Sunday, December 20, 2009

Citadel Broadcasting Moves to Reorganize and Restructure

Citadel Broadcasting files for bankruptcy after getting board approval to do so. Citadel is the third largest radio broadcaster in the United States, after having acquired Disney’s ABC Radio company in 2006. At that time, Radio was still booming and Citadel thought it was making the right decision going into debt for the acquisition. What a difference a day makes.

The broadcasting giant has entered a pre-arranged bankruptcy with the support of its lenders, who Citadel owes an aggregate of over $2 billion UDS. Additionally, the company plans to restructure and swap a large part of their debt into equity in the newly structured Citadel. According to an article in the Wall Street Journal, the CEO, Farid Suleman, shall remain at the helm.

The Financial Express reported that the structured filing would enable Citadel to reduce its debt load to approximately $762.5 million. Although the company was successful in getting their pre-arranged bankruptcy approved, they will need to petition for more creditor support in court in order to get the reorganization plan approved by a judge.

K. Reilly

Monday, December 7, 2009

Comcast: A Shark in the Water

GE and Comcast announced their plans for a joint-venture concerning GE’s NBC Universal last week. The two have been working toward smoothing out the details of the sale of 51% stake of NBC Universal to Comcast, with the ability of GE to gradually divest the remaining 49% over time. The sticking point was Vivendi’s 20% stake in NBC, which was worked out. Vivendi would sell its stake to GE for an estimated $5.8 billion, according to The deal is all but sealed, with the exception of regulatory approval. This transaction would essentially make Comcast one of the largest conglomerates in the cable industry. This is a win-win situation for the entities involved. It is a significant move for GE to sure up their bottom line, by divesting a business that is not lucrative. For Comcast, it would be an excellent way to be a cable service provider, as well as a distributor of content. The problem is that it seems to be a bit monopolistic and in some way poses a conflict of interest where consumers are concerned. Comcast would be the scary equivalent to Jaws in the ocean of service providers. As a consequence, customers will be subjected to higher fees and forced to pay extra for content that would have been included in the basic package. The are undoubtedly other issues to be considered.

It should be noted that there have been complaints about Comcast flexing its muscles in the past. Smaller providers have been victimized and bullied by Comcast much in the way that Intel was blocking AMD from eroding their market share. That is not a good sign. If this was an issue prior to Comcast purchasing the majority stake in NBC Universal, what can we expect from them if this venture is approved?

I know I said that this was a "win, win" situation, but that was speaking from the stand point of the entities involved. If I had to include how the consumers would fair should this acquisition pass regulatory approval, I would have to say win, win, lose situation.

K. Reilly

Monday, November 30, 2009

Dubai Troubles Loom:

As the news of Dubai made its global ripple on the financial markets, Europe stocks fell over 3% on Thursday, marking the steepest decline since this past April. Meanwhile, Friday’s opening market in the US quickly headed south, as investors ran for cover. By 9:30 the Dow had declined over 200 points, sending a troubling message to investors and non-investors alike. After several attempts to rally the Dow ended up just over 150 points down.

Dubai, known for its massive investments and development of the world’s most breath taking resort and hotels for the super rich, requested a 6-month stand still from its creditors. This sounds like nothing more than structured bankruptcy, without the stigma. Probably a wise decision, averting drastic decline in assets value and investor abandonment. Smart move. The reality remains that Investors held high hopes for high-end returns, which were reduced to pipe dreams since the Persion Gulf Debt Crisis unfolded last week.

On November 24th, the request for a stand still made to the Dubai World creditors involved interest payments on an estimated $60 billion worth of debt. The News prompted insurers to increase the cost of insuring Dubai’s debt, which was swiftly followed by Moody’s and Standard and Poor’s downgrades of the government-related entities in Dubai. Justin Urguhart Stewart, co-founder and director of Seven Investment Management, is quoted in the Wall Street Journal as saying “many [investors] have had their heads in the sand regarding Dubai”, adding that there was a lack of understanding of what the investment risks might have actually been.

To midigate fallout, the country’s government is doing everything it can to limit impact of its debt woes. Dubai United Arab Emirates(UAE) pledges to stand by Dubai foreign and domestic banks in the country. The country’s federal government, which is obviously backed by oil money, states that the UAE’s central bank has made overtures to all banks with branches domiciled in the country, making it clear that they will have access to cheap money, as well as the establishment of a special “additional liquidity” facility.

This morning, Squawk Box reported that an analyst at Credit Suisse estimated that European and American investments in Dubai amounted to only 5% exposure. That’s a relief. I am sure more will unfold as the week progresses.

K. Reilly

Monday, November 16, 2009

Housing Market: Struggling to Find Stability

The Federal Reserve Board of Governors is maintaining interest rates at or around zero percent, as an incentive to lure home buyers back into the market. The Feds are also buying up mortgage paper, which is a purchasing binge that is scheduled to end fairly soon. Nevertheless, the message is clear that the government is trying to do everything it can to stabilize the housing market. Two weeks ago housing analysts were overly excited about the rise in consumer spending in the housing sector during the 2nd quarter of this year. The reality eventually set in and we are now forced to face the fact that there will be no miracles or swift recoveries waiting around the bend.

The 30-year mortgage interest rates have declined in the last two weeks to 4.91 percent, down from 4.98 percent. Just one year ago the average 30-year mortgage interest rate was over 6 percent. There are signs that the housing market is improving, but we have previously noted that 80 percent of the FHA purchase loans this year have been first-time buyers, motivated by the tax incentives.

Determined to keep the ball rolling, the government has proposed a bill that will force banks to assist home owners who are facing foreclosure, in an effort to curtail the avalanche of foreclosures expected from the subprime loans underwritten in 2007 and 2008. Unfortunately, the Banking industry and real estate lobbyists’ made hefty donations amounting to over $350-million dollars to congressional campaigns during the height of the housing market, which may explain why the proposed bill appears to be on a slow path, and may never see the light of day. Let's hope, for the sake of the homeowners that will be facing foreclosure in the coming months, I am wrong.

k. Reilly

Monday, November 9, 2009

Out Of Control Credit Card Rates Add To Consumer Woes

It is bad enough that millions of Americans are out of work or employed in lower paying jobs, struggling to make bill payments. A number of credit card companies are adding salt to the wound by charging exorbitant interest rates on outstanding balances. In fact, they are beginning to take on loan sharking characteristics by charging as much as 36% to customers, as well as doubling the minimum monthly payment required to avoid penalties, making payments nearly impossible for some people.

Although President Obama signed a new law last May for credit card reform, the companies are making every possible effort to maintain their bottom line income. Under the new law, issuers will be curtailed from raising rates on existing
balances. However, customers are seeing new annual fees and inactivity charges that were not imposed before. At Bank of America, some clients were told that their no-fee credit cards would be subject to a new annual fee. At Chase, some clients must pay 5% of their monthly balance as a minimum payment - up from 2%. That translates to a 150% increase!

With other negative changes such as diminished rewards programs and shrinking credit limits, along with a record number of bankruptcies and declining buying power, the vice has tightened yet another notch to squeeze the American consumer by choking off the credit lifeline.

C. Cohn

Saturday, October 31, 2009

Are We There Yet?: The Economy and Mixed Messages

For the first time in over a year, the economy showed growth in the third quarter. Many main-stream news programs and financial news shows were reporting that the recession is over. Not so fast. It's a little surprising that financial news programs were making these declarations, since they should be more savvy about what the indications show, versus what is actually the case.

Lest we forget, the portions of the stimulus package which were rolled out over the last 8 months are clearly doing its job in stimulating the economy. So what we are seeing are the results of the (much criticized) steps taken by the Obama administration, under the auspices of the Treasury Secretary, Geitner. The economic growth data was reported by the Commerce Department on Thursday, sending stocks into a much needed rally, following four straight days of losses. Consumer spending for cars and homes amounted to an increase of 3.5% from July through September. That's great news for sure, but it is too soon to break into a Kenny Ortega dance sequence. The stimulus programs, i.e., cash for clunkers, and first-time home buyers tax credit, have artificially induced activity in these sectors. These programs are essentially crutches for the economy to get it hopping along until it can actually go it alone.

The Commerce Department's data showing a decline in consumer spending in September, (which is right after the cash for clunkers program ended), tells the true story about the economy still struggling to get back on its feet. The graph below shows consumer spending in August reaching the same levels of August of 2008.

Although this is encouraging, the September declines are certainly cause for concern for investors and retailers. Nevertheless, Friday’s issue of Investor’s Business Daily reported the increased growth data as “a clear sign that the recession has ended”. They are not alone in their assessment, but it couldn't be further from the truth. Thursday’s triple digit rally was short lived, as the DOW slipped into negative territory during Friday’s trading day. The sell off appears to indicate investors' realization that the so-called “recovery” is superficial, thus not sustainable.

America should put these times of economic uncertainty in perspective: remember how long it took for the country to dig itself into this steep hole, and note that we cannot simply click a “Reset button” to get us out. The country’s economy is moving in the right track, and drifting away from the darkest days of the recession - and no, “we’re not there yet”.

K. Reilly
Cohn-Reilly Report

Monday, October 19, 2009

Regulating the Industry: Derivatives spared harsh regulatory overhaul

Derivatives manage to maintain their smoke-and-mirrors appeal for hedge funds as the House Finance Services Committee approves a Derivatives Bill that would finally put derivative transactions under government regulatory control. The derivatives bill forces many of the complex products and negotiated contracts under the auspices of Commodity Futures Trading Commission, and Securities Exchange Commission, according to the Wall Street Journal.

Derivatives have always been a high risk, high return products that, until now, had little regulation and even less transparency. Derivatives are complex products which are privately negotiated agreements structured to hedge interest rate, credit risk, and commodities. These transactions involve private contracts with various institutions and third parties, often consisting of strips of bonds or interest rate swaps that are extremely difficult to track, or audit. So why did it take the near collapse of the financial market to bring the issue to light? Apparently, last year when authorities were trying to unravel the portfolio of derivatives for the faltering insurer AIG, regulators soon realized that it was next to impossible to figure out who owes who, and what the market value was given the circumstances.

Although the derivatives bill is a step in the right direction, there are exceptions written into it that should be cause for concern. Under the new bill, derivative contracts that are made between institutions are deemed standard and required to be processed through a clearing house. These trades will have to be traded on an electronic platform or exchanges, where dealers are required to use their own funds to make trades. The bill makes exceptions, however, for companies that use swaps as a way to hedge. In this instance, companies won't have to trade on exchanges, nor will they be required to go through a clearing house. Needless to say, this will result in untraceable trades, which could undoubtedly lead to abuses. It's these kinds of unregulated complex transactions that got us into trouble to begin with. It should be no surprise to find that corporations aggressively lobbied against this bill, and very possible that he loop hole left open for under-the-radar transactions is a kind of consolation gift.

The chairman of the Commodity Futures Trading Commission, Gary Gensler, was quoted as saying that "substantial challenges remain", although the passing of the bill marked a significant step (WSJ - Oct. 16). The bill will most likely see several revisions before it is signed into law, which should be by the end of the year.

Click for: Hedge Fund Fraud Article

K. Reilly

Saturday, October 10, 2009

Telecoms Decline As The Market Climbs

The major indexes rallied over the last six sessions, approaching twelve month highs established in September. This was bolstered by the first government to raise interest rates in over a year - the Australian Central Bank, and Alcoa, the traditional first Dow component to report earnings, beating analysts expectations by sixteen cents.

The Telecoms did not participate in the week long rally - why? On Wednesday, AT&T surprised the industry by announcing that they will allow Apple’s iPhone to carry VOIP (Voice Over Internet) applications, such as Skype, over AT&T’s 3G Network. This was applauded by analysts and financial journalists, but the public reacted adversely, dragging down the sector each day since the announcement was made. The investor knee-jerk reaction was due to the concern that long distance earnings will suffer, because customers will use Skype to make overseas calls for free, avoiding the regular per minute charge that is a lucrative source of income.

The same kind of reaction occurred when AT&T decided to subsidize the purchase of the iPhone, resulting in an upfront hit to their revenue stream. This strategy and the opening up of voice Internet applications on their network are both designed to meet customer demands and more importantly, as a long term goal, attract new subscribers. After all, you cannot use the iPhone in this country, unless you sign up to AT&T, and you will not be able to use Skype on your cell phone for international calls, unless you become a subscriber as well. Currently, Verizon and the other Telecoms are not offering this service, so AT&T has a jump on the competition. It is even rumored that AT&T may partner with Google in the near future, to further solidify integrating Internet applications with wireless phones.

Although there is stiff competition and declining revenues in the wire-line area, the major Telecoms have been consistently performing well through the recession. Last quarter, AT&T earned $3.2 Billion, with total revenues of $30.7 Billion. Verizon earned $3.1 Billion with revenues of 26 Billion. Not many companies can make such a claim during these tough times. They are basically cash cows with many sources of income and increasing wireless bases, both consistently paying dividends, with current yields over 6%. Try getting a return like that at your local bank!

Earnings season is upon us and AT&T will be reporting on October 21 - Verizon on October 26. We will be watching closely to see if they can continue their successful track records.

DISCLOSURE: Charlie Cohn owns shares of AT&T and Verizon common stock.

Click Here for Telecom Earning (Oct. '09)

C. Cohn

Monday, October 5, 2009

Banking On Geithner

Part 2 of 2

The Wall Street Journal’s September 18th article about bonuses and compensation reports that the Feds plan to curb compensation for traders, loan officers and executives on Wall Street. The front page article talks about the new policy that endeavors to structure pay for thousands of bank employees nationwide. It is important to note that this policy will only require the approval of the Federal Reserve, not Congress. Perhaps this is a good thing, considering the potential for months of bipartisan antics that could spark political debates, ultimately clouding the issues and stalling progress.

To the question asked by one citizen in the audience: "Given the new and deeper role the government plays in shaping our economy, do we have to reshape our Dreams?" Geithner offered reassurance saying “I think the American Dream is still about freedom and opportunity”. He went on to talk about one of the reasons America had been such a productive country in the past. He continued, citing how much ahead of other countries we were in establishing universal education and many other things that made us strong. The Secretary boasted that we were the envy of the world at one time, “That central vision is still going to be our future”. There were, of course, those questions that we've been hearing in televised round-table debates since the collapse of the financial market last Fall. Geithner fielded the questions with composure and confidence. Another concerned citizen asked: "You let GM fail, but City Bank was too big to fail? Why?": Geithner explained pension funds had already declined 30% by the time Citibank showed exposure, and also reiterated that the government failed to act soon enough. The Treasury Secretary emphasized that the American people played a role by taking on too much debt, and living beyond their means for too long. He went on to say that “you can not solve a crisis by teaching people a lesson”.

Geithner very aptly pointed out that we should be all more committed to never letting this happen again, adding “Never again commit to tax cuts without having a way to paying for them”. He went on to say we should never again finance two wars without a way to pay for them and expand health care without the money to pay for it. In response to the question asked by co-host Steve Liesman, “How much pressure are you under to dial back, and get out of the private sector?” The Secretary adamantly exclaimed “no one is going to be more eager than I am”. Judging by his tone, he meant it. Geithner explained that the TARP program was designed to be used no longer than necessary, adding that there are dangers to withdrawing too soon. He continued saying other country’s have made this mistake in the past, which could reignite the recession and cause even more damage. The Treasury Secretary seemed to believe that the measures that were taken are working. He talked about the recent indications of traction and growth, citing that they already have $88 billion coming back into the treasury from TARP. While predicting that unemployment will stay “unacceptably high?". In closing, Geithner said that after two years, we now have an economy that is starting to grow, but we are just at the beginning. He warned that it is going to take a while to fix this. See Part 1

K. Reilly
Cohn-Reilly Report
WSJ: 9/18/09,“Bankers Face Sweeping Curbs on Pay”

Saturday, September 26, 2009

Will The Stock Market Rally Continue?

The Dow and S&P pulled back this week, failing to reach the 10,000 and 1100 marks respectively; levels not seen since last October. Is this the start of a downturn, or just a lull before the next move up?

Where has the money been coming from to propel the markets, since trillions of investor dollars have been sitting on the side-lines throughout the recession in a hold pattern? A secret was kept for years, with few people aware - since the crash of 1987 the government has been supporting the markets by buying up futures contracts at opportune times to avoid steep short-term drops. The group responsible was called the “Plunge Protection Team”, and was used to avoid huge one-day collapses that have occurred historically. When Secretary Paulson announced that massive intervention would take place, he was really confirming what has been happening for the past twenty years; this time expanding the role of government intervention exponentially into areas not interfered with before at this magnitude. The government has been seeding the financial markets with stimulus money, stoking the emotions of investors - drawing on the classic greed feeling: “I don’t want to be left behind and miss out”.

What will happen when the stimulus funding stops, which will occur in the not too distant future? Also, don’t forget, there are still plenty of toxic assets sitting on the Fed’s books that have not been disposed of. This combined with a number of economic cracks in the rosy picture that analysts continue to portray, could lead to quite a different story from what is being told to us in the media today. Here are several examples of things that we have to watch out for: Sheila Bair, Chairperson of the FDIC, commented that 84 regional banks have failed this year. There is potential for another 100 to 300 banks to fail as well in the year ahead. It was reported this week that corporate staples such as Sprint Nextel - with the potential to lose 4.4 million subscribers, Macy’s - with same store sales falling and $2.4 Billion debt maturing, Goodyear - with massive debt and pension obligations, CBS - with $3.2 Billion in debt coming due in 5 years and weak advertising, and AMD - with $5 billion in debt, losing $3 billon in 2007-2008, may all face potential bankruptcies.

In the short-term, the key question, mentioned in a prior post, will be: how long will investors wait until they see real top-line revenue growth from companies before they become disenchanted with chasing stock prices? The answer is they won’t have to wait very long. We are fast approaching another earnings season that will take us into the historically volatile month of October through November. This will be a critical period where corporations will have to prove that profits are derived from revenues, not from cost cutting. If they fail to produce, there will be a strong reaction from the investor community, with cascading repercussions.

C. Cohn

Sunday, September 20, 2009

Banking On Geithner

Part 1 of 2

Last week marked one year after the fall of Lehman Brothers, pundits, newspapers, and financial news programs, both Cable and Network, felt compelled to weigh in on where the economy stands today, compared to where we were then. For whatever it’s worth, I believe we are on the path to recovery, though mixed indicators tell us that we should fasten our seat belts, because there will be bumps in the road. I was surprised to learn that the majority of Americans polled by CNBC believe that we are poised for another collapse. This is actually one of the questions Treasury Secretary, Geithner, was asked in the “ Banking On Geithner” special, among many other tough questions from the audience. After all that we’ve been through as a country, the American people have a need to know. The Treasury secretary was confident in his delivery when he stated that he did not see another collapse of the financial system. He added “It is in our power to prevent it. If we stick to it until we get this economy moving again”.

The past year felt as if the rug was pulled out from under us. With steep declines in pension and mutual funds, the loss of millions of jobs and housing values shifting below their underlying mortgages (often called upside-down mortgage), we have earned the right to be concerned about the future. Millions of hard working Americans believed in the American Dream, only to find that the country narrowly averted a nightmare, the likes of which we have never seen. To quote Timothy Geithner, “The financial system almost fell off a cliff.” I was relieved to hear the words that echoed my sentiments as it was unfolding last year. The “Banking on Geithner” special was aired on September 10th on CNBC, in a Town Hall-type setting, hosted by Erin Burnett and Steve Leisman. There were a litany of questions that were probably never asked but the ones that did make it to the floor were all about security, stability and taxes. They were all worded differently and maybe even sounded more eloquent, but in the underlying issues were the same; security, stability and taxes.

Geithner, who was referred to as the country’s chief financial officer, explained to a captive audience that the country went too long living beyond our means and built up too much leverage, so it will take a while to fix the economy. He went on to explain that we were behind the curve and did not move quickly enough, in response to the issues concerning the government’s over spending, and involvement in the private sector. In other words, the drastic measure that were taken, were necessary. He’s right. It was way too late to completely avoid the inevitable. At the time it was obvious to me and probably others in the financial industry, that the bail outs were desperate “last minute” measures to save the Country from a fate that we cannot even imagine. At this point last year, the country financial system was about to slip into a comma, the bail outs were efforts to keep the economy from flat-lining. The media coverage fostered panic and speculation, while the subsequent press conferences held by the Bush administration appeared to be strategies to improve global perception, and damage control.

Capitalism had spun out of control. Meanwhile, Investment Banks, Commercial Banks, Mortgage companies and Hedge Funds had to have known at least 18-months prior that their housing portfolios, loans, and mortgage backed securities represented high risk transactions. There were other high risk derivative positions that added to the losses. But like gambling addicts they irrationally thought that something, or some event would miraculously turn the losses around and no one would ever know. Further, knowing that they were sitting on billions in losses, how did they justify the distribution of bonuses - not just any bonuses, but multi-million dollar compensation packages to the folks who took excessive risks that amounted to massive losses, and in some cases, the downfall of companies. This is Capitalism at its worst. Greed has become the new four-letter-word. click for part 2

K. Reilly
Cohn-Reilly Report
WSJ:9/18/09, “Bankers Face Sweeping Curbs on Pay”

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Saturday, September 12, 2009

A Look At The Past Week And The Markets

This week, we saw consumer sentiment up by 4 points to 70.2. Consumer sentiment is supposed to be related to the strength of consumer buying, however, as my colleague stated in a prior post, indicators can be skewed and biased. The reality is that consumers are not spending, they are saving. They are still concerned about losing their jobs and if they are unemployed, they certainly are not spending, with less or little household disposable income available. Also, commodity prices have been rising - we have seen the dramatic increase in oil from its lows in the $30s during 2009 to over $70, with some predicting $85 by year-end. Import prices were reported to be up by 6% this week. Can inflation be rearing its ugly head in the near future, further eroding the spending power of the consumer and forcing the Fed to raise interest rates?

On another note, fundamentals do not support the rally we are experiencing in the equities markets. Sure, Q2 earnings beat expectations; however, they were based on lowered estimates and in many cases earnings improved because of bottom line cost cutting, not top line revenue growth.

The technical daily and weekly charts show that the S&P and Dow are currently over-bought, and are due for a pull back. I will cover technical analysis and charting in future posts and articles in detail. Volume is an important indicator to confirm a trend. For example, in the Dow, the weekly volume for the last five weeks has been substantially below its 50 week average of 1.5 billion, ranging between .5 billion to 1 billion per week. This shows a lack of conviction in the buying. Also, the weak dollar and the continuing propping up of the markets by the government are major factors contributing to the current lofty heights. These reasons alone could continue to propel the market upward, but it appears riskier to chase prices at these levels, as the rally is getting a bit long in the tooth and a correction is needed.

C. Cohn

Sunday, September 6, 2009

Unemployment, Recession & Recovery

Many financial news services are parading analysts on their programs, proclaiming that the recession ended in August or is about to end shortly; but is this really true? Friday's unemployment report shows that 26 million, or 16.7 % of the population is under employed or unemployed. The actual unemployment rate is 9.7 %, the highest in a couple of decades. This does not account for people who are not reporting or have given up looking for jobs.

I am sad to say that part of the increase in unemployment is due to teachers being laid off around the country. Also, the National Association of Manufacturers stated that it will take quite a long time before things improve.

People focus on the decrease in unemployment claims being reported and say that unemployment increases towards the end of a recession. That may be true, but employees are still being fired every week, and until that changes, we will not be out of the woods.

Some feel that the consumer is coming back as they look at the back to school purchases in the prior month and Labor Day, but that is seasonal necessity buying. Have you walked around malls lately? Many are emptier than ever, with some mid to high-end stores discounting as much as 75%, and still there is tremendous inventory that is not moving. If people do not have jobs they will cut back their spending and again, until this improves, we will not have a meaningful recovery. The consumer accounts for 70% of the economy.

Also, most agree that we must have a robust Equities market to support a recovery. We have come off the March lows nicely, but over the last few weeks trading has been in a narrow range. There are many double-dippers out there who believe we will go through another big correction before things get better.

Let's see what happens in the coming weeks. For now, we should maintain an air of cautiousness. click for part 2

C. Cohn

Friday, September 4, 2009

The Long Awaited Blog Makes Its Debut!

Welcome to Cohn-Reilly Report
This site is authored by Charlie Cohn and Katherine Reilly, who have worked in the financial industry both directly and indirectly for over a decade.
We have been debating about the market for years and decided to share our views.

We will discuss, debate, analyze and argue about the Economy as it relates to Financial Markets, the Federal Reserve, Banks, Housing, and everything that may be affected by the current events on Wall Street, Main Street and Capital Hill. Further, there will Special Posts and Articles from our colleagues to keep us intrigued and well informed.

Bernake is quoted as saying "the economy is leveling out". With economic indicators appearing to stabilize, Wall Street is poised to make complete recovery. Nevertheless, the new unemployment numbers say one thing but mean another. Statistics don't tell the whole story - when you zoom into the lives of millions who are still unemployed, but not receiving unemployment checks. The a-la-cart recovery is not all inclusive.

My colleague Charlie Cohn has his spin on what the numbers say to him in the article
"Unemployment, Recession and Recovery".

K Reilly

Thursday, September 3, 2009

Tuesday, September 1, 2009

The Great Net Neutrality Debate

What is Net Neutrality ?
It is simply that governments and Internet service providers (ISPs) should not place any restrictions on the Internet’s content or means of accessing that content. Internet users should be in control of what content they view and what applications they use on the Internet. The Internet has operated according to this neutrality principle since its earliest days and the big broadband carriers like AT&T, Verizon and Comcast for example, should not be permitted to use their market power to discriminate against competing applications or content. The telephone companies mentioned are not permitted to tell consumers who they can call or what they can say; Net Neutrality proponents say the same telephone companies and other broadband carriers should not be allowed to use their market power to control activity online.However, Google and Verizon put forward a proposal to the Federal Communications Commission to essentially retain this net neutrality on the public Internet but to allow broadband operators and network operators to offer new services that might be discriminatory in terms of their price and speed. They are proposing that broadband providers can allocate bandwidth for such projects, working with other application or service providers as they see fit. They mentioned a few specific examples to help illustrate this, such as health care monitoring, advanced educational services, or new entertainment and gaming options. Basically, they proposed that they be permitted to create a two-tier system whereby network capacity could be sold to companies willing to pay for that service, in turn to provide a higher quality service to their users.

Verizon said it has no intention of selling bandwidth from the ‘public’ network, it wants to make certain it could provide dedicated bandwidth-based services to third parties if it wanted to. Verizon CEO, Ivan Seidenberg said: “Verizon is standing tall. We said we agree that there should be no paid prioritization of traffic over the public Internet. Google (and others) will continue to innovate, and we have to feed that cookie monster. All we have asked is that we are allowed to offer services like Fios.” Fios is a bundled home communications service Verizon offers that makes use of an end-to-end fibre optics network, offering Internet, telephone and television. Verizon cannot offer it over the Internet, given neutrality requirements, so it is offered as a network separate from the Internet.
Those in favor of net neutrality clearly don’t like this at all, as creating a two-tier system, even if it means legislating neutrality in one of the tiers, results in the fragmentation that they fear and still discriminates in their eyes. Given that Google’s unofficial motto is ‘Do no evil’, the backlash in some quarters has been brutal. On the ominous Friday the 13th of August, internet users from across the Bay Area converged outside Google’s offices in protest. The rally was organized by, Credo Action,, Free Press and the Progressive Change Campaign Committee. summarized the sentiment as follows: “Google previously had been a champion of policies such as Net Neutrality — the fundamental principle that keeps the Internet open and free from discrimination. Its decision to team up with Verizon, long an opponent of such policies, has drawn the ire of public interest advocates.”

What is the scorecard? Many Internet giants are proponents of net neutrality, and also supporters of the U.S. government’s involvement in regulating it to ensure the Internet stays ‘open’. The likes of Amazon, Craigslist, Google (kind of), Facebook, Sony, IAC, and Twitter fall into this camp. President Obama himself does too: “I am a strong supporter of net neutrality … What you've been seeing is some lobbying that says that the servers and the various portals through which you’re getting information over the Internet should be able to be gatekeepers and to charge different rates to different Web sites… And that I think destroys one of the best things about the Internet — which is that there is this incredible equality there … Facebook, MySpace, Google might not have been started if you had not had a level playing field for whoever’s got the best idea and I want to maintain that basic principal in how the Internet functions. "As president, I am going to make sure that that is the principle that my FCC commissioners are applying as we move forward.”

In the against-net-neutrality camp are a number of large hardware and telecommunications firms, who would invariably benefit from being allowed to redefine the way the Internet works as they control the means of accessing it. In addition, opponents also include heavyweights such as Bob Kahn (inventor of TCP — “net neutrality is a slogan that would freeze innovation in the core of the Internet”) and Professor David Farber (“The Internet needs a makeover”). Robert Pepper, senior managing director of global advanced technology policy believes all the pro-net neutrality hype, is just that, hype.

What does the law say?
The law that affects net neutrality differs globally. In the U.S. there is considerable debate around the topic, with the FCC being involved in trying to legislate around this area, and sometimes not by choice. For instance, a court case against Comcast was the first to seriously touch on this aspect, with Comcast was accused of unlawfully throttling BitTorrent traffic in a class action suit. Comcast settled for $16 million, with the FCC stating Comcast needed to comply with transparent network management practices.
Are we truly net neutral today and if so,
How long can it be sustained?

There are a number of central arguments used in opposition to any kind of net neutrality legislation. Firstly, that the ability to charge users/sites different rates for differing levels of access will provide the revenues to ISPs and other network operators necessary for them to recoup their investments in broadband networks. Verizon has said there is no current incentive for it to develop and deploy advanced, super-fast fibre optic networks if it can’t charge more for access to such networks. Verizon and a number of ISPs have often referred to firms like Google and Skype as ‘freeloaders’ for making money using networks that they have provided at a cost of billions. Secondly, many suggest what we have right now isn’t in fact net neutrality at all. The biggest firms can invest in higher bandwidth deals and server replication to provide faster access for its users in comparison to smaller sites that wouldn’t be able to afford such infrastructure, for net neutrality isn’t even something that exists to uphold. Thirdly, the increase in rich media means infrastructure providers have far more pressures on their resources than was once the case. Bret Swanson of the Wall Street Journal suggests Youtube streams as much data in three months as the world’s radio, cable and broadband television channels stream in one year, i.e. 75 petabytes. By extension he believes telecommunications firms are simply not ready for the era of ‘exabyte’ delivery and something needs to give.

What’s next? In a recent bill introduced in Congress, U.S. House Democrats failed to win Republican support needed for legislation giving regulators temporary authority over how companies led by Comcast Corp. and AT&T Inc. provide Web service, Representative Henry Waxman said. A measure that would let the U.S. Federal Communications Commission enforce net-neutrality rules for two years won’t be introduced immediately, Waxman, a California Democrat and chairman of the House Energy and Commerce Committee, said on September 29, in an e-mailed statement. “This development is a loss for consumers and a gain only for the extremes,” Waxman said. “We need to break the deadlock on Net Neutrality.” The bill aimed to ensure the FCC has the power that was called into question when a U.S. court in April ruled it lacked authority over Internet-service providers. Republican leaders decided “there is not sufficient time to ensure that Chairman Waxman’s proposal will keep the Internet open without chilling innovation,” Representative Joe Barton of Texas, the top Republican on the committee, said in an e-mailed statement. Congress is to adjourn within days to campaign for the Nov. 2 elections. “It is not appropriate to give the FCC authority to regulate the Internet,” Barton said The bill may be introduced after the elections, Waxman said. The measure would restore the FCC’s authority to prevent the blocking of Internet content, bar phone and cable companies from unjustly or unreasonably discriminating against any lawful Internet traffic, and apply strictures to wireless providers, Waxman said.
“Under our proposal, the FCC could begin enforcing these open Internet rules immediately, with maximum fines increased from $75,000 to $2,000,000 for violations,” Waxman said. FCC Chairman Julius Genachowski in September 2009 proposed rules aimed at ensuring net neutrality. He hasn’t sought a vote while the commission considers its reaction to the April court ruling.
Today’s development prompted renewed calls for Genachowski to proceed with his idea to claim power over Internet service using rules written for monopoly telephone service in the 20th century. AT&T and Verizon Communications Inc. oppose such action and say it may prompt more regulation, including price controls. Lawmakers and advocacy groups have urged Genachowski to proceed, saying customers need protection. Waxman’s bill would bar the FCC from using the phone rules during its two-year duration. “If our efforts to find bipartisan consensus fail, the FCC should move forward,” Waxman said.
Complete freedom of open access on the Internet or tiered payment approaches to stimulate corporate innovation.- you decide.

C. Cohn
The Cohn-Reilly Report