Miscellaneous

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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There are several “flavors” of net neutrality–Eli Noam at Columbia University estimates there are seven distinct meanings of the term–but most net neutrality proponents agree that reinterpreting the 1934 Communications Act and “classifying” Internet service providers as Title II “telecommunications” companies is the best way forward. Proponents argue that ISPs are common carriers and therefore should be regulated much like common carrier telephone companies. Last week I filed a public interest comment about net neutrality and pointed out why the Title II option is unwise and possibly illegal. Continue reading →

Adam Thierer, senior research fellow with the Technology Policy Program at the Mercatus Center at George Mason University, discusses his latest book Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom. Thierer discusses which types of policies promote technological discoveries as well as those that stifle the freedom to innovate. He also takes a look at new technologies — such as driverless cars, drones, big data, smartphone apps, and Google Glass — and how the American public will adapt to them.

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The outrage over the FCC’s attempt to write new open Internet rules has caught many by surprise, and probably Chairman Wheeler as well. The rumored possibility of the FCC authorizing broadband “fast lanes” draws most complaints and animus. Gus Hurwitz points out that the FCC’s actions this week have nothing to do with fast lanes and Larry Downes reminds us that this week’s rules don’t authorize anything. There’s a tremendous amount of misinformation because few understand how administrative law works. Yet many net neutrality proponents fear the worst from the proposed rules because Wheeler takes the consensus position that broadband provision is a two-sided market and prioritized traffic could be pro-consumer.

Fast lanes have been permitted by the FCC for years and they can benefit consumers. Some broadband services–like video and voice over Internet protocol (VoIP)–need to be transmitted faster or with better quality than static webpages, email, and file syncs. Don’t take my word for it. The 2010 Open Internet NPRM, which led to the recently struck-down rules, stated,

As rapid innovation in Internet-related services continues, we recognize that there are and will continue to be Internet-Protocol-based offerings (including voice and subscription video services, and certain business services provided to enterprise customers), often provided over the same networks used for broadband Internet access service, that have not been classified by the Commission. We use the term “managed” or “specialized” services to describe these types of offerings. The existence of these services may provide consumer benefits, including greater competition among voice and subscription video providers, and may lead to increased deployment of broadband networks.

I have no special knowledge about what ISPs will or won’t do. I wouldn’t predict in the short term the widespread development of prioritized traffic under even minimal regulation. I think the carriers haven’t looked too closely at additional services because net neutrality regulations have precariously hung over them for a decade. But some of net neutrality proponents’ talking points (like insinuating or predicting ISPs will block political speech they disagree with) are not based in reality.

We run a serious risk of derailing research and development into broadband services if the FCC is cowed by uninformed and extreme net neutrality views. As Adam eloquently said, “Living in constant fear of hypothetical worst-case scenarios — and premising public policy upon them — means that best-case scenarios will never come about.” Many net neutrality proponents would like to smear all priority traffic as unjust and exploitative. This is unfortunate and a bit ironic because one of the most transformative communications developments, cable VoIP, is a prioritized IP service.

There are other IP services that are only economically feasible if jitter, latency, and slow speed are minimized. Prioritized traffic takes several forms, but it could enhance these services:

VoIP. This prioritized service has actually been around for several years and has completely revolutionized the phone industry. Something unthinkable for decades–facilities-based local telephone service–became commonplace in the last few years and undermined much of the careful industrial planning in the 1996 Telecom Act. If you subscribe to voice service from your cable provider, you are benefiting from fast lane treatment. Your “phone” service is carried over your broadband cable, segregated from your television and Internet streams. Smaller ISPs could conceivably make their phone service more attractive by pairing up with a Skype- or Vonage-type voice provider, and there are other possibilities that make local phone service more competitive.

Cloud-hosted virtual desktops. This is not a new idea, but it’s possible to have most or all of your computing done in a secure cloud, not on your PC, via a prioritized data stream. With a virtual desktop, your laptop or desktop PC functions mainly as a dumb portal. No more annoying software updates. Fewer security risks. IT and security departments everywhere would rejoice. Google Chromebooks are a stripped-down version of this but truly functional virtual desktops would be valued by corporations, reporters, or government agencies that don’t want sensitive data saved on a bunch of laptops in their organization that they can’t constantly monitor. Virtual desktops could also transform the device market, putting the focus on a great cloud and (priority) broadband service and less on the power and speed of the device. Unfortunately, at present, virtual desktops are not in widespread use because even small lag frustrates users.

TV. The future of TV is IP-based and the distinction between “TV” and “the Internet” is increasingly blurring, with Netflix leading the way. In a fast lane future, you could imagine ISPs launching pared-down TV bundles–say, Netflix, HBO Go, and some sports channels–over a broadband connection. Most ISPs wouldn’t do it, but an over-the-top package might interest smaller ISPs who find acquiring TV content and bundling their own cable packages time-consuming and expensive.

Gaming. Computer gamers hate jitter and latency. (My experience with a roommate who had unprintable outbursts when Diablo III or World of Warcraft lagged is not uncommon.) Game lag means you die quite frequently because of your data connection and this depresses your interest in a game. There might be gaming companies out there who would like to partner with ISPs and other network operators to ensure smooth gameplay. Priority gaming services could also lead the way to more realistic, beautiful, and graphics-intensive games.

Teleconferencing, telemedicine, teleteaching, etc. Any real-time, video-based service could reach critical mass of subscribers and become economical with priority treatment. Any lag absolutely kills consumer interest in these video-based applications. By favoring applications like telemedicine, providing remote services could become attractive to enough people for ISPS to offer stand-alone broadband products.

This is just a sampling of the possible consumer benefits of pay-for-priority IP services we possibly sacrifice in the name of strict neutrality enforcement. There are other services we can’t even conceive of yet that will never develop. Generally, net neutrality proponents don’t admit these possible benefits and are trying to poison the well against all priority deals, including many of these services.

Most troubling, net neutrality turns the regulatory process on its head. Rather than identify a market failure and then take steps to correct the failure, the FCC may prevent commercial agreements that would be unobjectionable in nearly any other industry. The FCC has many experts who are familiar with the possible benefits of broadband fast lanes, which is why the FCC has consistently blessed priority treatment in some circumstances.

Unfortunately, the orchestrated reaction in recent weeks might leave us with onerous rules, delaying or making impossible new broadband services. Hopefully, in the ensuing months, reason wins out and FCC staff are persuaded by competitive analysis and possible innovations, not t-shirt slogans.

Adam and I recently published a Mercatus research paper titled Video Marketplace Regulation: A Primer on the History of Television Regulation And Current Legislative Proposals, now available on SSRN. I presented the paper at a Silicon Flatirons academic conference last week.

We wrote the paper for a policy audience and students who want succinct information and history about the complex world of television regulation. Television programming is delivered to consumers in several ways, including via cable, satellite, broadcast, IPTV (like Verizon FiOS), and, increasingly, over-the-top broadband services (like Netflix and Amazon Instant Video). Despite their obvious similarities–transmitting movies and shows to a screen–each distribution platform is regulated differently.

The television industry is in the news frequently because of problems exacerbated by the disparate regulatory treatment. The Time Warner Cable-CBS dispute last fall (and TWC’s ensuing loss of customers), the Aereo lawsuit, and the Comcast-TWC proposed merger were each caused at least indirectly by some of the ill-conceived and antiquated TV regulations we describe. Further, TV regulation is a “thicket of regulations,” as the Copyright Office has said, which benefits industry insiders at the expense of most everyone else.

We contend that overregulation of television resulted primarily because past FCCs, and Congress to a lesser extent, wanted to promote several social objectives through a nationwide system of local broadcasters:

1) Localism
2) Universal Service
3) Free (that is, ad-based) television; and
4) Competition

These objectives can’t be accomplished simultaneously without substantial regulatory mandates. Further, these social goals may even contradict each other in some respects.

For decades, public policies constrained TV competitors to accomplish those goals. We recommend instead a reliance on markets and consumer choice through comprehensive reform of television laws, including repeal of compulsory copyright laws, must-carry, retransmission consent, and media concentration rules.

At the very least, our historical review of TV regulations provides an illustrative case study of how regulations accumulate haphazardly over time, demand additional “correction,” and damage dynamic industries. Congress and the FCC focused on attaining particular competitive outcomes through industrial policy, unfortunately. Our paper provides support for market-based competition and regulations that put consumer choice at the forefront.

Some people believe that American broadband prices are too high. They claim that Europeans pay less for faster speeds. Frequently these assertions fail to standardize the comparisons, for example to compare similar networks and speeds. A higher speed, next generation network connection delivering more data generally costs more than a slower one. The challenge for measuring European and American prices is that networks are not uniform across the regions. The OECD comparisons are based on availability in at least one major city in each country, not the country as a whole.

As I describe in my report the EU Broadband Challenge, the EU’s next generation networks exist only in pockets of the EU. For example, 4G/LTE wireless networks are available to 97% of Americans but just 26% of Europeans. Thus it is difficult to prepare a fair assessment of mobile prices on the surface when Americans use 5 times as much voice and twice as much data as Europeans. Furthermore American networks are 75% faster when compared to the EU. The overall price may be higher in the US, but the unit cost is lower, and the quality is higher. This means Americans get value for money.

Another item rarely mentioned in international broadband comparisons is mandatory media license fees. These fees can add as much as $44 to the monthly cost of broadband. When these fees are included in comparisons, American prices are frequently an even better value. In two-thirds of European countries and half of Asian countries, households pay a media license fee on top of the subscription fees to information appliances such as connected computers and TVs. Historically nations needed a way to fund broadcasting, so they levied fees on the people.

Because the US took the route to fund broadcasting through advertising, these fees are rare in the US. State broadcasting has moved to the internet, and the media license fees are now applied to fixed line broadband subscriptions. In general in the applicable countries, all households that subscribe to information services (e.g. broadband) must register with the national broadcasting corporation, and an invoice is sent to the household once or twice year. The media fees are compulsory, and in some countries it is a criminal offense not to pay.

Defenders of media license fees say that they are important way to provide commercial free broadcasting, and in countries which see the state’s role to preserve national culture and language, media license fees make this possible. Many countries maintain their commitment to such fees as a deterrent to what they consider American cultural imperialism.

Media license fees may seem foreign to Americans because there is not a tradition for receiving an annual bill for monthly broadcasting. Historically many associated television and radio as “free” because it was advertising supported. Moreover, the US content industry is the world’s largest and makes up a large part of America’s third largest category of export, that of digital goods and services, which totaled more than $350 billion in 2011.

When calculating the real cost of international broadband prices, one needs to take into account media license fees, taxation, and subsidies. This information is not provided through the Organization for Cooperation and Development’s Broadband Portal nor the International Telecommunication Union’s statistical database.  However, these inputs can have a material impact on the cost of broadband, especially in countries where broadband is subject to value added taxes as high as 27%, not to mention media license fees of hundreds of dollars per year.

In a forthcoming paper for the Mercatus Center at George Mason University, Michael James Horney, Casper Lundgreen, and I provide some insight to media license fees and their impact to broadband prices. We have collected the media license fees for the OECD countries, and where applicable, added them to prevailing broadband price comparisons. Following is an excerpt from our paper.

Here are the media license fees for the OECD countries.

Country Yearly (USD) Monthly (USD)
Australia $0,00 $0,00
Austria $459,10 $38,26
Belgium $236,15 $19,68
Canada $0,00 $0,00
Chile $0,00 $0,00
Czech Republic $90,33 $7,53
Denmark $443,75 $36,98
Estonia $0,00 $0,00
Finland $0,00 $0,00
France $179,45 $14,95
Germany $295,56 $24,63
Greece $70,68 $5,89
Hungary $0,00 $0,00
Iceland $0,00 $0,00
Ireland $219,18 $18,26
Israel $128,77 $10,73
Italy $155,48 $12,96
Japan $197,66 $16,47
Korea $28,32 $2,36
Luxembourg $0,00 $0,00
Mexico $0,00 $0,00
Netherlands $0,00 $0,00
New Zealand $0,00 $0,00
Norway $447,51 $37,29
Poland $72,01 $6,00
Portugal $0,00 $0,00
Slovenia $180,82 $15,07
Spain $0,00 $0,00
Sweden $318,45 $26,54
Switzerland $527,40 $43,95
Turkey $0,00 $0,00
United Kingdom $242,50 $20,21
United States $0,00 $0,00

Here is an example of the media license fee invoice from Denmark, which is levied semi-annually. The fee of 1218 Danish crowns ($225.79) includes tax.

 

Example of media license fee from Denmark, February 2014

 

We added the price of the media license fees to the OECD’s broadband price report. The data is taken from section 4c-4m of the OECD broadband pricing database. The OECD compiles prices for a set of 10 broadband baskets of different speeds ranging from 2 GB at 0.25 Mbit/s to 54 GB at 45 Mbit/s and above in at least 1 major city in each country. The prices are current as of September 2012.

For a graphical illustration, we provide a subset of countries to show the fluctuation of prices depending on the speed and data of each package. The data show that when compulsory media fees are added, US prices are commensurate with other OECD countries.

Broadband prices with media license fees

We also calculated the average broadband price for each basket for all of the OECD countries, adjusted for media license fees. Here we find that among the ten baskets, the US price is lower than the world average in 4 out of 10 baskets. In 5 baskets, the US price is within 1 standard deviation of the world average, and in two cases just $2-3 dollars more. In only one case is the US price outside one standard deviation of the world average, and that is for the penultimate basket of highest speed and data.

These data call into questions assertions that the US is out of line when it comes to broadband prices. Not only are US prices within a normal range, but the entry level prices for broadband are below many other countries.

The ITU has also recognized this. According to the ITU in its 2013 report Measuring the Information Society, broadband prices should be no more than 5% of income. The US scored #3 in the world in 2012 for entry level affordability of fixed line broadband. The country is tied with Kuwait for fixed line broadband prices being just 0.4% of gross national income per capita. This means for as little as $15 per month, Americans could get a basic broadband package at purchasing power parity in 2011 ($48,450 annual income).

The figures are higher for mobile broadband (based on a post-paid handset with 500 MB of data), 2.1% of gross national income per capita, equating to $85/month. However, using mobile broadband for a computer with 1 GB of data compares to just 0.5% of gross national income per capita, about $20 in 2011. The US scores in the top ten for entry level affordability in the world for both prepaid and postpaid mobile broadband for use with a computer.

If you believe that broadband prices should scale with consumption, then you will likely support such an analysis. However, there are those who simply say broadband should be the same price regardless of how much or how little data is used. In general, the price tiers favor a pay as you go approach (and is particularly better for people of lower income) while the one size fits all models increases the overall price, with the heaviest users paying less than their consumption.

Taking the highly digital nation of Denmark as an example, 80% of broadband subscriptions are under 30 mbps. That corresponds to baskets 1-4 in the chart. If we assume that most American households subscribe to 30 mbps or less, then American prices are in line with the rest of the OECD countries. Only subscribers who demand more than 30 mbps pay more than the OECD norm.

The assertion that Americans pay more for broadband than people in other countries is frequently supported by incomplete and inappropriate data. To have a more complete picture of the real price of broadband across countries, media license fees need to be included.

Aereo’s antenna system is frequently characterized perjoratively as a Rube Goldberg contraption, including in the Supreme Court oral arguments. Funny enough, Preston Padden, a veteran television executive, has characterized the legal system producing over-the-air broadcast television–Aereo’s chief legal opponents–precisely the same way. It’s also ironic that Aereo is in a fight for its life over alleged copyright violations since communications law diminishes the import of copyright law and makes copyright almost incomprehensible. Larry Downes calls the legal arguments for and against Aereo a “tangled mess.” David Post at the Volokh Conspiracy likewise concluded the situation is “pretty bizarre, when you think about it” after briefly exploring how copyright law interacts with communications law.

I agree, but Post actually understates how distorted the copyright law becomes when TV programs pass through a broadcaster’s towers, as opposed to a cable company’s headend. In particular, a broadcaster, which is mostly a passive transmitter of TV programs, gains more control over the programs than the copyright owners. It’s nearly impossible to separate the communications law distortions from the copyright issues, but the Aereo issue could be solved relatively painlessly by the FCC. It’s unfortunate copyright and television law intertwine like this because a ruling adverse to Aereo could potentially–and unnecessarily–upend copyright law.

This week I’ve seen many commentators, even Supreme Court justices, mischaracterize the state of television law when discussing the Aereo case. This is a very complex area and below is my attempt to lay out some of the deeper legal issues driving trends in the television industry that gave rise to the Aereo dispute. Crucially, the law is even more complex than most people realize, which benefits industry insiders and prevents sensible reforms. Continue reading →

Patrick Byrne, CEO of Overstock.com, discusses how Overstock.com became one of the first online retail stores to accept Bitcoin. Byrne provides insight into how Bitcoin lowers transaction costs, making it beneficial to both retailers and consumers, and how governments are attempting to limit access to Bitcoin. Byrne also discusses his project DeepCapture.com, which raises awareness for market manipulation and naked short selling, as well as his philanthropic work and support for education reform.

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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 →

Monday, TechFreedom submitted comments urging the White House to apply economic thinking to its inquiry into “Big Data,” also pointing out that the worst abuses of data come not from the private sector, but government. The comments were in response to a request by the Office of Science and Technology Policy.

“On the benefits of Big Data, we urge OSTP to keep in mind two cautions. First, Big Data is merely another trend in an ongoing process of disruptive innovation that has characterized the Digital Revolution. Second, cost-benefit analyses generally, and especially in advance of evolving technologies, tend to operate in aggregates which can be useful for providing directional indications of future trade-offs, but should not be mistaken for anything more than that,” writes TF President Berin Szoka.

The comments also highlight the often-overlooked reality that data, big or small, is speech. Therefore, OSTP’s inquiry must address the First Amendment analysis. Historically, policymakers have ignored the First Amendment in regulating new technologies, from film to blogs to video games, but in 2011 the Supreme Court made clear in Sorrell v. IMS Health that data is a form of speech. Any regulation of Big Data should carefully define the government’s interest, narrowly tailor regulations to real problems, and look for less restrictive alternatives to regulation, such as user empowerment, transparency and education. Ultimately, academic debates over how to regulate Big Data are less important than how the Federal Trade Commission currently enforces existing consumer protection laws, a subject that is the focus of the ongoing FTC: Technology & Reform Project led by TechFreedom and the International Center for Law & Economics.

More important than the private sector’s use of Big Data is the government’s abuse of it, the group says, referring to the NSA’s mass surveillance programs and the Administration’s opposition to requiring warrants for searches of Americans’ emails and cloud data. Last December, TechFreedom and its allies garnered over 100,000 signatures on a WhiteHouse.gov petition for ECPA reform. While the Administration has found time to reply to frivolous petitions, such as asking for the construction of a Death Star, it has ignored this serious issue for over three months. Worse, the administration has done nothing to help promote ECPA reform and, instead, appears to be actively orchestrating opposition to it from theoretically independent regulatory agencies, which has stalled reform in the Senate.

“This stubborn opposition to sensible, bi-partisan privacy reform is outrageous and shameful, a hypocrisy outweighed only by the Administration’s defense of its blanket surveillance of ordinary Americans,” said Szoka. “It’s time for the Administration to stop dodging responsibility or trying to divert attention from the government-created problems by pointing its finger at the private sector, by demonizing private companies’ collection and use of data while the government continues to flaunt the Fourth Amendment.”

Szoka is available for comment at media@techfreedom.org. Read the full comments and see TechFreedom’s other work on ECPA reform.