Chairman Thomas E. Wheeler of the Federal Communications Commission unveiled his proposal this week for regulating broadband Internet access under a 1934 law. Since there are three Democrats and two Republicans on the FCC, Wheeler’s proposal is likely to pass on a party-line vote and is almost certain to be appealed.
Free market advocates have pointed out that FCC regulation is not only unnecessary for continued Internet openness, but it could lead to years of disruptive litigation and jeopardize investment and innovation in the network.
Writing in WIRED magazine, Wheeler argues that the Internet wouldn’t even exist if the FCC hadn’t mandated open access for telephone network equipment in the 1960s, and that his mid-1980s startup either failed or was doomed because the phone network was open whereas the cable networks (on which his startup depended) were closed. He also predicts that regulation can be accomplished while encouraging investment in broadband networks, because there will be “no rate regulation, no tariffs, no last-mile unbundling.” There are a number of problems with Chairman Wheeler’s analysis. First, let’s examine the historical assumptions that underlie the Wheeler proposal.
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Supporters of Title II reclassification for broadband Internet access services point to the fact that some wireless services have been governed by a subset of Title II provisions since 1993. No one is complaining about that. So what, then, is the basis for opposition to similar regulatory treatment for broadband?
Austin Schlick, the former FCC general counsel, outlined the so-called “Third Way” legal framework for broadband in a 2010 memo that proposed Title II reclassification along with forbearance of all but six of Title II’s 48 provisions. He noted that “this third way is a proven success for wireless communications.” This is the model that President Obama is backing. Title II reclassification “doesn’t have to be a big deal,” Harold Feld reminds us, since the wireless industry seems to be doing okay despite the fact mobile phone service was classified as a Title II service in 1993.
To be clear, only mobile voice services are subject to Title II, since the FCC classified broadband access to the Internet over wireless networks as an “information” service (and thus completely exempt from Title II) in March of 2007.
Sec. 6002(c) of the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66) modified Sec. 332 of the Communications Act so commercial mobile services would be treated “as a common carrier … except for such provisions of title II as the Commission may specify by regulation as inapplicable…”
The FCC commendably did forbear. Former Chairman Reed E. Hundt would later boast in his memoir that the commission “totally deregulated the wireless industry.” He added that this was possible thanks to a Democratic Congress and former Vice President Al Gore’s tie-breaking Senate vote. Continue reading →
As I and others have recently noted, if the Federal Communications Commission reclassifies broadband Internet access as a “telecommunications” service, broadband would automatically become subject to the federal Universal Service tax—currently 16.1%, or more than twice the highest state sales tax (California–7.5%), according to the Tax Foundation.
Erik Telford, writing in The Detroit News, has reached a similar conclusion.
U.S. wireline broadband revenue rose to $43 billion in 2012 from $41 billion in 2011, according to one estimate. “Total U.S. mobile data revenue hit $90 billion in 2013 and is expected to rise above $100 billion this year,” according to another estimate. Assuming that the wireline and wireless broadband industries as a whole earn approximately $150 billion this year, the current 16.1% Universal Service Contribution Factor would generate over $24 billion in new revenue for government programs administered by the FCC if broadband were defined as a telecommunications service.
The Census Bureau reports that there were approximately 90 million households with Internet use at home in 2012. Wireline broadband providers would have to collect approximately $89 from each one of those households in order to satisfy a 16.1% tax liability on earnings of $50 billion. There were over 117 million smartphone users over the age of 15 in 2011, according to the Census Bureau. Smartphones would account for the bulk of mobile data revenue. Mobile broadband providers would have to collect approximately $137 from each of those smartphone users to shoulder a tax liability of 16.1% on earnings of $100 billion. Continue reading →
Would the Federal Communications Commission expose broadband Internet access services to tax rates of at least 16.6% of every dollar spent on international and interstate data transfers—and averaging 11.23% on transfers within a particular state and locality—if it reclassifies broadband as a telecommunications service pursuant to Title II of the Communications Act of 1934?
As former FCC Commissioner Harold Furchtgott-Roth notes in a recent Forbes column, the Internet Tax Freedom Act only prohibits state and local taxes on Internet access. It says nothing about federal user fees. The House Energy & Commerce Committee report accompanying the “Permanent Internet Tax Freedom Act” (H.R. 3086) makes this distinction clear.
The law specifies that it does not prohibit the collection of the 911 access or Universal Service Fund (USF) fees. The USF is imposed on telephone service rather than Internet access anyway, although the FCC periodically contemplates broadening the base to include data services.
The USF fee applies to all interstate and international telecommunications revenues. If the FCC reclassifies broadband Internet access as a telecommunications service in the Open Internet Proceeding, the USF fee would automatically apply unless and until the commission concluded a separate rulemaking proceeding to exempt Internet access. The Universal Service Contribution Factor is not insignificant. Last month, the commission increased it to 16.1%. According to Furchtgott-Roth,
At the current 16.1% fee structure, it would be perhaps the largest, one-time tax increase on the Internet. The FCC would have many billions of dollars of expanded revenue base to fund new programs without, according to the FCC, any need for congressional authorization.
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Chairman and CEO Masayoshi Son of SoftBank again criticized U.S. broadband (see this and this) at last week’s Code Conference.
The U.S. created the Internet, but its speeds rank 15th out of 16 major countries, ahead of only the Philippines. Mexico is No. 17, by the way.
It turns out that Son couldn’t have been referring to the broadband service he receives from Comcast, since the survey data he was citing—as he has in the past—appears to be from OpenSignal and was gleaned from a subset of the six million users of the OpenSignal app who had 4G LTE wireless access in the second half of 2013.
Oh, and Son neglected to mention that immediately ahead of the U.S. in the OpenSignal survey is Japan. Continue reading →
Allowing broadband providers to impose tolls on Internet companies represents a “grave” threat to the Internet, or so wrote several Internet giants and their allies in a letter to the Federal Communications Commission this past week.
The reality is that broadband networks are very expensive to build and maintain. Broadband companies have invested approximately $250 billion in U.S. wired and wireless broadband networks—and have doubled average delivered broadband speeds—just since President Obama took office in early 2009. Nevertheless, some critics claim that American broadband is still too slow and expensive.
The current broadband pricing model is designed to recover the entire cost of maintaining and improving the network from consumers. Internet companies get free access to broadband subscribers.
Although the broadband companies are not poised to experiment with different pricing models at this time, the Internet giants and their allies are mobilizing against the hypothetical possibility that they might in the future. But this is not the gravest threat to the Internet. Continue reading →
Recent reports highlight that the telephone meta-data collection efforts of the National Security Agency are being undermined by the proliferation of flat-rate, unlimited voice calling plans. The agency is collecting data for less than a third of domestic voice traffic, according to one estimate.
It’s been clear for the past couple months that officials want to fix this, and President Obama’s plan for leaving meta-data in the hands of telecom companies—for NSA to access with a court order—might provide a back door opportunity to expand collection to include all calling data. There was a potential new twist last week, when Reuters seemed to imply that carriers could be forced to collect data for all voice traffic pursuant to a reinterpretation of the current rule.
While the Federal Communications Commission requires phone companies to retain for 18 months records on “toll” or long-distance calls, the rule’s application is vague (emphasis added) for subscribers of unlimited phone plans because they do not get billed for individual calls.
The current FCC rule (47 C.F.R. § 42.6) requires carriers to retain billing information for “toll telephone service,” but the FCC doesn’t define this familiar term. There is a statutory definition, but you have to go to the Internal Revenue Code to find it. According to 26 U.S.C. § 4252(b),
the term “toll telephone service” means—
(1) a telephonic quality communication for which
(A) there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication… Continue reading →
The House Subcommittee on Communications and Technology will soon consider whether to reauthorize the Satellite Television Extension and Localism Act (STELA) set to expire at the end of the year. A hearing scheduled for this week has been postponed on account of weather.
Congress ought to scrap the current compulsory license in STELA that governs the importation of distant broadcast signals by Direct Broadcast Satellite providers. STELA is redundant and outdated. The 25 year-old statute invites rent-seeking every time it comes up for reauthorization.
At the same time, Congress should also resist calls to use the STELA reauthorization process to consider retransmission consent reforms. The retransmission consent framework is designed to function like the free market and is not the problem.
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Retransmission consent came under attack again this month, and two long-awaited bills on the subject have finally been introduced—the Next Generation Television Marketplace Act (H.R. 3720) by Rep. Steve Scalise, and the Video CHOICE (Consumers Have Options in Choosing Entertainment) Act (H.R. 3719) by Rep. Anna G. Eshoo.
The American Cable Association’s Matthew M. Polka has reiterated his view that the process whereby cable and satellite TV providers negotiate with broadcasters for the right to retransmit broadcast signals is a “far cry from the free market,” and Alan Daley and Steve Pociask with the American Consumer Institute claim that retransmission consent jeopardizes the Broadcast Television Spectrum Incentive Auction.
As Jeff Eisenach pointed out at the Hudson Institute, “Congress created retransmission consent in 1992 to take the place of the property rights that it and the FCC abrogated. Prior to 1992, broadcasters weren’t permitted to charge anyone for retransmitting their signals.” Continue reading →
The 600 MHz spectrum auction “represents the last best chance to promote competition” among mobile wireless service providers, according to the written testimony of T-Mobile executive who appeared before a congressional subcommittee Jul. 23 and testified in rhetoric that is reminiscent of a bygone era.
The idea that an activist Federal Communications Commission is necessary to preserve and promote competition is a throwback to the government-sanctioned Ma Bell monopoly era. Sprint still uses the term “Twin Bells” in its FCC pleadings to refer to AT&T and Verizon Wireless in the hope that, for those who can remember the Bell System, the incantation will elicit a visceral response. The fact is most of the FCC’s efforts to preserve and promote competition have failed, entailed serious collateral damage, or both.
Unless Congress and the FCC get the details right, the implementation of an innovative auction that will free up spectrum that is currently underutilized for broadcasting and make it available for mobile communications could fail to raise in excess of $7 billion for building a nationwide public safety network and making a down payment on the national debt. Aside from ensuring that broadcasting is not disrupted in the process, one important detail concerns whether the auctioning will be open to every qualified bidder, or whether government officials will, in effect, pick winners and losers before the auctioning begins. Continue reading →