with the speculation that Comcast—the nation’s largest provider of cable TV and broadband services—might look to Freewheel for lessons about how to approach the WiFi-based service it is expected to launch sometime in the near future.

Though Comcast executives have so far been reluctant to discuss their WiFi plans, they did shed a little light on their thinking during the company’s February 24 yearend earnings call.

For example, during the call’s Q&A session, Comcast Cable CEO Neil Smit, describing WiFi as “a great asset,” had this to say:

We have 8.3 million hotspots now, including the in-home and outdoors…[W]e are working on how we monetize that asset and bring it to market. As you know, we have MVNO relationships with Sprint and Verizon and the use of Wi-Fi continues to go up…[W]e will be working on ways to bring it to market over the coming months… and we will announce when we’ve got the product well-refined and developed…

Clearly, the world is becoming more mobile. We have our apps, our video apps out in the mobile space and they are getting a lot of usage. Our My Account app for customer service had 41% of our customer relationships visit it in December, so we view the mobile world expanding as well as we are assessing the business opportunity.

As with Cablevision, a key element of Comcast’s WiFi network and strategy is the deployment of dual-SSID “gateway” devices in customers’ homes. In addition to supporting an in-home WiFi network, these devices also provide a second “XFINITY WiFi” network for use by other Comcast customers within reach of this second network’s signal (the XFINITY WiFi service is available free for customers subscribing to the higher speed tiers offered by Comcast).

Though I’m not aware of Comcast having released any details regarding the mix of devices in its hotspot network, it seems reasonable to assume that these in-home devices account for the bulk of the 8.3 million hotspots comprising that network.  The company serves a total of 22 million broadband customers, so if just a third of them were equipped with dual-SSID gateways, this would amount to 7.3 million home gateway-based hotspots.

In response to a question during the call, CFO Michael Angelakis described Comcast’s investment in these in-home WiFi gateway devices as having “great returns on their own and…seed us for different businesses that are attractive going forward.”

This comment highlights the favorable economics for Comcast of investing in a service that leverages the WiFi coverage footprint provided by the millions of customer premise-based gateway devices it has deployed.  For example:

  1. There’s no licensing costs associated with WiFi spectrum use (as a point of contrast, Comcast and several other cable operators paid $2.4 billion for AWS spectrum in 2006 and six years later sold it to Verizon for $3.9 billion)
  2. Comcast typically charges a $10 per month rental fee for its gateway devices. Based on retail pricing of integrated modem/router devices, I’d guess that this provides the company with a financial payback on these devices within 12-18 months, perhaps even less. And it’s important to remember that these same devices also support the company’s core Internet access business, which has historically generated an average revenue of roughly $40 per month, and at very healthy margins.  The incremental cost of adding a public hotspot functionality to such devices is probably quite modest.
  3. The task of connecting wireless hotspots to each other and to the Internet is readily provided by Comcast’s existing wireline network, which is already supporting a mix of video, data and voice services to residential and business customers.
  4. Given Comcast’s existing technical and customer service infrastructure, the incremental operating costs associated with adding a WiFi-based service is likely to be relatively small.

Together, these factors suggest that the main cost components associated with operating a WiFi-based service will be incremental to Comcast’s core business and relatively modest, especially when compared to the cost structure of the networks operated by licensed wireless carriers.

Angelakis’s comments also suggested that, like Cablevision’s Freewheel, a future Comcast WiFi service would initially focus on providing added value to existing video and high speed data customers, by supplying them with untethered and nomadic connectivity outside the home environment.  But he also suggested the company’s investment in WiFi provides a strong platform for expanding beyond this initial focus in response to the continued and rapid evolution of market demand, technology and competitive dynamics (bolding is mine).

[W]hen you think about all the investment we have made in Wi-Fi over the years and everything on our cloud DVR and our TV Everywhere platform, the real goal has been that our customers can access their video anytime anywhere whether in the home or outside the home and we think Wi-Fi is a great delivery mechanism to expand that product. If Wi-Fi can also develop into a different type of service then that is an added benefit to the Wi-Fi investment.

In a follow-up post I’ll consider public policy issues related to Comcast’s WiFi strategy in the context of its overall strategy and market position.

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