November 2013

Both parties of Congress has been increasingly critical of federal agencies’ inefficient use of spectrum in the past few years and it seems like agencies are getting the message. The NTIA, which is the official manager of federal agency spectrum, released a letter yesterday announcing that the Department of Defense would be relocating some of its systems. Defense had reached an agreement with broadcasters that Defense systems will share spectrum in the Broadcast Auxiliary Service (BAS) band.

The soon-to-be vacated band held by Defense will eventually be auctioned off–hopefully in 2014–for billions of dollars and likely used for mobile broadband provided by wireless carriers like AT&T, Verizon, Sprint, and T-Mobile. These carriers face serious congestion problems because of government-created scarcity of spectrum.

The carriers actually had targeted some of BAS spectrum because they weren’t convinced Defense would be willing to move their systems. The broadcaster deal reached with Defense means everyone’s apparently happy–the broadcasters can keep their BAS spectrum, the feds get new equipment and Congress off their back (temporarily), and the carriers get new spectrum for auction.

The deal is welcome news because the spectrum will be put to a higher-valued use once auctioned. The federal government pays almost nothing for its own spectrum and is a poor steward of the resource. Transferring spectrum from agencies to carriers means lower phone bills and more mobile broadband coverage. Government agencies are notoriously resistant to moving their systems or sharing with others, so entering into a sharing pact with the broadcasters indicates some of the resistance is thawing.

It’s not unequivocal good news, though.

The government is clearing out from a 25 MHz band of spectrum and occupying the larger, 85 MHz BAS band that will be shared with broadcasters. The military will need a larger band because sharing imposes some capacity constraints necessitating new, agile systems that search the airwaves to make sure they don’t interfere with existing broadcast users. Dynamic sharing like this only adds to the cost and complexity and may imperil next years’ planned auction.

Further, the BAS band is unavailable for auction only because of the antiquated command-and-control regime the FCC uses to award spectrum licenses. BAS is mostly used for electronic news gathering, which relays local and national newscasts from reporters on the scene to broadcast studios. Broadcasters have used BAS spectrum since the 1960s when it was allocated to them for free.

In a market, broadcasters likely would not have as much BAS spectrum as they currently have. In fact, because of technology changes and squeezed newsroom budgets, broadcasters are finding cheaper alternatives. Increasingly, journalists are using carriers’ LTE technology to transmit their breaking newscasts since the technology costs a fraction of the cost of news vans and equipment needed for BAS transmissions. That is to say, there are alternative business models in the absence of Soviet-style allocations.

So despite these industry changes, BAS spectrum cannot be auctioned for its highest-valued use (probably mobile broadband) under current FCC rules. Further, it will be even more difficult to bring the benefits of auctions to the airwaves if federal users are intermingling with existing users, broadcasters in this case. It’s a trend to be wary of. Let’s just hope that next year’s planned auctions occur on time so that more consumers can benefit from mobile broadband.

soviet-beerIt’s been way too long since the Tech Liberation Front hosted an IRL meetup, more than a year in fact, so we’re looking to make amends next week. You’re invited to the 15th Alcohol Liberation Front happy hour, which we’ll hold at Churchkey on 14th Street at 6 p.m. on Wednesday, December 4th.

Lots of us from the TLF gang will be there, including quite a few of our out-of-town contributors. So please come by and have a beer with us, and bring a friend!

In my Reason column this week I took inspiration from the fact that I will soon be sporting a Narrative Clip life-logging camera, and I wrote about our coming sousveillance future when everyone will be recording everyone else with wearable cameras. Lo and behold, looks like our good friend Fred Smith of CEI last night lived that future.

That’s a video posted by a biker who apparently wears a camera on his helmet and records his rides. He was calling the police to report a car blocking the bike lane when Fred and his wife Fran asked him not to. One thing I find fascinating is that being recorded, their instinct was to record back with the cameras on their phones.

As wearables become mainstream we’re going to begin to see many more videos like this, and I leave it to the reader to decide whether that’s a good thing. Sousveillance, whether we like it or not, will be a giant accountability machine. Obviously, recording the behavior of police and other government agents will help keep them accountable, but we’ll also be recording each other. Indeed, this biker wears a camera in part, I’m sure, to hold others accountable should anything happen to him on the road. What’s interesting is that what we will be held accountable for will be not just traffic accidents, but also sidewalk interactions that until now would have remained private and anonymous. Do check out my column in which I go into much more detail about the coming mainstreaming of sousveillance.

I’m pleased to announce that Alex Tabarrok and I have a new working paper out from the Mercatus Center today, “Public Choice and Bloomington School Perspectives on Intellectual Property.” The paper will appear in Public Choice in 2014.

Here’s the abstract:

We mine two underexplored traditions for insights into intellectual property: the public choice or Virginia school, centered on James Buchanan and Gordon Tullock, and the Bloomington or Institutional Analysis and Development school, centered on Elinor Ostrom and Vincent Ostrom. We apply the perspectives of each school to issues of intellectual property and develop new insights, questions, and focuses of attention. We also explore tensions and synergies between the two schools on issues of intellectual property.

The gist of the paper is that the standard case for intellectual property—that a temporary monopoly is needed in order to recoup the sunk costs of innovation or creation—ignores issues raised by the two schools we investigate.

From a public choice perspective, a temporary monopoly provides enormous opportunities for rent seeking. Copyright and patent owners are constantly manipulating the political environment to expand either the duration of the monopoly or the scope of what can be monopolized. We document the evolution of intellectual property in the United States from its modest origins to its current strong and expansive state.

From a Bloomington perspective, the standard case for IP wrongly treats the commons as a kind of wasteland. In fact, numerous innovations and sprawling creative works occur without monopolization—just look at Wikipedia. Innovation occurs when the right institutional structures are in place, and intellectual property that is too severe can hamper the smooth operation of these institutions. Too much IP can harm as much as too little.

Read the whole thing, cite it copiously, etc.

“Selfie” was selected today as the word of the year by the Oxford English Dictionary’s editors, beating both “twerking” and “bitcoin.” Bitcoin’s company in that word list makes me appreciate the fact that others may be as sick of hearing about Bitcoin as I am about twerking. Nevertheless, it’s a pretty important week for Bitcoin, an I wanted to highlight some of the work I’ve been doing.

Yesterday the Senate Homeland Security and Governmental Affairs Committee held a hearing on the promises and challenges that virtual currencies hold for consumers and law enforcement respectively. I testified at that hearing and video of my testimony is below. You can also check out the written testimony, which is an updated version of the Bitcoin primer for policymakers I wrote with Andrea Castillo earlier this year. And ahead of the hearing I published an op-ed in The Guardian arguing that if the U.S. doesn’t foster a sane regulatory environment for Bitcoin, entrepreneurs will go to other jurisdictions that do.

All in all the hearing was hearteningly positive. The federal regulators and law enforcement representatives all agreed that Bitcoin is a lawful and legitimate payments system and that it holds great promise. They also agreed that plain old cash and centralized virtual currencies (contra Bitcoin’s decentralized design) are much greater magnets for money laundering, and that they needed no new laws or authority to deal with illegal uses of Bitcoin. I discuss the hearing and its implications on today’s Cato Daily Podcast with Caleb Brown.

Finally, I think there are lots of folks, especially in the wonkosphere, who think they know what Bitcoin is, but really don’t, and so the opinions they offer about its viability or significance are based on misunderstanding. For example, Neil Irwin at Wonkblog today wrote a 700-word post to suggest that what Bitcoin needs is a central bank. Now, if he’s trolling, kudos to him. But I really think he’s innocently ignorant of the fact that Bitcoin’s seminal design feature is that it is a decentralized payments system, and that the moment you add a central banker (which would in any case be impossible) you would no longer have Bitcoin, but Facebook Credits or Microsoft Points or airline miles.

So, if you think you have an inkling about what Bitcoin is, but you’re not too sure, or you don’t know why it’s so significant, please check out my cover story in the December issue of Reason, which was just made available online. Apart from explaining the basics, I go into detail about the little understood fact that Bitcoin is much more than just money. Value transmission is just the most obvious use case for Bitcoin, and thus the one that’s being built out first, but the Bitcoin platform is essentially a decentralized ledger, so it is also able to support property registrations, decentralized futures markets, and much more.

And truly finally, if you want to keep up with all the happenings in Bitcoin, including the Senate Banking Committee hearing later today, check out, a site a built for myself but that I hope is useful to others that tracks Bitcoin stories in the mainstream media.

The Hill is reporting that Rep. Goodlatte, under pressure from “companies like Microsoft, IBM and Apple,” is planning to drop the provision in his patent reform bill that expands the Covered Business Method (CBM) program. Mike Masnick also has commentary.

Julie Samuels explains CBM review:

The “Covered Business Method Review” (CBM) was first introduced in 2011’s America Invents Act. It created, for a limited time, an additional avenue of patent review at the Patent Office. Unfortunately, as drafted, it really was only intended to apply to patents that deal with financial institutions.

CBM is a good program. First, we have long favored the use of Patent Office procedure to challenge patents; it is much cheaper and much quicker than going to court. Second, it allows for more ways to challenge patents than other types of Patent Office review—making it a more robust procedure that promises to knock out more improvidently granted patents. Third, it automatically puts concurrent patent litigation between the parties on hold.

Putting ongoing litigation on hold is no small thing. Patent litigation often costs each side well into the millions of dollars, while CBMs cost just a fraction of that. This means that more people will be in a position to challenge bad patents and fight back against the trolls who wield those patents.

The original Goodlatte bill would have expanded CBM review to patents beyond the financial sector.

From a public choice perspective, it is unsurprising that finance would have better patent law than the rest of the economy: finance is a concentrated industry that can go up politically against and offset another concentrated industry, the patent bar. But non-finance covered business method patents are asserted against all kinds of companies, for practices as banal as retrieving data from a database (not joking: “A method of retrieving information from a database record having plural fields“) or selling things online (“An apparatus to market and/or sell goods and/or services over an electronic network“). The fact that the victims of these patent assertions are dispersed throughout the economy means that they are not organized enough to effectively oppose the patent interests that are lobbying against the CBM program expansion.

Still, it is very disappointing that Rep. Goodlatte is caving to such lobbying. I already thought that his bill did not go far enough; now it goes even less far.

Tomorrow, the Federal Trade Commission (FTC) will host an all-day workshop entitled, “Internet of Things: Privacy and Security in a Connected World.” [Detailed agenda here.] According to the FTC: “The workshop will focus on privacy and security issues related to increased connectivity for consumers, both in the home (including home automation, smart home appliances and connected devices), and when consumers are on the move (including health and fitness devices, personal devices, and cars).”

Where is the FTC heading on this front? This Politico story by Erin Mershon from last week offers some possible ideas. Yet, it still remains unclear whether this is just another inquiry into an exciting set of new technologies or if it is, as I worried in my recent comments to the FTC on this matter, “the beginning of a regulatory regime for a new set of information technologies that are still in their infancy.”

First, for those not familiar with the “Internet of Things,” this short new report from Daniel Castro & Jordan Misra of the Center for Data Innovation offers a good definition:

The “Internet of Things” refers to the concept that the Internet is no longer just a global network for people to communicate with one another using computers, but it is also a platform or devices to communicate electronically with the world around them. The result is a world that is alive with information as data flows from one device to another and is shared and reused for a multitude of purposes. Harnessing the potential of all of this data for economic and social good will be one of the primary challenges and opportunities of the coming decades.

The report continues on to offer a wide range of examples of new products and services that could fulfill this promise.

What I find somewhat worrying about the FTC’s sudden interest in the Internet of Things is that it opens to the door for some regulatory-minded critics to encourage preemptive controls on this exciting new wave of digital age innovation, based almost entirely on hypothetical worst-case scenarios they have conjured up. Continue reading →

From the time Tom Wheeler was nominated to become the next FCC Chairman, many have wondered, “What would Wheeler do?” Though it is still early in his chairmanship, the only ruling issued in Chairman Wheeler’s first meeting signals a pro-investment approach to communications regulation.

The declaratory ruling clarified that the FCC would evaluate foreign investment in broadcast licensees that exceeds the 25 percent statutory benchmark using its existing analytical framework. It had previously been unclear whether broadcasters were subject to the same standard as other segments of the communications industry. The ruling recognized that providing broadcasters with regulatory certainty in this respect would promote investment and that greater investment yields greater innovation.

The FCC’s decision to apply the same standards for reviewing foreign ownership of broadcasters as it applies to other segments of the communications industry is very encouraging. It affirms the watershed policy decisions in the USF/ICC Transformation Order, in which the FCC concluded that “leveling the playing field” promotes competition whereas implied subsidies deter investment and are “unfair for consumers.” Continue reading →

I recently prepared a paper for the Expanding Opportunities for Broadcasters Coalition and Consumer Electronics Association that provides empirical data regarding the costs of restricting the eligibility of large firms to participate in FCC spectrum auctions (available in PDF here). The paper demonstrates that there is no significant likelihood that an open incentive auction would substantially harm the competitive positions of Sprint and T-Mobile. It also demonstrates that Sprint and T-Mobile have incentives to constrain the ability of Verizon and AT&T to expand their network capacity, and that Sprint and T-Mobile could consider FCC restraints on their primary rivals a “win” even if Sprint and T-Mobile don’t place a single bid in the incentive auction. (Winning regulatory battles is a lot cheaper than winning spectrum in a competitive auction.)

Some might think it is implausible that Sprint or T-Mobile would decide to forgo participation in the incentive auction. However, the recent announcement by Sprint that it won’t compete in the H block auction highlights the difficulty in predicting accurately whether any particular company will participate in a particular auction. Sprint’s announcement stunned market analysts, who had considered Sprint a key contender for the H block spectrum. Until recently, Sprint had given every indication it was keen to acquire this spectrum, which is located directly adjacent to the nationwide G block that Sprint already owns. It participated heavily in the FCC’s service rules proceeding for the H block (WT Docket No. 12-357) and even conducted its own testing to assist the FCC in assessing the technical issues. But, by the time the H Block auction was actually announced, Sprint decided its business would be better served by focusing its efforts on the deployment of its trove of spectrum in the 2.5 GHz band. Continue reading →

“Net neutrality is a dead man walking,” Marvin Ammori stated in Wired last week, citing the probable demise of the FCC’s Open Internet rules in court. I’d agree for a different reason. Net neutrality has been dead ever since the FCC released its net neutrality order in December 2010. (This is not to say the damaging rules should be upheld by the DC Circuit. For many reasons, the Order should be struck down.) I agree with Ammori because we already have the Internet “fast lane” many net neutrality proponents wanted to prevent. Since that goal is precluded, all the rules do is hang Damocles’ Sword over ISPs regarding traffic management.

The 2010 rules managed to make both sides unhappy. The ISPs face severe penalties if three FCC commissioners believe ISP network management practices “unreasonably discriminate” against certain traffic. Public interest groups, on the other hand, were dissatisfied because they wanted ISPs reclassified as common carriers to prevent deep-pocketed content creators from allying with ISPs to create an Internet “fast lane” for some companies, relegating most other websites to the so-called “winding dirt road” of the public Internet.

Proponents emphasize different goals of net neutrality (to the point–many argue–it’s hard to discern what the term means). But if preventing the creation of a fast lane is the main goal of net neutrality, it’s dead already. Consider two popularly-cited net neutrality “violations” that do not violate the Open Internet Order: Netflix’ Open Connect program and Comcast not counting its Xfinity video-on-demand (VOD) service against customers’ data limits

Both cases involve the creation of a fast lane for certain content and activists rail against them. Both cases also involve network practices expressly exempted from net neutrality regulations. The FCC exempted these sorts of services because they are important, benefit the public, and should be encouraged. With Open Connect, Netflix scatters its many servers across the country closer to households, which allows its content to stream at a higher quality than most other video sites. Comcast gives its Xfinity VOD fast-lane treatment as well, which is completely legal since VOD from a cable company is a “specialized service” exempt from the rules.

“Specialized service” needs some explanation since it’s a novel concept from the FCC order. The net neutrality rules distinguish between “broadband Internet access service” (BIAS)–to which the regulations apply–and specialized (or managed) services–to which they don’t apply. The exemption of specialized services opens up a dangerous loophole in the view of proponents.

BIAS is what most consider “the Internet.” It’s the everyday websites we access on our computers and smartphones. What are specialized services? In the sleepy month of August the FCC’s Open Internet Advisory Committee released its report on what criteria specialized service needs to meet to be exempt from net neutrality scrutiny (these are influential and advisory, but not binding):

1. The service doesn’t reach large parts of the Internet, and
2. The service is an “application level” service.

The Advisory Committee also thought that “capacity isolation” is a good indicator that a service should be exempt. With capacity isolation, the ISP has one broadband connection going to the home but is separating the service’s data stream from the conventional Internet stream consumers use to visit Facebook, YouTube, and the like. This is how Comcast’s streaming of Xfinity to Xboxes is exempt–it is a proprietary network going into the home. As long as carriers don’t divert BIAS capacity for the application, the FCC will likely turn a blind eye.

What are some examples? Specialized service is marked by higher-quality streams that typically don’t suffer from jitter and latency. If you have “digital voice” from Comcast, for example, you are receiving a specialized service–proprietary VoIP. Specialized service can also include data streams like VOD, e-reader downloads, heart monitor data, and gaming services. The FCC exempted these because some are important enough that they shouldn’t compete with BIAS Internet. It would be obviously damaging to have digital phone service or health monitors getting disrupted because others are checking up on their fantasy football team. The FCC also wanted to spur investment in specialized services and video companies like Netflix are considering pairing up with ISPs to deliver a better experience to customers.

That is to say, the net neutrality effort has failed even worse than most realize. The FCC essentially prohibited innovative business models in BIAS, freezing that service into common-carrier-like status. Further, we have an Internet fast lane (which I consider a significant public benefit, though net neutrality proponents often do not). As business models evolve and the costs of server networks fall, our two-tier system will become more apparent.