FCC Chairman Wheeler Signals Pro-Investment Approach to Communications Regulation

by on November 18, 2013 · 0 comments

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 →

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H Block Spectrum Highlights Risk of No Shows at FCC Incentive Auction

by on November 18, 2013 · 0 comments

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 →

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Yes, Net Neutrality is a Dead Man Walking. We Already Have a Fast Lane.

by on November 15, 2013 · 1 comment

“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.

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New paper on the FTC’s dangerously broad Section 5 authority

by on November 14, 2013 · 0 comments

The following is a guest post by James C. Cooper of George Mason University School of Law.

What are the limits to the FTC’s Section 5 antitrust authority? The short answer is, who knows. The FTC has been on a 100-year quest to find the maleficence that it alone was meant to combat. Early in its history, the Supreme Court appeared to give the FTC license to challenge a wide range of conduct that had little to do with competition. A series of appellate setbacks in the 1980s – relating largely to claims that Section 5 could reach tacit collusion and oligopolistic interdependence – led the Commission to retrench. Since then, the FTC has avoided litigating a Section 5 case, focusing primarily on invitations to collude (ITCs), and breaches of agreements to disclose or to license standard essential patents. Of course since all of these cases have settled, no court has had to opportunity to weigh in on whether Congress meant Section 5 to cover this type of conduct.

In my new Mercatus Center working paper, The Perils of Excessive Discretion: The Elusive Meaning of Unfairness in Section 5 of the FTC Act, I argue that the undefined nature of Section 5 leaves the FTC with broad discretion to investigate and extract settlements from companies. Although the appellate rebukes of the 1980s provide some clear boundaries, given firms’ understandable aversion to litigation – especially when only injunctive relief is on the table, and when the risk of follow-on private suits is much lower than it would be under a Sherman Act settlement – there is still a relatively large zone in which the FTC can develop this quasi Section 5 common law with little fear of triggering litigation, which would lead to appellate review. (A similar problem exists with respect to the FTC’s use of its Section 5 authority to become the de facto national privacy and data security regulator, but that’s another post).

Continue reading →

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Problematic “Do Not Track Kids” Bill Reintroduced

by on November 14, 2013 · 0 comments

Sen. Edward J. Markey (D-Mass.) and Rep. Joe Barton (R-Texas) have reintroduced their “Do Not Track Kids Act,” which, according to this press release, “amends the historic Children’s Online Privacy Protection Act of 1998 (COPPA), will extend, enhance and update the provisions relating to the collection, use and disclosure of children’s personal information and establishes new protections for personal information of children and teens.” I quickly scanned the new bill and it looks very similar to their previous bill of the same name that they introduced in 2011 and which I wrote about here and then critiqued at much greater length in a subsequent Mercatus Center working paper (“Kids, Privacy, Free Speech & the Internet: Finding The Right Balance”).

Since not much appears to have changed, I would just encourage you to check out my old working paper for a discussion of why this legislation raises a variety of technical and constitutional issues. But I remain perplexed by how supporters of this bill think they can devise age-stratified online privacy protections without requiring full-blown age verification for all Internet users. And once you go down that path, as I note in my paper, you open up a huge Pandora’s Box of problems that we have already grappled with for many years now. As I noted in my paper, the real irony here is that the “problem with these efforts is that expanding COPPA would require the collection of more personal information about kids and parents. For age verification to be effective at the scale of the Internet, the collection of massive amounts of additional data is necessary.” Continue reading →

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A Nice Illustration of The Law of Disruption in Action

by on November 13, 2013 · 0 comments

My friend and frequent co-blogger Larry Downes has shown how lawmaking in the information age is inexorably governed by “The Law of Disruption” or the fact that “technology changes exponentially, but social, economic, and legal systems change incrementally.” This law is “a simple but unavoidable principle of modern life,” he said, and it will have profound implications for the way businesses, government, and culture evolve going forward. “As the gap between the old world and the new gets wider,” he argues, “conflicts between social, economic, political, and legal systems” will intensify and “nothing can stop the chaos that will follow.” This has profound ramifications for high-tech policymaking, or at least it should.

A powerful illustration of the Law of Disruption in action comes from this cautionary tale told by telecom attorney Jonathan Askin in his new essay, “A Remedy to Clueless Tech Lawyers.” In the early 2000s, Askin served as legal counsel to Free World Dialup (FWD), “a startup that had the potential to dramatically disrupt the telecom sector” with its peer-to-peer IP network that could provide free global voice communications. Askin notes that “FWD paved the way for another startup—Skype. But FWD was Skype before Skype was Skype. The difference was that FWD had U.S. attorneys who put the reigns on FWD to seek FCC approvals to launch free of regulatory constraints.” Here’s what happened to FWD according to Askin: Continue reading →

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Tom Brokaw on Old vs. New Media

by on November 12, 2013 · 0 comments

Tom BrokawI think I owe Tom Brokaw an apology. When I first started reading his most recent Wall Street Journal column, “Imagine the Tweets During the Cuban Missile Crisis,” I assumed that I was in for one of those hyper-nosalgic essays about how the ‘good ‘ol days’ of mass media had passed us by and why the new media era is an unmitigated disaster. Instead, I was pleased to read his very balanced and sensible view of the old versus news media environments. Reflecting on the evolution of the media marketplace over the past 50 years since JFK’s assassination, Brokaw notes that:

The media climate has changed dramatically. The New Frontier, as Kennedy liked to call his administration, received a great deal of attention, but 50 years ago the major national information sources consisted of a handful of big-city daily newspapers, a few weekly news periodicals and two dominant TV network evening newscasts. Now the political news comes at us 24/7 on cable, through the air, the digital universe, on radio and print. And it comes to us more and more as opinion rather than a recitation of the facts as best they can be determined. News is a hit-and-run game, for the most part, with too little accountability for error.

This leads Brokaw to wonder if the amazing media metamorphosis has been, on net, positive or negative. “The virtual town square has been wired and expanded,” he notes, “but the question remains whether more voices make for a healthier political climate. With a keystroke we can easily move from an online credible source of information to a website larded with opinion or deliberately malicious erroneous claims. Have we simply enlarged the megaphone, cranked up the decibel level, and rallied the like-minded without regard to facts or consequences?” Continue reading →

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Anupam Chander on free speech and cyberlaw

by on November 12, 2013 · 0 comments

Anupam Chander, Director of the California International Law Center and Martin Luther King, Jr. Hall Research Scholar at the UC Davis School of Law, discusses his recent paper with co-author Uyen P. Lee titled The Free Speech Foundations of Cyberlaw. Chander addresses how the first amendment promotes innovation on the Internet; how limitations to free speech vary between the US and Europe; the role of online intermediaries in promoting and protecting the first amendment; the Communications Decency Act; technology, piracy, and copyright protection; and the tension between privacy and free speech.

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Bitcoin is going mainstream. Here is why cypherpunks shouldn’t worry.

by on October 31, 2013 · 14 comments

Deep Web Time CoverToday is a bit of a banner day for Bitcoin. It was five years ago today that Bitcoin was first described in a paper by Satoshi Nakamoto. And today the New York Times has finally run a profile of the cryptocurrency in its “paper of record” pages. In addition, TIME’s cover story this week is about the “deep web” and how Tor and Bitcoin facilitate it.

The fact is that Bitcoin is inching its way into the mainstream. Indeed, the NYT’s headline is “Bitcoin Pursues the Mainstream,” and this month’s issue of WIRED includes an article titled, “Bitcoin’s Radical Days Are Over. Here’s How to Take It Mainstream.”

The radicals, however, are not taking this sitting down. Also today, Cody Wilson and Unsystem have launched a crowdfunding campaign to build an anonymizing wallet. In their explanatory video, they criticize the Bitcoin Foundation as “helping the United States” regulate Bitcon, presumably to hasten its mainstream adoption. “Their mission is a performance to both agree with, and maintain an independence from, regulatory power,” Wilson says. “But you can’t have it both ways.”

This is an internecine battle that I’ve observed in the Bitcoin community for years. That of the cypherpunks who see Bitcoin as an escape hatch from state control versus the entrepreneurs who are more interested in the network’s disruptive (and thus profitable) potential. While it might be a fool’s errand, I’d like to make the case that not only is the work of the two groups not in conflict, they actually benefit from each other.

I’ve been following Bitcoin since early 2011, and in April of that year I penned the first (yes) mainstream article about Bitcoin. It was in TIME.com, and it’s been credited with kicking off the first bubble. Since then my work has focused on the regulatory policy around Bitcoin and other crypto currencies, especially looking to educate policymakers about the workings and potential benefits of decentralized payments systems. Why am I so interested in this? My reasons are twofold and they track both the entrepreneurial and cypherpunk ideals, and yet I don’t think I’m bipolar.

Continue reading →

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The Coming Fight Over the IP Transition

by on October 31, 2013 · 0 comments

Last week, the House held a hearing about the so-called IP Transition. The IP Transition refers to the telephone industry practice of carrying all wire-based consumer services–voice, Internet, and television–via faster, better fiber networks and not on the traditional copper wires that had fewer capabilities. Most consumers have not and will not notice the change. The completed IP Transition, however, has enormous implications for how the FCC regulates. As one telecom watcher said, “What’s at stake? Everything in telecom policy.”

For 100 years or so, phone service has had a special place in regulatory law given its importance in connecting the public. Phone service was almost exclusively over copper wires, a service affectionately called “plain old telephone service” (POTS). AT&T became the government-approved POTS national monopolist in 1913 (which ended with the AT&T antitrust breakup in the 1980s). The deal was: AT&T got to be a protected monopolist while the government got to require AT&T provide various public benefits. The most significant of these is universal service–AT&T had to serve virtually every US household and charge reasonable rates even to remote (that is, expensive) customers.

To create more phone competitors to the Baby Bells–the phone companies spun off from the AT&T break-up in the 1980s–the Congress passed the 1996 Telecom Act and the FCC put burdens on the Baby Bells to allow new phone companies to lease the Baby Bells’ AT&T-created copper wires at regulated rates. The market changed in ways never envisioned in the 1990s however. Today, phone companies face competition–not from the new phone companies leasing the old monopoly infrastructure but from entirely different technologies. You can receive voice service from your cable company (“digital voice”), your “phone” company (POTS), your wireless company, and even Internet-based providers like Vonage and Skype. Increasingly, households are leaving POTS behind in favor of voice service from cable or wireless providers. Yet POTS providers–like Verizon and AT&T (which also offer wireless service)–must abide by monopoly-era regulations that their cable and wireless competitors–Comcast, Sprint, and others–don’t have to abide by.

Understanding the significance of the IP Transition requires (unfortunately) knowing a little bit about Title I and Title II of the Communications Act. “Telecommunications services,” which are the phone companies with copper networks, are heavily regulated by the FCC under Title II. On the other hand, “information services,” which includes Internet service, are lightly regulated under Title I. This division made some sense in the 1990s. It is increasingly under stress now because burdened “telecommunications” companies like AT&T and Verizon are offering “information services” like Internet via DSL, FiOS, and U-Verse. Conversely, lightly-regulated “information services” companies like Comcast, Charter, and Time-Warner Cable are entering the regulated telephone market but face few of the regulatory burdens.

Which brings us to the IP Transition. As Title II phone companies replace their copper wires with fiber and deploy broadband networks to compete with cable companies, their customers’ phone service is being carried via IP packets. Functionally, these new networks act like a heavily-regulated Title II service since they carry voice, but they also act like the Title I broadband networks that cable providers built. So should these new fiber networks be burdened like Title II services or deregulated like Title I services? Or is it possible to achieve some middle ground using existing law? Those are the questions before the FCC and policymakers. Billions of dollars of investment will be accelerated or slowed and many firms will live or die depending on how the FCC and Congress act. Stay tuned.

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