September 2009

Today is the filing deadline in a somewhat unusual Federal Communications Notice of Inquiry that asks how the commission should revise its framework for evaluating competition in mobile wireless communications. Among other things, the FCC asks how it should measure wireless companies’ profits. It’s clear from an earlier public notice issued by the FCC’s Wireless Bureau that regulators are looking for a way to identify “abnormal” profits that might justify new regulation.

For 13 years, Congress has required the FCC to issue annual reports on wireless competition.  These reports have usually found that wireless is pretty competitive by most conventional measures. There are now four national competitors, numerous regional ones that are growing larger, and a bunch of resellers.   The FCC’s most recent report provides numerous examples of innovation in technology, pricing, and services. 

About the only fly in the ointment is federal policies that severely limit the amount of spectrum allocated for “flexible use.”  Limits on the amount of flexible use spectrum are like taxi medallions: they hinder entry and  limit the amount of service the wireless firms can offer.

Nevertheless, the wireless industry’s performance has been impressive. Adjusted for inflation, average revenue per minute fell by 87 percent between 1997 and 2007, and average voice revenue per minute fell by 90 percent.  Just during the last five years, inflation-adjusted average revenue per minute fell by 53 percent, and average voice revenue per minute fell by 61 percent.

Could regulation improve on these outcomes? In our comments to the FCC, Jerry Brito and I offer a little thought experiment.  Suppose the wireless industry were subject to enlightened, highly efficient, and perfectly operating price regulation. Specifically, suppose the FCC had mandated a version of “incentive” regulation that allowed the wireless companies to increase their prices by no more than the rate of increase in the consumer price index minus an annual 7 percent offset to reflect increased productivity. (Seven percent is the highest productivity offset we’ve seen any telecommuncations regulator in the U.S. use in any context.) Would this be better or worse than what the market actually produced?

Wireless market vs incentive regs

This graph shows the answer.  If wireless had been subject to incentive regulation, even a 7 percent productivity offset would have reduced wireless revenue per minute by only 36 percent since 1997 and by 19 percent since 2002.  In other words, the lightly regulated wireless market produced price reductions nearly 2.5 times as large as those that could have been expected under severe, highly efficient, perfectly operating regulation. And these results measure only the price effects, not the explosion of innovation that accompanied the price reductions.

Would the results have been even better if more spectrum were available for wireless services?  Probably. But beyond that step, it’s doubtful that regulators could have done much else to improve on the 90 percent price reduction we’ve seen in the past decade.

Last Wednesday, Holman Jenkins penned a column in The Wall Street Journal about net neutrality (Adam discussed it here). In response, I have a letter to the editor in today’s The Wall Street Journal:

To the Editor:

Mr. Jenkins suggests that Google would likely “shriek” if a startup were to mount its servers inside the network of a telecom provider. Google already does just that. It is called “edge caching,” and it is employed by many content companies to keep costs down.

It is puzzling, then, why Google continues to support net neutrality. As long as Google produces content that consumers value, they will demand an unfettered Internet pipe. Political battles aside, content and infrastructure companies have an inherently symbiotic relationship.

Fears that Internet providers will, absent new rules, stifle user access to content are overblown. If a provider were to, say, block or degrade YouTube videos, its customers would likely revolt and go elsewhere. Or they would adopt encrypted network tunnels, which route around Internet roadblocks.

Not every market dispute warrants a government response. Battling giants like Google and AT&T can resolve network tensions by themselves.

Ryan Radia

Competitive Enterprise Institute

Washington

To be sure, the market for residential Internet service is not all that competitive in some parts of the country — Rochester, New York, for instance — so a provider might in some cases be able to get away with unsavory practices for a sustained period without suffering the consequences. Yet ISP competition is on the rise, and a growing number of Americans have access to three or more providers. This is especially true in big cities like Chicago, Baltimore, and Washington D.C.

Instead of trying to put a band-aid on problems that stem from insufficient ISP competition, the FCC should focus on reforming obsolete government rules that prevent ISP competition from emerging. Massive swaths of valuable spectrum remain unavailable to would-be ISP entrants, and municipal franchising rules make it incredibly difficult to lay new wire in public rights-of-way for the purpose of delivering bundled data and video services.

Cherry BlossomsHere in Washington, DC we’re finally experiencing a changing of the seasons. The summer heat is retreating as cool , autumn air invades. It’s a changing of the guard–just like what’s happening to ICANN with today’s expiration of its oversight by the U.S. government. Only its a spring-like blossoming for ICANN.

The Department of Commerce has allowed the JPA to expire, thus completing the transition of DNS management to ICANN.  There were many skeptics that wanted to give ICANN more time to develop permanent mechanisms for true accountability.  Others were concerned about the threat of capture, especially on hearing proposals from the United Nations and European Commission to assume control over a newly-independent ICANN.

Over at the NetChoice blog, Steve DelBianco says that we should be pleasantly surprised to see the new Affirmation of Commitments unveiled by ICANN today, because it does much to address both of those concerns. It creates review mechanisms for accountability, new domains, and domains in non-Latin characters (IDNs).

These new “review teams” could bring to ICANN something similar to the ‘official review’ we have for football and tennis.  For close, controversial decisions, this framework could help ICANN to correct a bad call and get back on-track.  I can see a couple of areas where these new review teams can have an impact right away:

I’m glad to see that the security review team has a forward-looking focus on making sure the DNS stays up 24-7, around the world, even under increasing security threats and a major expansion of top-level domains.

The review team for competition and consumer choice might finally get ICANN to get its registrars to fulfill the role they were designed for: to offer consumers a choice of all top level domains—not just the ones that a registrar prefers to sell.

So it seems more like a Spring-like flowering than a Fall dropping of the leaves. ICANN gets independence, plus there’s a balanced framework that brings all governments into the oversight process alongside private sector stakeholders, with a sharpened focus on security and serving global internet users.

Coming: Google Wave

by on September 30, 2009 · 10 comments

I noticed on Twitter that Google Wave was a trending topic, so I went looking to see what the hell it is. Many of you already know, I’m sure, but for those of you who don’t: It’s a hosted/’cloud’ communications platform that could supplant email, IM, chatrooms, wikis, word processors, and a few other things. Might be good for simple games too.

This video of a preview presentation to developers is long, but it takes you through a lot of the features. No idea whether Google Wave will take off, but it looks pretty neat. I’ll look forward to learning about privacy tools and portability of data.

Stacey Higginbotham at GigaOm conducted a great interview with Verizon CTO Dick Lynch, in which he endorsed broadband metering:

We believe that you have to be allowed to have a level of service that is not on a public Internet. What you’re suggesting is different kind of IP service that’s not delivered over the public Internet and that needs to be part of the option set in the argument.

Such metering, if allowed by Washington, might lessen the need for some of the network management practices that so incense net neutrality fanatics.  So I’d really like to see Verizon and other ISPs explore using a “Ramsey two-part tariff,” as Adam has suggested again and again:

A two-part tariff (or price) would involve a flat fee for service up to a certain level and then a per-unit / metered fee over a certain level.

I don’t know where the demarcation should be in terms of where the flat rate ends and the metering begins; that’s for market experimentation to sort out. But the clear advantage of this solution is that it preserves flat-rate, all-you-can-eat pricing for casual to moderate bandwidth users and only resorts to less popular metering pricing strategies when the usage is “excessive,” however that is defined.

ISPs would have an incentive to set the demarcation to a point where, roughly, the vast majority of users would never have to worry about their usage, but the small percentage of bandwidth hogs would have a real disincentive to cut back on bandwidth use—thus avoiding the “Tragedy of the Commons,” which is really the “Tragedy of the Unmetered Commons,” as I noted a year ago.

Louis XVI

Louis XVI

Americans often quote, or allude to, the French expression “Le Roi est mort, vive le Roi!” But few realize that this apparent paradox was meant quite literally by the French:From its first official proclamation in 1422 upon the coronation of Charles VII to 1774, when Louis XV finally died, the term expressed the abstract constitutional concept that sovereignty transfered from the old king (the first “Le Roi“) to the new king (the second  “Le Roi“) the very instant the old king died. Thus, France was literally never without a king until until the monarchy was finally dis-established in early 1793. When Louis XVI was guillotined later that year, his death was acclaimed simply with “Le Roi est mort!

Tomorrow, September 30, ICANN’s Joint Project Agreement with the Department of Commerce finally terminates. Le JPA est mort!” But a new agreement (the “Affirmation”) will take its place, apparently providing more accountability than the JPA ever did. Vive l’Affirmation! There may come a day when, like Louis XVI, ICANN’s JPA-like agreement with Commerce terminates and nothing is there to replace it, but that day has not yet come.

Grant Gross has a great piece on this new agreement. Grant extensively quotes my PFF Adjunct Fellow (my ICANN mentor and former ICANN board member) Mike Palage, who explained that the JPA’s successor (JPA II?):

will tell [ICANN] what it should do, but it can’t legally bind them [much like past agreements]… It gives the appearance in the global community that the U.S. government has recognized that ICANN has done what is was supposed to do. What it’s also doing is … it’s putting in some accountability mechanisms.”

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Post image for Grills! Grills! Grills! … Surprisingly Free!

Technological change confers enormous benefits, even for those of us who do not rush out to buy the latest  neat new thing.  Here’s one example.

I like to grill. I own four barbecue grills and three smokers. We got one smoker as a wedding present, but the rest were bestowed free of charge by the progressive forces of technological change.

OK, no bestowing was involved; I fished them out of neighbors’ trash.  This model on the right was considered the iPhone of barbecue grills when it was introduced in the 1950s, and not just because it was a hot wireless device.   Before then, most grills were topless — which let wind, rain, snow, etc. wreak havoc with whatever was on the barbie.  George Stephen of Mt. Prospect, IL, cut a buoy in half, and the Weber grill was born.  According to one authoritative web site, “American grillers now had a way to protect their steaks and burgers from the wind and rain, and the lid also sealed in a moist and smoky new flavor.”  I know from personal experience it also works in a snowstorm.

By the way, that was once a $400 piece of equipment.  Weber grills cost $50 when they were introduced in the 1950s — which is equivalent to $400 today when adjusted for inflation.  I’m sure by the time the previous owner bought it, improvements in manufacuring methods brought the retail price down; this basic one now costs less than $100 new.  But it became mine — surprisingly free! — when its previous owner upgraded to the next big innovation, a gas grill.

So we all have a steak in innovation — even those of us who still drive cars with manual locking doors and only use our cell phones for conversation!

Be sure to read Julian’s write-up of the USA-PATRIOT Act reform bills.

“On Notice” @Cato

by on September 29, 2009 · 2 comments

I had some time cooling my heels in airports and a hospital over the latter part of last week and the weekend, so I thumbed a long (too long) response to Julian’s recent post discussing privacy notices. It’s over on Cato@Liberty.

Testifying in a Senate Homeland Security and Governmental Affairs Committee hearing today, Trey Hodgkins of technology trade association “TechAmerica” offered some pretty bogus excuses for resisting transparency in government contracts.

[I]f disclosure included posting to a public website the unredacted contract, a number of critical elements would be exposed. Something as simple as identifying the location where work is to be performed could reveal the geographic location of crucial components of our National and Homeland Security apparatuses, thereby exposing them to attack, disruption or destruction. Similarly, if data about program capabilities were to be disclosed as part of the public disclosure of contracting actions, adversaries could evaluate the supply chain, identify critical production components and, by attacking that component, disrupt our security. Data aggregated from published contracting actions also would allow adversaries to discern and reverse-engineer our capabilities and identify our weaknesses.

From a corporate perspective, disclosure of data from a contracting action—particularly the publication of an unredacted contract—would expose intellectual property, corporate sensitive and technical data to industrial espionage and allow corporate competitors to aggregate data, such as pricing methods, and weaken the competitive posture of a company in the government and commercial markets.

There is a remote possibility of risk to domestic security in some contracts, but the public benefits of disclosure vastly outstrip those risks. Hodgkins’ veiled pants-wetting about terrorism is a crock.

The corporate interests Hodgkins cites are balderdash. If you want to do government contracting, you are going to be involved in a public contracting process. Get over it or get out of the business.

I have not been impressed with “TechAmerica” since it was formed by the merger of several smaller trade associations. Hodgkins and TechAmerica should get on the other side of this issue, figure out how to protect what needs protecting, and disclose the rest.

I look forward to seeing something from “TechAmerica” that is actually innovative and not just slavish pursuit of government contracts, good public policies be damned.