America’s small towns are underpopulated, while big cities of plague, protests, and panic are overpopulated, overpriced, and overpopularized. We could start by ensuring rural spaces high-speed internet (still unavailable as I can attest in the rural center of supposedly high-tech California)…. Victor Davis Hanson

A proposal by Congressman G.K. Butterfield of North Carolina could be a big step in the right direction of opening up rural spaces to full participation in the modern economy.  

His proposal would expand the eligibility of who can receive Federal support for building infrastructure in unserved areas, making it easier for cable operators, satellite providers and others to complete with traditional telecommunications carriers. 

The Butterfield vision is gaining bipartisan support and may possibly be included in a stimulus package.  It certainly should be.  

The proposal would simply eliminate the requirement that a competitor must receive designation as an Eligible Telecommunications Carrier (ETC) from a state public utility/service commission as a prerequisite for receiving Federal support.

This requirement harkens back to a bygone era when cable, wireless and satellite services were not substitutes for landline telephone service.  At that time, small rural telephone providers worried that a competitor would “cherry pick” or “cream skim” their most lucrative (enterprise) customers—such as the local hospital—and strand the small rural telco in a potential death spiral serving only the barely profitable (or even unprofitable) consumer segment.

Now that cable, satellite and wireless services are a substitute for many consumers, the requirement for ETC designation does nothing to protect small rural telcos from competition.  It is an anachronism.  However, it does create an unnecessary hurdle for cable, wireless and satellite providers to qualify for Federal support to help close the digital divide—which is an urgent priority.

Originally intended to prevent the loss of telecommunications services in rural areas, the requirement now serves to prevent the necessary expansion of those services to keep up with the modern world economy.  

As awful as this horrible pandemic is, at least we are driving less and spending more time with our families.  Many have learned that a daily commute may not be necessary.  Broadband seems to be boosting productivity and reducing air pollution at the same time.  Hopefully broadband can also help facilitate a revival of rural America.  

Congress should let the Satellite Television Extension and Localism Act Reauthorization (STELAR) of 2014 expire at the end of this year. STELAR is the most recent reincarnation of the Satellite Home Viewer Act of 1988, a law that has long since outlived it’s purposes.

Owners of home satellite dishes in the 1980s—who were largely concentrated in rural areas—were receiving retransmission of popular television programs via satellite carriers in apparent violation of copyright law. When copyright owners objected, Congress established a compulsory, statutory license mandating that content providers allow secondary transmission via satellite to areas unserved by either a broadcaster or a cable operator, and requiring satellite carriers to compensate copyright holders at the rate of 3 cents per subscriber per month for the retransmission of a network TV station or 12 cents for a cable superstation.

The retransmission fees were purposely set low to help the emerging satellite carriers get established in the marketplace when innovation in satellite technology still had a long way to go. Today the carriers are thriving business enterprises, and there is no need for them to continue receiving subsidies. Broadcasters, on the other hand, face unprecedented competition for advertising revenue that historically covered the entire cost of content production.

Today a broadcaster receives 28 cents per subscriber per month when a satellite carrier retransmits their local television signal. But the fair market value of that signal is actually $2.50, according to one estimate.

There is no reason retransmission fees cannot be “determined in the marketplace through negotiations among carriers, broadcasters and copyright holders,” as the Reagan administration suggested in 1988.

Aside from perpetuating an unjustified subsidy, renewal of STELAR may deprive owners of home satellite dishes in the nation’s twelve smallest Designated Market Areas from receiving programming from their own local broadcast TV stations.

Due to severe capacity constraints inherent in satellite technology in the 1980s, the statutory license originally allowed satellite carriers to retransmit a single, distant signal (e.g. from a New York or Los Angeles network affiliate) throughout their entire footprint. As the technology has improved, the statutory license has been expanded in recent years to include local-into-local retransmission. DISH Network, which already provides local-into-local retransmission throughout the nation (in all 210 DMAs), has demonstrated that a statutory license for distant signals is no longer necessary or warranted.

Although DirecTV does not yet offer nationwide local-into-local retransmission, this is a voluntary business decision that should not dictate the renewal of a statutory license based on 30 year old technology.

A group of lawmakers is asking the Federal Communications Commission to maintain the agency’s 27 year old “Kid Vid” rules in their “current form,” rather than open a proceeding to evaluate whether the rules can be improved or are even still necessary.

The rules were enacted by the FCC pursuant to the Children’s’ Television Act of 1990—in the analog era, when digital technologies were just starting to be deployed, and the same year that initial steps were being taken to privatize the Internet and open it for commercial use.  A lot has changed since the Act was passed.

The Act set limits on advertising that exceeded what the networks had been running in the absence of regulation, and led to “unintended consequences,” including a decline in locally produced children’s’ programming and an increase in “educationally weaker” network programming, according to a 1998 study.

There are some proposals for common sense reforms, including allowing multicasting stations to satisfy their obligation to air three hours of children’s’ programming per week either on their main program stream or one one of their newer program streams (which are just as easy to access)—broadcasters get no credit for children’s’ programming that doesn’t run on the main stream, so they have no regulatory incentive to expand their children’s’ programming.

Another common sense proposal would be to allow regularly-scheduled non-weekly series, short series, specials, programs and segments shorter than 30 minutes and PSAs to count toward the three hour limit.

Broadcasters could also be given more scheduling flexibility.  Right now, with rare exception, the 30-minute programs that qualify have to run on a weekly basis in the same time slot.

The lawmakers object to these common sense reforms, arguing that low income families that lack access to pay-TV and online streaming options would be left with fewer opportunities to provide their kids with educational programming.  (According to Nielsen data, the number of households: 1) with a child between the ages of two and 17, and 2) without cable or Internet access from April to May was one half of one percent.)  But an FCC review of the Kid Vid rules isn’t about reducing opportunities, it’s about adapting regulation to the realities of both the marketplace (more sources of video content) and viewing habits (it’s not just about appointment viewing these days, on-demand viewing and binge watching are also popular) as they have evolved in the 27 years since the Act was passed.

The FCC is scheduled to consider opening a proceeding to reviewing the Kid Vid rules at it’s July 12 ^th open meeting later this week.

Hal Singer has discovered that total wireline broadband investment has declined 12% in the first half of 2015 compared to the first half of 2014.  The net decrease was $3.3 billion across the six largest ISPs.  As far as what could have caused this, the Federal Communications Commission’s Open Internet Order “is the best explanation for the capex meltdown,” Singer writes.

Despite numerous warnings from economists and other experts, the FCC confidently predicted in paragraph 40 of the Open Internet Order that “recent events have demonstrated that our rules will not disrupt capital markets or investment.”

Chairman Wheeler acknowledged that diminished investment in the network is unacceptable when the commission adopted the Open Internet Order by a partisan 3-2 vote.  His statement said:

Our challenge is to achieve two equally important goals: ensure incentives for private investment in broadband infrastructure so the U.S. has world-leading networks and ensure that those networks are fast, fair, and open for all Americans. (emphasis added.)

The Open Internet Order achieves the first goal, he claimed, by “providing certainty for broadband providers and the online marketplace.” (emphasis added.)

Yet by asserting jurisdiction over interconnection for the first time and by adding a vague new catchall “general conduct” rule, the Order is a recipe for uncertainty.  When asked at a February press conference to provide some examples of how the general conduct rule might be used to stop “new and novel threats” to the Internet, Wheeler admitted “we don’t really know…we don’t know where things go next…”  This is not certainty.

As Singer points out, the FCC has speculated that the Open Internet rules would generate only $100 million in annual benefits for content providers compared to the reduction of investment in the network of at least $3.3 billion since last year.  While the rules obviously won’t survive cost-benefit analysis, I’m not sure they will survive some preliminary questions and even get to a cost-benefit analysis stage.

The FCC has argued that the definitions of “telecommunications” and “information” services in the Telecommunications Act of 1996 are ambiguous and that “changed factual circumstances” justify the reclassification of broadband as a “telecommunications” offering that can be tightly regulated by the FCC—as if it were a dangerous monopoly subject to no competitive checks and balances whatsoever—and not as an “information” service that is otherwise subject to Federal Trade Commission supervision.

The Supreme Court agreed in the 2005 Brand X decision that there is statutory ambiguity with regard to the “last mile” connection between the customer’s computer and the broadband provider’s computer processing facilities, but the FCC has now chosen to regulate well beyond the last mile.  According to Commissioner Ajit Pai,

It is not limited to the last-mile transmission service between a customer and an ISP’s point of presence. It extends into the ISP’s network all the way to “the exchange of traffic between a last-mile broadband provider and connecting networks”—a scope that necessarily extends onto the Internet’s backbone, since that’s where many networks interconnect.  (citation omitted.)

As the industry trade associations and others who are appealing the order point out, all nine justices in Brand X agreed that broadband Internet access is an information service—the only disagreement concerned the last mile.  If nothing else, the Open Internet Order may be extremely vulnerable to legal challenge as a result of this example of over-reaching.

With regard to the “changed factual circumstances,” the commission argues, first, that it is now possible to conceive of broadband as nothing more than a bare “connection link,” and, second, that competition for fixed broadband is insufficient.

One thing that is clear is that the statutory definitions of “telecommunications” and “information” services look to the nature of the service provided and not to the market structure.  For this reason, whether the broadband market mirrors the textbook definition of “perfect competition” or not is completely  irrelevant.

The Supreme Court agreed in 2005 with the commission’s original interpretation that broadband is an information service because—as the FCC argued and the Court agreed—it enables users to browse the World Wide Web, access email and Usenet groups and transfer files from file archives available on the Internet.  It also facilitate access to third-party Web pages by offering consumers the ability to cache popular content on local servers and provides access to the Domain Name System (DNS) that matches Web page addresses with Internet Protocol (IP) addresses.

The commission now argues that things like DNS, caching and network security don’t count because they’re merely used for the management of a telecommunications system or service; and that things like email and web hosting shouldn’t count because “consumers are very likely to use their high-speed Internet connections to take advantage of competing services offered by third parties.”  (emphasis added.) Once these exceptions are made, all that’s left—in the commission’s view—is a telecommunications service.

But  is there is no third-party exception in the statutory definitions, and the petitioners who’ve brought suit in the D.C. Circuit Court of Appeals point out that the telecommunications management exception is extremely narrow.  The commission clarified in 1985, they note, that the exception is limited to services that “facilitate use of the basic network without changing the nature of basic telephone service.”  In the Supreme Court’s 2005 decision, the dissent similarly tried to argue that DNS doesn’t count—as the commission argues now—but the majority responded that this argument “begs the question because it assumes that Internet service is a “telecommunications system” or “service” that DNS manages…”  The Supreme Court declined to resolve this issue in 2005, but perhaps it eventually will this time around.

Hal Singer’s observation that investment in broadband infrastructure is already declining is hardly surprising.  Telecommunications and information services were distinguished for regulatory purposes in 1979-80 to protect regulation of communications while protecting computing from regulation.  But it soon became painfully obvious that preventing the Bell System from participating in the market for information services had the unintended effect of restricting innovation in communications.  The resulting bandwidth limitations in communications ultimately became a barrier to progress in computing.  In 1996, Congress tried to preserve regulation of monopoly telecommunications services while competition developed for voice services, but it was determined to free advanced information services from legacy regulation.  The Open Internet Order is an attempt to do exactly the opposite of what Congress intended.

A British telecom executive alleges that Verizon and AT&T may be overcharging corporate customers approximately $9 billion a year for wholesale “special access,” services, according to the Financial Times.

The Federal Communications Commission is presently evaluating proprietary data from both providers and purchasers of high-capacity, private line (i.e., special access) services.  Some competitors want nothing less than for the FCC to regulate Verizon’s and AT&T’s prices and terms of service. There’s a real danger the FCC could be persuaded–as it has in the past–to set wholesale prices at or below cost in the name of promoting competition.  That discourages investment in the network by incumbents and new entrants alike.

As researcher Susan Gately explained in 2007, a study by her firm claimed $8.3 billion in special access “overcharges” in 2006.  She predicted they could reach $9.0-$9.5 billion in 2007.  This would mean that special access overcharges haven’t increased at all in the past seven to eight years, implying that Verizon and AT&T must not be doing a very good job “abusing their landline monopolies to hurt competitors” (the words of the Financial Times writer).

As I wrote in 2009, researchers at both the National Regulatory Research Institute (NRRI) and National Economic Research Associates (NERA) pointed out that Gately and her colleagues relied on extremely flawed FCC accounting data.  This is why the FCC required data collection from providers and purchasers in 2012, the results of which are not yet publicly known.  Both the NRRI and NERA studies suggested the possibility that accusations of overcharging could be greatly exaggerated.  If Verizon and AT&T were over-earning, their competitors would find it profitable to invest in their own facilities instead of seeking more regulation.

Verizon and AT&T are responsible for much of the investment in the network.  Many of the firms that entered the market as a result of the 1996 telecom act have been reluctant to invest in competitive facilities, preferring to lease facilities at low regulated prices.  The FCC has always expressed a preference for multiple competing networks (i.e., facilities-based competition), but taking the profit out of special access is sure to defeat this goal by making it more economical to lease.

A bill before Congress would for the first time require radio broadcasters to pay royalty fees to recording artists and record labels pursuant to the Copyright Act. The proposed Fair Play Fair Pay Act (H.R. 1733) would “[make] sure that all radio services play by the same rules, and all artists are fairly compensated,” according to Congressman Jerrold Nadler (D-NY).

… AM/FM radio has used whatever music it wants without paying a cent to the musicians, vocalists, and labels that created it. Satellite radio has paid below market royalties for the music it uses …

The bill would still allow for different fees for AM/FM radio, satellite radio and Internet radio, but it would mandate a “minimum fee” for each type of service for the first time.

A February report from the U.S. Copyright Office cites the promotional value of airtime as the longstanding justification for exempting terrestrial radio broadcasters from paying royalties under the Copyright Act.

In the traditional view of the market, broadcasters and labels representing copyright owners enjoy a mutually beneficial relationship whereby terrestrial radio stations exploit sound recordings to attract the listener pools that generate advertising dollars, and, in return, sound recording owners receive exposure that promotes record and other sales.

The Copyright Office now feels there are “significant questions” whether the traditional view remains credible today. But significant questions are not the same thing as clear evidence.The problem with the proposed Fair Play Fair Pay Act is two-fold. First, notwithstanding that there is now some uncertainty around the traditional view of the AM/FM market, the bill mandates new minimum fees anyway. Second, it would empower a government panel consisting of three judges appointed by the Librarian of Congress to engage in what could become highly-subjective decision-making.

The Copyright Royalty Judges shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.

The most efficient way to get an accurate indicator of what a willing buyer and a willing seller would’ve negotiated in the marketplace is to call for private negotiations. The Copyright Office recommends this approach, too. Only when a music rights organization (MRO) and a licensee are unsuccessful in reaching an agreement on their own would the Copyright Royalty Board set the rates.

Each MRO would enjoy an antitrust exemption to negotiate performance and mechanical licenses collectively on behalf of its members—as would licensee groups negotiating with the MROs—with the CRB available to establish a rate in case of a dispute.

If Congress wants to end the terrestrial radio exemption, this is the better way to do it. Plainly, however, promotional value counts for something—and even the proposed Fair Play Fair Pay Act acknowledges that the value of the promotional effect qualifies as a legitimate form of compensation to recording artists and record labels.

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.

The FCC had to mandate open access for network equipment in the late 1960s only because of the unintended consequences of another regulatory objective—that of ensuring that basic local residential phone service was “affordable.” In practice, strict price controls required phone companies to set local rates at or below cost. The companies were permitted to earn a profit only by charging high prices for all of their other services including long-distance. Open access threatened this system of cross-subsidies, which is why the FCC strongly opposed open access for years. The FCC did not seriously rethink this policy until it was forced to do so by a federal appeals court ruling in the 1950s. That court decision set the stage for the FCC’s subsequent open access rules. Wheeler is trying to claim credit for a heroic achievement, when actually all the commission did was clean up a mess it created.

The failure of Wheeler’s Canadian government-subsidized startup in 1985 had nothing to do with open access, according to Wikipedia. NABU Network was attempting to sell up to 6.4 Mbps broadband service over Canadian cable networks notwithstanding the extremely limited capabilities of the network at the time. For one thing, most cable networks of that era were not bi-directional. The reason Wheeler’s startup didn’t choose to offer broadband over open telephone networks is because under-investment rendered those networks unsuitable. The copper loop simply didn’t offer the same bandwidth as coaxial cable. Why was there under-investment? Because of over-regulation.

Next, let’s examine Chairman Wheeler’s prediction that new regulation won’t discourage investment because there will be “no rate regulation, no tariffs, no last-mile unbundling.” Let’s be real. Wheeler simply cannot guarantee there will be no rate regulation, no tariffs, no last-mile unbundling nor other inappropriate regulation in the future. Anyone can petition the FCC to impose more regulation at any time, and nothing will prevent the commission from going down that road. The FCC will become a renewed target for special-interest pleading if Chairman Wheeler’s proposal is adopted by the commission and upheld by the courts.

Wheeler’s proposal would reclassify broadband as a “telecommunications” service notwithstanding the fact that the commission has previously found that broadband is an “information” service and the Supreme Court upheld that determination. These terms are clearly defined in the In the 1996 telecom act, in which bipartisan majorities in Congress sought to create a regulatory firewall. Communications services would continue to be regulated until they became competitive. Services that combine communications and computing (“information” services) would not be regulated at all. Congress wanted to create appropriate incentives for firms that provide communications service to invest and innovate by adding computing functionality. Congress was well aware that the commission tried over many years to establish a bright-line separation between communications and computing, and it failed. It’s an impossible task, because communications and computing are becoming more integrated all the time. The solution was to maintain legacy regulation for legacy network services, and open the door to competition for advanced services. The key issue now is whether or not broadband is a competitive industry. If the broadband offerings of cable operators, telephone companies and wireless providers are all taken into account, the answer is clearly yes.

In the view of Chairman Wheeler and others, regulation is needed to ensure the Internet is fast, fair and open. In reality, the Internet wants to be fast, fair and open. So called “walled garden” experiments of the past have all ended in failure. Before broadband, the open telephone network was significantly more profitable than the closed cable network. Now, broadband either is or soon will become more profitable than cable. Since open networks are more profitable than closed networks, legacy regulation is more than likely to be unnecessary and almost certain to be counter-productive.  Internet openness is chiefly a function not of regulation but of innovation and investment in bandwidth abundance.  With sufficient bandwidth, all packets travel at the speed of light.

Then again, this debate isn’t really about open networks. Republican leaders in Congress are offering to pass a bill that would prevent blocking and paid prioritization, and they can’t find any Democratic co-sponsors. That’s because the bill would prohibit reclassification of broadband as a “telecommunications” service, which would give the FCC a green light to regulate like it’s 1934. The idea that we need to give the commission unfettered authority so it can enact a limited amount of “smart” regulation that can be accomplished while encouraging private investment–and that we can otherwise rely on the FCC to practice regulatory restraint and not abuse its power–sounds a lot like the sales pitch for the Affordable Care Act, i.e., that we can have it all, there are no trade-offs. Right.

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.

Lest there be any doubt whether there was widespread bipartisan support for regulating mobile wireless services under Title II so the FCC could deregulate them, the fact is not a single Republican in either chamber voted for the Omnibus Budget Reconciliation Act of 1993.  In the Senate, the vote was 50-50, with six Democrats voting with the Republicans.  The vote was 218-216 in the House of Representatives, with 41 Democrats joining the Republicans.

This convoluted regulatory framework—under which the FCC is not specifically prohibited from changing its mind whenever it wants, reversing course and un-forbearing—was enacted because one party jammed the other.

There was no appetite for regulating wireless services in 1993, since the FCC would be conducting competitive auctions for the first time for assigning four new licenses on top of the two existing licenses in every trading area.  Applying Title II—even though that meant forbearing from applying 45 out of 48 of Title II’s provisions—was a clever manipulation of deregulatory sentiment.

Although in theory limited Title II regulation “doesn’t have to be a big deal,” let’s be clear that’s not what Feld and others are advocating.

The Democrats reserved only three of Title II’s 48 provisions (sections 201, 202 and 208) when they applied Title II to wireless and authorized the FCC forbear from applying everything else.  In comments filed with the FCC, Feld and company clearly oppose what we’re calling doesn’t-have-to-be-a-big-deal regulatory treatment (“blanket forbearance”) of broadband.  In fact, they’ve identified a total of only four of Title II’s 48 provisions that they believe are candidates for forbearance (sections 223, 226, 228 and 260).

Given the forbearance framework and public interest concerns discussed above, and mindful that the existing broadband market is neither as nascent nor as competitive as the wireless market was in 1994, when the Commission engaged in blanket forbearance, Commenters provide this list of specific statutes the Commission should not simply forbear from on the assumption that doing so meets the statutory criteria. As a general matter, these involve Commission authority over interconnection and shut down of service (Sections 251(a), 256, and portions of 214(c)), discretionary authority to compel production of information (Sections 211, 213, 215, and 218-20), provisions which provide explicit power for the Commission to hold parties accountable and prescribe adequate remedies (Sections 205-07, 209, 212, and 216), provisions designed to protect consumers (Sections 203 and 222), or provisions designed to ensure affordable deployment and the benefits of broadband access to all Americans (Sections 214(e), 225, 254, 255, and 257).  These statutes are in addition to the bare minimum recognized in Section 332(c) as the minimum needed to protect consumers—Sections 201, 202, and 208. On the other hand, it would appear that forbearance from some provisions would serve the public interest, either because they create barriers to deployment and improvement of capacity, or because it is unclear what these provisions would mean in the context of broadband access service—assuming they applied at all (such as Sections 223, 226, 228, and 260).  Commenters express no opinion on statutes not specifically addressed, beyond urging the Commission to apply the general framework discussed above. (references omitted.)

For the proponents of net neutrality regulation, Title II reclassification is not simply about applying sections 201, 202 and 208 of the Communications Act to broadband, and that’s why the wireless analogy is irrelevant and one reason why there’s so much opposition.

Another reason has to do with the basic purpose of the 1996 Telecommunications Act.  As Reed Hundt also pointed out in his memoir, “our policy was to introduce competition and then to deregulate,” and the “purpose of pro-competitive rulemaking ultimately would be the elimination of rules.”  The competition between telephone carriers, wireless providers and cable operators that a few visionaries tried to persuade a skeptical Congress in 1994-96 was just around the corner has come to pass, and with it the justification for the 1934 Title II regulatory framework is gone.

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.

The FCC adjusts the Universal Service Contribution Factor quarterly with the goal of generating approximately $8 billion annually to subsidize broadband for some users. One could argue that if the tax base increases by $150 billion, the FCC could afford to drastically reduce the Universal Service Contribution Factor. However, nothing would prevent the FCC from raising the contribution factor back up into the double digits again in the future. The federal income tax started out at 2%.

The FCC is faced with the problem of declining international and interstate telecommunications revenues upon which to impose the tax—since people are communicating in more ways besides making long-distance phone calls—and skeptics might question whether the FCC could resist the temptation to make vast new investments in the “public interest.” For example, at this very moment the FCC is proposing to update the broadband speed required for universal service support to 10 Mbps.

What Role Will the States Play?

Another interesting question is how the states will react to this. There is a long history of state public utility commissions and taxing authorities acting to maximize the scope of state regulation and taxes. Remember that telecommunications carriers file tax returns in every state and local jurisdiction—numbering in the thousands.

In Smith v. Illinois (1930), the United States Supreme Court ruled that there has to be an apportionment of telecommunication service expenses and revenue between interstate and intrastate jurisdictions. The Communications Act of 1934 is scrupulously faithful to Smith v. Illinois.

In 2003, Minnesota tried to regulate voice over Internet Protocol (VoIP) services the same as “telephone services.” The FCC declined to rule whether VoIP was a telecommunication service or an information service, however it preempted state regulation anyway when it concluded that it is “impossible or impractical to separate the intrastate components of VoIP service from its interstate components.” The FCC emphasized

the significant costs and operational complexities associated with modifying or procuring systems to track, record and process geographic location information as a necessary aspect of the service would substantially reduce the benefits of using the Internet to provide the service, and potentially inhibit its deployment and continued availability to consumers.

The U.S. Court of Appeals for the Eighth Circuit agreed with the FCC in 2007. Unfortunately, this precedent did not act as a brake on the FCC.

In 2006—while the Minnesota case was still working it’s way through the courts—the FCC was concerned that the federal Universal Service Fund was “under significant strain”; the commission therefore did not hesitate to establish universal service contribution obligations for providers of fixed interconnected VoIP services. The FCC had no difficulty resolving the problem of distinguishing between intrastate and interstate components: It simply took the telephone traffic percentages reported by long-distance companies (64.9% interstate versus 35.1% intrastate) and applyed them to interconnected VoIP services. Vonage Holdings Corp., the litigant in the Minnesota case (as well as in the subsequent Nebraska case, discussed below), did not offer fixed interconnected VoIP Service, so it was unaffected.

Before long, Nebraska tried to require “nomadic” interconnected VoIP service providers (including Vonage) to collect a state universal service tax on the intrastate portion (35.1%) of their revenues. Following the Minnesota precedent, the Eighth Circuit rejected the Nebraska universal service tax.

Throughout these legal and regulatory proceedings, the distinction between “fixed” and “nomadic” VoIP services was observed. According to the Nebraska court,

Nomadic service allows a customer to use the service by connecting to the Internet wherever a broadband connection is available, making the geographic originating point difficult or impossible to determine.   Fixed VoIP service, however, originates from a fixed geographic location. * * * As a result, the geographic originating point of the communications can be determined and the interstate and intrastate portions of the service are more easily distinguished.

Nebraska argued that it wasn’t impossible at all to determine the geographic origin of nomadic VoIP service—the state simply used the customer’s billing address as a proxy for where nomadic services occurred.  If Nebraska had found itself in a more sympathetic tribunal, it might have won.

The bottom line is that the FCC has been successful so far in imposing limits on state taxing authority—at least within the Eighth Circuit (Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota)—but there are no limits on the FCC.

Conclusion

Reclassifying broadband Internet access as a telecommunications service will have significant tax implications. Broadband providers will have to collect from consumers and remit to government approximately $24 billion—equivalent to approximately $89 per household for wireline Internet access and approximately $137 per smartphone. The FCC could reduce these taxes, but it will be under enormous political pressure to collect and spend the money.  States can be expected to seek a share of these revenues, resulting in litigation that will create uncertainty for consumers and investors.

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.

In another Forbes column, Steve Posiask discusses the possibility that reclassification could also trigger state and local taxes.  The committee report notes that if Congress allows the Internet access tax moratorium (which expires on Dec. 11, 2014) to lapse, states and localities could impose a crippling burden on the Internet.

In 2007, the average tax rate on communications services was 13.5%, more than twice the rate of 6.6% on all other goods and services. Some rates even exceed sin tax rates. For example, in Jacksonville, Florida, households pay 33.24% wireless taxes, higher than beer (19%), liquor (23%) and tobacco (28%). Moreover, these tax burdens fall heavier on low income households. They pay ten times as much in communications taxes as high income households as a share of income.  (citation omitted.)

For more information on state and local taxation of communications services, see, e.g., the report from the Tax Foundation on wireless taxation that came out this month.

The House committee report also notes that broadband Internet access is highly price-elastic, which means that higher taxes would be economically inefficient.

former White House Chief economist Austan Goolsbee authored a paper finding the average elasticity for broadband to be 2.75. Elasticity is a measure of price sensitivity and here indicates that a $1.00 increase in Internet access taxes would reduce expenditures on those services by an average of $2.75.  (citation omitted.)

Even if the Internet Tax Freedom Act is renewed by the lame duck Congress, the act isn’t exactly a model of clarity on this issue. The definition (see Sec. 1104) of “internet access service,” for example, specifically excludes telecommunications services.

INTERNET ACCESS.—The term ‘‘Internet access’’ means a service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users. Such term does not include telecommunications services.

And the definition of “telecommunications service” (also in Sec. 1104) is the same one (by cross-reference) that the FCC may try to interpret as including broadband.

TELECOMMUNICATIONS SERVICE.—The term ‘‘telecommunications service’’ has the meaning given such term in section 3(46) of the Communications Act of 1934 (47 U.S.C. 153(46)) and includes communications services (as defined in section 4251 of the Internal Revenue Code of 1986).

When the Internet Tax Freedom Act was enacted in 1998, Congress took great pains to not jeopardize the pre-existing authority of state and local governments to levy substantial taxes on telecommunications carriers. Notwithstanding, state and local tax collectors have been fighting the moratorium ever since.  Their point of view was summarized by Michael Mazerov in The Hill as follows:

Beyond costing states the $7 billion a year in potential revenue to support education, healthcare, roads, and other services, the bill would violate an understanding between Congress and the states dating back to the 1998 Internet Tax Freedom Act (ITFA): that any ban on applying sales taxes to Internet access charges would be temporary and not apply to existing access taxes.

The House passed H.R. 3086 in July. The “Internet Tax Freedom Forever Act” (S. 1431) is pending in the Senate Finance Committee.  Even if Congress renews the Internet Tax Freedom Act but fails to clarify the definitions in current law, there is a distinct possibility that state and local tax collectors will test the limits of the law if and when the FCC rules that broadband is no different than a Title II telecommunications service.

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.

Son, who is also the chairman of Sprint, has a legitimate grievance with overzealous U.S. antitrust enforcers.  But he should be aware that for many years the proponents of network neutrality regulation have cited international rankings in support of their contention that the U.S. broadband market is under-regulated.

It is a well-established fact that measuring broadband speeds and prices from one country to the next is difficult as a result of “significant gaps and variations in data collection methodologies,” and that “numerous market, regulatory, and geographic factors determine penetration rates, prices, and speeds.”  See, e.g., the  Federal Communications Commission’s most recent International Broadband Data Report .  In the case of wireless services, as one example, the availability of sufficient airwaves can have a huge impact on speeds and prices.  Airwaves are assigned by the FCC.

There are some bright spots in the broadband comparisons published by a number of organizations.

For example,  U.S. consumers pay the third lowest average price for entry-level fixed broadband of 161 countries surveyed by ITU (the International Telecommunications Union).

And as David Balto notes over at Huffington Post, Akamai reports that the average connection speeds in Japan and the U.S. aren’t very far apart—12.8 megabits per second in Japan versus 10 Mbps in the U.S.

Actual speeds experienced by broadband users reflect the service tiers consumers choose to purchase, and not everyone elects to pay for the highest available speed. It’s unfair to blame service providers for that.

A more relevant metric for judging service providers is investment.  ITU reports that the U.S. leads every other nation in telecommunications investment by far.  U.S. service providers invested more than $70 billion in 2010 versus less than $17 billion in Japan.  On a per capita basis, telecom investment in the U.S. is almost twice that of Japan.

In Europe, per capita investment in telecommunications infrastructure is less than half what it is in the U.S., according to Martin Thelle and Bruno Basalisco.

Incidentally, the European Commission has concluded,

Networks are too slow, unreliable and insecure for most Europeans; Telecoms companies often have huge debts, making it hard to invest in improvements. We need to turn the sector around so that it enables more productivity, jobs and growth.

It should be noted that for the past decade or so Europe has been pursuing the same regulatory strategy that net neutrality boosters are advocating for the U.S.  Thelle and Basalisco observe that,

The problem with the European unbundling regulation is that it pitted short-term consumer benefits, such as low prices, against the long-run benefits from capital investment and innovation. Unfortunately, regulators often sacrificed the long-term interest by forcing an infrastructure owner to share its physical wires with competing operators at a cheap rate. Thus, the regulated company never had a strong incentive to invest in new infrastructure technologies — a move that would considerably benefit the competing operators using its infrastructure.

Europe’s experience with the unintended consequences of unnecessary regulation is perhaps the most useful lesson the U.S. can learn from abroad.

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.  Broadband is a “multisided” market like newspapers.  Newspapers have two sets of customers—advertisers and readers—and both “pay to play.”  Advertisers pay different rates depending on how much space their ads take up and on where the ads appear in the newspaper.  And advertisers underwrite much of the cost of producing newspapers.

Or perhaps broadband providers might follow the longstanding practice of airlines that charge more than one price on the same flight.  In the early days of air travel, passengers only had a choice of first class.  The introduction of discounted coach fares made it affordable for many more people to fly, and generated revenue to pay for vastly expanded air service.

Broadband companies voluntarily invest approximately $65 billion per year because they fundamentally believe that more capacity and lower prices will expand their markets.  “Foreign” devices, content and applications are consistent with this vision because they stimulate demand for broadband.

The Internet giants and their allies oppose “paid prioritization” in particular.  But this is like saying the U.S. Postal Service shouldn’t be able to offer Priority or Express mail.

One of the dangers in cementing the current pricing model in regulation under the banner of preserving the open Internet is that of prohibiting alternative pricing strategies that could yield lower prices and better service for consumers.

FCC Chairman Tom Wheeler intends for his agency to begin a rulemaking proceeding this week on the appropriate regulatory treatment of broadband.  Earlier this month in Los Angeles, Wheeler said the FCC will be asking for input as to whether it should fire up “Title II.”

Wheeler was referring to a well-known section of the Communications Act of 1934 centered around pricing regulation that buttressed the Bell System monopoly and gave birth to the regulatory morass that afflicted telecom for decades.  A similar version of suffocating regulation was imposed on the cable companies in 1992 in a quixotic attempt to promote competition and secure lower prices for consumers.

Then, as now, cable and telephone companies were criticized for high prices, sub-par service and/or failing to be more innovative.  And regulation didn’t help.  There was widespread agreement that other deregulated industries were outperforming the highly-regulated cable and telecom companies.

By 1996, Congress overwhelmingly deemed it necessary to unwind regulation of both cable and telephone firms “in order to secure lower prices and higher quality services for American telecommunications  consumers and encourage the rapid deployment of  new telecommunications technologies.”

With this history as a guide, it is safe to assume not only that the mere threat of a new round of price regulation could have a chilling effect on the massive private investment that is still likely to be needed for expanding bandwidth to meet surging demand, and that enactment of such regulation could be a disaster.

Diminished investment is the gravest threat to the Internet, because reduced investment could lead to higher costs, congestion, higher prices and fewer opportunities for makers of devices, content and applications to practice innovation.

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…

This Congressional definition describes the dynamics of long-distance pricing in 1965, but it pre-dates the FCC rule (1986) and it’s still on the books.

Distance subsequently became virtually irrelevant as a cost factor due to improving technology by the 1990s, when long-distance prices became based on minutes of use only (although clashing federal and state regulatory regimes frequently did result in higher rates for many short-haul intrastate calls as compared to long-haul interstate calls).  Incidentally, it was estimated at the time that telephone companies spent between 30 and 40 percent of their revenues on their billing systems.

In any event, with the elimination of distance-sensitive pricing, the Internal Revenue Service’s efforts to collect the Telephone Excise Tax—first enacted during the Spanish American War—were stymied.  In 2006, the IRS announced it would no longer litigate whether a toll charge that varies with elapsed transmission time but not distance (time-only service) is taxable “toll telephone service.”

I don’t see why telecom companies are required to collect and store for 18 months any telephone data, since it’s hard to imagine they are providing any services these days that actually qualify as “toll telephone service,” as that term is currently defined in the United States Code.

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.

Those advocating retransmission consent changes are guilty of exaggerating the fact that retransmission consent fees have been on the increase and blackouts occasionally occur when content producers and pay-tv providers fail to reach agreement.  They are also at fault for attempting to  pass the blame.  DIRECTV dropped the Weather Channel in January, for example, rather than agree to pay “about a penny a subscriber” more than it had in the past.

A DIRECTV executive complained at a hearing in June that “between 2010 and 2015, DIRECTV’s retransmission consent costs will increase 600% per subscriber.”  As I and other have noted in the past, retransmission consent fees account for an extremely small share of pay-tv revenue.  Multichannel News has estimated that only two cents of the average dollar of cable revenue goes to retransmission consent.

According to SNL Kagan, retransmission-consent fees were expected to be about 1.2% of total video revenue in 2010, rising to 2% by 2014. at that rate, retrans currently makes up about 3% of total video expenses.

Among other things, DIRECTV recommended that Congress use the STELA reauthorization process to outlaw blackouts or permit pay-tv providers to deliver replacement distant broadcast signals during local blackouts.  In effect, DIRECTV wants to eliminate the bargaining power of content producers, and force them to offer their channels for retransmission at whatever price DIRECTV is willing to pay.

There is a need for regulatory reform in the video marketplace.  Unfortunately, proposals such as these do not advance that goal.  The government intervention DIRECTV is seeking would simply add to the problem by forcing local broadcasters to subsidize pay-tv providers instead of being allowed to recover the fair market value of their programming.  Broadcaster Marci Burdick was correct when she observed that regulation which unfairly siphons local broadcast revenue could have the unintended effect of reducing the “quality and diversity of broadcast programming, including local news, public affairs, severe weather, and emergency alerts, available both via [pay-tv providers] and free, over-the-air to all Americans.”

Broad regulatory reform of the video marketplace can and should be considered as part of the process House Energy and Commerce Committee Chairman Fred Upton (R-MI) and Communications and Technology Subcommittee Chairman Greg Walden (R-OR) recently announced by which the committee will examine and update the Communications Act.

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.”

After 1992, compensation for broadcasters was typically in-kind.  For example, Mark Robichaux writes in Cable Cowboy: John Malone and the Rise of the Modern Cable Business (2002) that in the ‘90s,

TCI, for one, refused to pay cash to any of the big networks, but it indicated it might be willing to make room on its systems for a new cable channel a broadcaster might like to start. One of TCI’s first deals was with the Fox network, owned by Rupert Murdoch’s News Corporation, Ltd. He was eager to forgo carriage fees for Fox’s TV stations in exchange for a slot on the cable dial, where he could start a new Fox cable network that would receive a separate fee from TCI cable systems.

As the years went by, channel space became far less scarce, and that’s why broadcasters and cable and satellite providers started negotiating cash compensation about ten years ago.  SNL Kagan projects that the fees will amount to $3.3 billion this year, and that they could increase to $7.15 billion in 2019.  There is nothing sinister about this.

Buyers and sellers are homing in on the true and sustainable fair market value of broadcast content using a new method of compensation.  Although the year-to-year increases look dramatic, rentansmission consent fees account for only about two cents out of every dollar of cable revenue and make up only about 3% of total video content expenses on average.  This isn’t a big deal.

Polka gets it wrong when he says that in a “truly free market, a cable operator would be allowed to negotiate a carriage deal with any TV station.”  He acknowledges in the next paragraph that the exclusivity rules merely “use government resources to enforce private contracts” that protect local affiliates of a particular network  such as ABC, CBS, NBC or FOX in one market from competition by affiliates in other markets.  Even without the exclusivity regulation, in other words, the private exclusivity contracts would still remain in effect.  We don’t need duplicative government enforcement mechanisms.  But in a free market economy the government does enforce valid private contracts as well as protect private property.  Exclusive dealing is common throughout the economy, and it can be enormously pro-competitive.

Although an unfortunate regulatory thicket has grown in and around how broadcasters monetize their product, one wonders if part of the angst surrounding this issue stems from a need for some people to overcome the fact that, although TV used to be “free,” times are changing.  The broadcast business model is evolving now that broadcasters compete for advertising dollars and cannot produce high-quality programming if they can’t sell it.

I respectfully disagree with my friends Alan and Steve, with whom I normally see eye-to-eye, if they are suggesting that limiting retransmission compensation would be a good thing because it would diminish the value of spectrum in the hands of broadcasters so they would be more likely to sell it for mobile wireless use.  That would be an example of central planning and letting the outdated, bureaucratic, cronyistic FCC pick winners and losers and block innovation.  Ideally, the solution is to let the broadcasters go into the mobile wireless business and vice versa.

There is plenty of room to reform FCC broadcast and media ownership rules, but unfortunately the focus of the current debate mostly seems to be about diminishing the fair market value of broadcast television.

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.

Wireless carriers T-Mobile and Sprint, both of which freely chose to load up on above-1 GHz spectrum in the past, now want to improve their access to low-frequency spectrum by capping the amount of spectrum below 1 GHz that any one carrier can hold.  T-Mobile proposes that no carrier be permitted to hold more than one-third of the spectrum below 1 GHz.  A cap would hit AT&T and Verizon Wireless. A lawyer for T-Mobile has even suggested the possibility that if regulators don’t ambush AT&T and Verizon Wireless going into the 600 MHz auction, then T-Mobile and perhaps others may not participate at all.

Fewer bidders could lead to lower auction proceeds, and the idea of T-Mobile and perhaps others sitting out the auction is intended to moot the objection that excluding AT&T and Verizon Wireless would depress bidding by suggesting that government and taxpayers can’t have it both ways. Either AT&T and Verizon Wireless are allowed to bid; OR, if the coast is clear, T-Mobile, Sprint and perhaps others will bid.  An auction in which all qualified bidders participate, apparently, may be out of the question.

Meanwhile, Sprint wants the FCC to classify, for regulatory purposes, the massive spectrum available to Sprint and its wholly-owned subsidiary Clearwire above 1 GHz as of inferior marketplace value and therefore not subject to any cap whatsoever—a policy that would let Sprint off the hook when it seeks to acquire more spectrum for itself in the future.

The implication of the T-Mobile and Sprint advocacy is that AT&T’s and Verizon Wireless’ low-frequency spectrum holdings confer a decisive competitive advantage; and that both T-Mobile and Sprint, through no fault of their own, could be irretrievably crippled if policymakers don’t intervene to ensure that they can immediately acquire significant amounts of low-frequency spectrum.

Ideally, any carrier would prefer to offer mobile wireless services using a combination of low- and high-frequency spectrum (see, e.g., the FCC’s Sixteenth Wireless Competition Report at page 17).  In the long run, T-Mobile and Sprint/Clearwire could theoretically improve operational flexibility by acquiring more of the low-frequency spectrum—although the competitive significance of this added flexibility is becoming less obvious as a result of changes in technology and consumer demand.

On the other hand, given that the upcoming 600 MHz auction comprises the only source of new spectrum on the horizon, were a cap to be imposed now it could inflict a severe hardship on AT&T and Verizon Wireless in the short- to medium-term.

That’s because in terms of network congestion, T-Mobile and Sprint currently have the competitive advantage.  Their networks are less congested.  Earlier this month, Sprint announced unlimited voice, text and data plans, something that would not be possible on a congested network.  And T-Mobile’s current advertising claims that T-Mobile’s network “delivers 50% more bandwidth than AT&T for significantly less congestion.”

What T-Mobile and Sprint actually fear is not the possibility that they will be unfairly foreclosed from acquiring more spectrum, but the possibility that AT&T and Verizon Wireless will be able to obtain additional spectrum for relieving network congestion, and that as a result there will be fewer dissatisfied AT&T and Verizon Wireless customers for Sprint and T-Mobile to poach.

The U.S. Department of Justice, which has warned of a possibility that AT&T or Verizon Wireless could try to act anticompetitively to “foreclose” a competitor from acquiring needed spectrum, is oblivious to the reality of network congestion as it relates in particular to AT&T and Verizon Wireless.

An obvious example of anticompetitive foreclosure occurs when a firm acquires an essential input for no other purpose but to keep it out of the hands of a competitor, not because the acquiring firm needs or intends to use the input itself.  Not only does the FCC have rules that prohibit stockpiling, or “warehousing”; but AT&T and Verizon Wireless have valid commercial purpose for acquiring more spectrum to alleviate network congestion.  If anything, AT&T and Verizon Wireless are the most likely victims of a foreclosure strategy.

Depriving the two most popular wireless service providers of additional spectrum by operation of regulation is a foreclosure strategy in which government is the bad actor.  If the FCC aids and abets Sprint’s  and T-Mobile’s invitation to foreclose on their competitors in the hope of forcing customers of AT&T and Verizon Wireless to jump ship without the need for offering them lower prices or other inducements to switch, then it will be an egregious example of government picking winners and losers.

Until recently, both Sprint and T-Mobile were losing customers and struggling to attract investment capital.  Whatever justification there might have been for government intervention a short time ago has been overtaken by events.

The FCC has approved an acquisition of Sprint by Softbank, a deal which provides $5 billion for Sprint to invest in network and service improvements, as well as Sprint’s acquisition of 100 percent of the stock of Clearwire.

T-Mobile is reinventing itself with innovative pricing and service plans, a network upgrade and the iPhone.  Company officials expect to halt the defection of contract customers that began in 2009 by the end of this year, and begin adding customers in 2014.

“T-Mobile’s innovative moves are putting pressure on our competitors, forcing other carriers – including AT&T and Verizon – to follow suit and start treating their own customers differently,” according to the Congressional testimony of the T-Mobile executive who testified Jul. 23.  “That’s what healthy competition achieves.”

T-Mobile’s recent success in the marketplace vindicates the U.S. Department of Justice’s assertion that “each of the Big Four nationwide carriers is especially well-positioned to drive competition” when it sued to block a proposed merger between T-Mobile and AT&T in 2011—unless the price of an independent T-Mobile is a continuing need for special treatment conferred by regulators at the expense of competitors.

The FCC and the Antitrust Division have successfully justified ongoing Congressional appropriations for years arguing that they are responsible for competition in telecommunications, and that they can play a continuing vital role in preserving and promoting competition.  In reality, technological development has made it possible for telephone companies, cable operators and wireless providers to compete with one another and  develop broadband Internet  services.  The only useful role the agencies have played is peeling back regulatory barriers that prevent competition or discourage private investment—later rather than sooner.

But as long as the agencies manage to hold themselves out, illogically, as indispensable protectors and promoters of competition, special interests are going to exploit the possibilities.  Competition was supposed to substitute for and not supplement regulation, and the proposals for spectrum aggregation provide yet another example of why it is time for Congress to complete the deregulation of telecommunications, a process that has been going on for, oh, about 30 years.

DISH Network gets another opportunity on Tuesday to plead with Congress for another Satellite Home Viewer Act reauthorization—ostensibly to protect consumers from unwarranted rate increases and program blackouts, but actually to preserve and expand DISH Network’s and DirecTV’s access to broadcast programming at regulated, below-market rates.

A couple minor provisions in the Act that have nearly outlived their original purpose are due to expire, but DISH Network is taking advantage of this opportunity to argue that  “there is much more that Congress can do to expand consumers’ access to local programming…”  DISH’s plea is an example of the narcotic effect of supposedly benign regulation intended to promote competition by giving nascent competitors a leg up.  DISH Network, in particular, has become addicted to artificially low prices for broadcast programming, and will seize any opportunity to reduce its programming costs some more through regulation.One of the problems with betting your shareowners’ company on regulation is that in politics, nothing lasts forever.  Another is that there are certain laws of economics, and they still apply.  Shareowners really ought to be on high alert for the appearance of a Beltway, State Capitol or City Hall strategy—firms that can compete and win in the marketplace have no need for regulatory advantages.

When the Act was passed, broad-beam satellite technology meant that carriers had to transmit the same programming across North America.  The carriers were given the right to retransmit distant broadcast signals from “superstations” (without first having to obtain the broadcaster’s consent) to households that could not receive an adequate over-the-air signal from any local station affiliated with a particular major network.

Spot-beam technology now allows the carriers to deliver local broadcast signals to each of the 210 corresponding local viewing areas.  And as a result of significant investment by the satellite carriers, very few households are without access to major networks or local stations.

In that sense, the Act and its progeny can be viewed as a success.  On the other hand, SNL Kagan estimates that, in 2013, programming fees received by broadcasters will represent a total of only $2.7 billion, compared to $31.5 billion for basic cable networks.  This data suggests the possibility that broadcasters are not recovering the fair market value of their programming.  If that’s the case, their ability to continue producing popular programming is in jeopardy.

DISH Network Chairman Charlie Ergen complains that broadcasters “cling to the status quo instead of meeting consumer demand and embracing new technologies and business models.”

But clearly, broadcasters are adapting to the fact that advertisers who used to underwrite the entire cost of broadcasting now have many more options that include cable networks.  It’s unrealistic to pretend we were still living in the 1970’s, when broadcasters had market power.

The facts are: (1) broadcasters are competing for their lives, and (2) broadcasters are a potent source of competition in content and delivery.  The last thing policymakers should be contemplating is forcing broadcasters to subsidize their competitors.

Under current law, satellite carriers will no longer be able to retransmit distant network signals to unserved households without first obtaining the consent of the broadcaster after Dec. 31, 2014.  Nor will broadcasters be prohibited from engaging in exclusive contracts for carriage of their signals.

As content producers, broadcasters generally have an incentive to reach as many viewers as possible by any means. But there are exceptions.  If both a professional ball club or a movie studio and a cable network or broadcaster, for example, believe it is in their mutual best interest to strike an exclusive deal, what’s wrong with allowing them to recover the full economic value of their collaborative enterprise?

If you are DISH Network and if reason prevails and your lobbyists cannot persuade Congress to prohibit exclusivity, there is a solution.  You can become the exclusive supplier of must-see content.

Consumers are best served in the long run by an efficient economy that expands prosperity, not by unholy alliances between struggling firms and policymakers.  Consumers benefit when a producer of something is permitted to obtain the full economic value of his or her product, because then they will produce more of it and look for ways to improve it.

So far, no one has demonstrated that consumers will be harmed if these expiring provisions—which are quite narrow in scope—are allowed to sunset.  The reality is that satellite carriers pay market-based rates for cable networks but don’t want to pay market-based rates for broadcast programming.  The simple fact is DISH Network is receiving a subsidy, and if Congress preserves it that is corporate welfare.

In her new book, Captive Audience, Susan Crawford makes the same argument that the lawyers for AT&T made in Judge Harold H. Greene’s courtroom in response to the government’s antitrust complaint beginning in 1981, i.e., that telephone service was a “natural monopoly.”  In those days, AT&T wanted regulation and hated competition, which is the same as Crawford’s perspective with respect to broadband now.  Here is what she said today on the Diane Rehm Show:

Diane Rehm: “Is regulation the next step?”

Susan Crawford: “It always has been for these industries, because it really doesn’t make sense to have more than one wire into our homes.  It is a very expensive thing to install; once it’s there, it has to be kept up to the highest level of maintenance, it has to allow for lots of competition at the retail level—across this wholesale facility—and it has to be available to consumers at reasonable cost.  That kind of result isn’t produced by the marketplace; it doesn’t happen by magic, because … when you can divide markets, and cooperate, you’re not going to come up with the best solution for consumers.

In her book, Crawford candidly says that “America needs to move to a utility model” for broadband … and “stop treating this commodity as if it were a first-run art film…”

It’s time for a stroll down memory lane.

In the early 1970’s, writes Steve Coll in his wonderful book on this subject (one of the most readable ever), there was a “precipitous and unprecedented decline in the quality of AT&T’s basic phone service to the public” and “morale among AT&T’s one million employees was disintegrating into malaise and dissension.”  This was when basic phone service was a utility.

By 1970 … the decline had reached crisis proportions in a number of major cities, including New York.  The basic problem was one of supply and demand: too much demand for new phone service and not enough AT&T facilities to accommodate all the new customers.  The result had been horrendous delays and breakdowns, especially in Manhattan, the nation’s media and financial capital.  Television networks, banks, securities underwriters, and publishing companies—all of which wielded great influence over how AT&T was perceived by investors and the public—had experienced long, aggravating delays in obtaining new phone service and having their phone systems repaired … Ma Bell quickly became a favorite object of jokes and political satire.  Lily Tomlin, the “Laugh In” comedienne, had developed a popular routine around an insolent telephone operator which seemed to capture perfectly the widespread unrest over deteriorating phone service.

Innovation also suffered during this period, because a 1956 consent decree severely limited AT&T’s ability to develop new business products based on emerging computer technologies.  The point is, regulation doesn’t always perform like the textbook model.  In telecommunications, the record is extremely spotty.  If regulation did not play a direct role in the service quality problems of 1970, for example, it certainly was powerless to stop them.

Coll’s excellent book is entitled The Deal of the Century: The Breakup of AT&T (1986); sadly, I have not been able to find a reference to this volume in Crawford’s source material.

The AT&T divestiture is frequently cited by progressives and populists as a splendid example of government intervention.  For Crawford, a similar intervention pointed in the reverse direction is the sort of thing the broadband industry needs now.  This is what Judge Greene had to say in 1985:

I have no doubt about the correctness of deregulation.  The basic fact of the phone industry is it grew up when it was a natural monopoly: wooden poles and copper wires.  Once it became possible to bypass this network through microwaves, AT&T’s [long-distance] monopoly could not survive.

As Judge Greene’s observation makes clear, it’s a gross exaggeration to claim that the government magically created the conditions for competition, as some do; technology did that.  The government—which awarded monopoly franchises and encouraged hidden cross-subsidies that were incompatible with competition—merely (as the late Alfred E. Kahn put it) had to “get the hell out of the way.”  Today, voice, video and data services can all be bypassed, and monopolies cannot survive.

Coll notes that the government lawyers were “driven by the conviction that AT&T was ‘unregulatable,’ as Walter Hinchman, the former common carrier chief, always put it.”  Crawford’s great flaw is her stubborn refusal to accept the frequent occurrence of regulatory failure.

Coll also cites the following observation by Irving Kristol, which captures how I partly felt reading Crawford’s book overall:

Irving Kristol, the former socialist turned neoconservative editor of The Public Interest, once commented that U.S. v. AT&T was less a conventional antitrust case than a “modern day variant on classical Marxist class warfare theories,” because it was fundamentally a struggle for power between a class of bureaucrats in the government—lawyers and technocrats in the Justice department, the FCC’s common carrier bureau, and in Congress—and the class of bureaucrats who ran the nation’s phone system, the one million employees of AT&T.

As Crawford’s book makes clear to me, that struggle for power rages on.

On Wednesday, the Subcommittee on Communications and Technology will conduct an oversight hearing of the implementation of spectrum auctions by the Federal Communications Commission.

The subcommittee members ought to consider the fact that although the mobile wireless industry faces an acute shortage of spectrum (“broadband spectrum deficit is likely to approach 300 MHz by 2014”), the FCC risks getting distracted and mired in a pointless effort to leverage its spectrum auctioning authority to manipulate the structure of the mobile wireless industry.

In mid-2011, former Commissioner Michael J. Copps warned of “darkening clouds over the state of mobile competition … we find ongoing trends of industry consolidation.”  As Copps saw it, increasing concentration will lead to higher prices for consumers.  His solution was for the market to have more competitors that look and perform like AT&T and Verizon Wireless.

Since Congress failed to prevent the FCC from engaging in what the late Alfred Kahn once called “oxymoronic efforts to promote competition by regulation” when it adopted the Middle Class Tax Relief and Job Creation (JOBS) Act in February, the path was clear for the FCC to act on Mr. Copps’ pessimism.  The commission issued a Notice of Proposed Rulemaking in late September for establishing caps on mobile spectrum holdings.  The NPRM is designed to eliminate AT&T’s and Verizon Wireless’ access to additional spectrum they need in the short-term to meet growing demand for mobile broadband services.There is a serious possibility of unintended consequences, since no one at the FCC appears to realize that establishing spectrum caps – even if only applied to a subset of mobile wireless providers – would create artificial scarcity that would tend to raise (not lower) overall consumer prices for these services, and/or promote more network “management” that would curtail (not expand) consumer choice.  For example, when government imposes discriminatory regulatory obligations that force some firms but not others to raise prices, it creates a protective pricing “umbrella” that allows those firms’ competitors to successfully compete by offering a lower price even though that may be higher than the lowest price the competitors are capable of charging.  The competitors get to pocket the difference and consumers are left holding the bag.

The justification for a rulemaking is based on an outdated analysis of market conditions, and this too seems to have escaped the FCC’s notice.  As has so often been the case in the history of telecommunications, the best efforts of FCC planners have been completely overtaken by events, and competition has expanded not as a result of the FCC’s planning and policies, but in spite of them.

By mid-October, before the ink could dry on the NPRM, the mobile wireless industry was undergoing another transformation.  T-Mobile USA and MetroPCS announced plans to merge, Softbank announced that it is acquiring 70 percent of Sprint (and providing $8 billion in capital for Sprint to invest) and Sprint reacquired a controlling share in Clearwire.  “We went from what was becoming a duopoly to a market with potentially four strong, well capitalized competitors with differentiated value propositions,” according to analyst Mark Lowenstein.  Sprint CEO Dan Hesse, notes the same report, claims that the Softbank deal “creates a stronger No. 3 … it competes with the duopoly of AT&T and Verizon.”

The FCC is always looking for ways to expand it’s jurisdiction, and arguably this is no exception.  The NPRM (paragraph 21) claims that “band-specific spectrum limits generally applicable to all licensees would be consistent with Section 6404 of the Spectrum Act,” although surely the commission realizes that that provision did not create new jurisdiction nor even encourage the agency to do anything.  Sec. 6404 of what is more commonly known as the JOBS Act was merely for the purpose of preventing the commission from evading the Administrative Procedure Act and targeting individual firms for discriminatory treatment.  If clarification is needed, Wednesday’s hearing would be a good opportunity.

Otherwise, the commission is on track to justify micromanaging the mobile wireless market in the future based on variations in the propagation characteristics of various frequency bands – not the sort of subject that Congress is calculated to want to study in great detail for the purpose of fulfilling its oversight responsibilities.

Understanding the Basics of Spectrum Propagation Characteristics

The commission points out (paragraph 35) that, as a general matter, lower frequency spectrum “allows for better coverage across larger geographic areas and inside buildings,” and it has noted elsewhere (paragraph 296) that “higher-frequency spectrum may be just as effective, or more effective, for providing significant capacity, or increasing capacity, within smaller geographic areas,” such as high-traffic urban areas.  “Because the properties of lower and higher frequency spectrum are complementary,” observes the FCC (NPRM, paragraph 35), “both types of spectrum may be helpful for the development of an effective nationwide competitor that can address both coverage and capacity needs.”

Generally, bidders have offered to pay less for higher-frequency spectrum, because it required more investment in facilities.   Since fewer towers were necessary to provide coverage in the lower bands, they tended to be more valuable.  As firms struggle to meet growing demand for mobile broadband services, however, these assumptions are being tested.

Sprint-Clearwire, for example, conserved cash at the auction block by acquiring extensive high-frequency holdings.  The current regulatory fest arises from the fact that Sprint-Clearwire now wants more low frequency spectrum, but does not want to want to pay a fair market price for it (another explanation is that it wants to foreclose its rivals from acquiring the only spectrum resources that are likely to be available in the “short” term).  Excluding AT&T and Verizon Wireless from the auction would accomplish all of these goals.  And apparently the FCC is willing to carry Sprint-Clearwire’s water.  Otherwise, the solution would be to encourage firms to buy and sell spectrum from each other on a secondary market to round out their holdings.

Sprint-Clearwire’s combined spectrum holdings are almost twice as big as AT&T’s, Verizon Wireless’ or T-Mobile USA-MetroPCS’s.  Sprint-Clearwire can “maintain it’s unlimited, lower-cost data offering several years longer than any other competitor in the market” without buying new spectrum, according to analyst Roger Entner.  “While all the other carriers are feeling the sprectrum crunch to a varying degree, the New Sprint sits pretty.”

Hoping to not trigger the FCC’s attribution rules, Sprint-Clearwire is trying to downplay the significance of its massive spectrum inventory (“While we have a majority stake, we do not have control of [Clearwire] …” according to a spokesperson for Sprint) .  Sprint gave up direct control of Clearwire’s board of directors – mainly in an attempt to escape potential liability for Clearwire’s debts – but retains de facto control of company.  Now the company needs to convince the FCC to draft the final rules with it’s complicated relationship in mind.  Were Sprint to have “control” of Clearwire, it could potentially be disqualified from bidding for more spectrum in some cases.  Ironically, Congress might be doing Sprint-Clearwire a favor by shutting down this rulemaking proceeding.

Congress ought to help the FCC see that it’s current course is problematic on multiple levels.  First, it will distract the FCC from its primary objective (supplying more spectrum to the market to facilitate abundant mobile broadband services).  Second, it could have unintended consequences, i.e., it could harm consumers.  Third, the market can no longer be described as a “duopoly” in need of government intervention (arguably it never was).  Fourth, with the relentless evolution of technology, the significance of variations in spectrum propagation characteristics is likely to be difficult to predict.  It all adds up to a counterproductive waste of the FCC’s limited resources.

No doubt you are aware that the Communications Act of 1934 eastablished the Federal Communications Commission, which has profoundly affected the broadcast, cable, telecommunications and satellite industries.  You will recall that the legislation was signed into law by President Franklin D. Roosevelt.  What you may not realize is that President Roosevelt made two subsequent attempts to abolish the Federal Communications Commission.

On Jan. 23, 1939, Roosevelt wrote similar letters to Senator Burton K. Wheeler and Congressman Clarence F. Lea urging dramatic FCC reform.

I am thoroughly dissatisfied  with the present legal framework and administrative machinery of the [Federal Communications] Commission.  I have come to the definite conclusion that new legislation is necessary to effectuate a satisfactory reorganization of the Commission. New legislation is also needed to lay down clear Congressional policies on the substantive side – so clear that the new administrative body will have no difficulty in interpreting or administering them. I very much hope that your committee will consider the advisability of such new legislation.

Although proposals for FCC reorginization were introduced at the time, Congress did not act.  Then World War II intervened.  It wasn’t until 1996 that Congress “comprehensively” updated the 1934 Act.  But the 104 ^th Congress left the “present legal framework and administrative machinery of the Commission” intact, and it failed to to “lay down clear Congressional policies on the substantive side.”

Roosevelt wanted to transfer the functions of all independent agencies like the FCC to cabinet departments.  A 1937 initiative for this purpose failed.  Two years later, Roosevelt took aim at the FCC directly.

Roosevelt’s specific issues with the FCC of the 1930s are a subject for a subsequent essay (they were primarily on the radio side, although also relevant to the telephone side).  In any event, his 1939 letter reinforces a libertarian critique of the 1934 act.  The law was overly broad and created too much room for the FCC to establish its own  policy preferences instead of serving to enforce the policies of elected congressional representatives and the president.

Althouth well-intentioned, the FCC (even to its most famous creator) was a disapointment and a mistake.  The 113 ^th Congress should carefully consider the 32^nd president’s advice.

An ad campaign urged residents of Butler, GA to “Stop AT&T From Raising Your Rates” by planning to attend a public hearing earlier this month at the Taylor County Courthouse to provide testimony in Docket #35068, Rate Cases on the Track 2 Companies.

The Georgia Public Service Commission sets the phone rates in Butler, but politics are politics, and AT&T is a better scapegoat for an ad campaign. AT&T doesn’t even provide the town’s phone service, although the telecom giant does help finance it. That’s because Georgia consumers pay a hidden tax on their phone bills that subsidizes the phone service provided by Public Service Telephone Co. in Butler. You guessed it, PST paid for the ads.

Congenial industry relations were a hallmark of the regulatory era.  The large companies that contribute the bulk of the subsidies mostly kept quiet, because they needed political support from the smaller companies that receive the subsidies to convince legislators and regulators to reform outdated rules that destroy proper incentives for investment and innovation. Besides, they could also pass the cost on to their customers. Nowadays, these firms simply can’t afford to play this game as they struggle to compete.

PST currently charges $17.27 per month for residential phone service, which is exceptionally low if you consider that in Atlanta the cost of residential phone service was $28.26 in 2007 (the last year such data was published by the Federal Communications Commission). The price in Butler may go up by 10%, according to PST, if the commission denies part of the company’s claim for assistance from the state’s Universal Access Fund.

PST is one of only three companies requesting in excess of $1 million in annual support from the fund, which is just one of several sources of subsidies these companies receive. At a hearing last August in Atlanta, certain expenses at PST received particular scrutiny, including: holiday party catering ($2,044), travel to industry meetings in the Virgin Islands ($913) and Alaska ($5,398), aircraft rental ($10,921), executive compensation ($1.2 million) and dividend payments made to the owners ($2 million).

AT&T, the Cable Television Association of Georgia and the Competitive Carriers of the South all participated in the hearing, because each has an interest in minimizing the burden that contributing to the fund imposes on consumers (most of whom receive no benefit). Captive ratepayers are a thing of the past as new technologies have given consumers added choices and reduced many of the costs of doing business, enabling providers of voice and video services get into each other’s business and offer consumers better value.

Revenues have been tanking for providers of traditional telephone service as more consumers discontinue landline service in favor of Internet-enabled VoIP and/or mobile phones. To survive, the phone companies can and must fully exploit new revenue opportunities that lay in cable TV, mobile phones and broadband.

Large and midsize providers may be forced to write off significant investment in facilities that are no longer needed, regardless of anticipated depreciation schedules. The Georgia legislature passed HB 168 in 2010 to protect small rural providers like PST. The legislation ensures sufficient funds for these lucky firms to recover their investment for several more years, even for facilities that are no longer in service. This means that even if their revenues continue to shrink, their subsidy entitlements will grow on a dollar for dollar basis. Similar firms in other states aren’t so fortunate.

As signed into law, HB 168 made it hard for consumers to monitor the cost of this arrangement. Since the legislation prohibited voice service providers from establishing a surcharge on bills consumers can see how much they are contributing, the firms have been forced to find less transparent ways of recovering this assessment. Fortunately, the legislature has since amended the law so that a fee can appear on bills beginning next year.

As manager of the fund, the Public Service Commission is attempting to act as a prudent steward. Telecom companies that contribute to the fund but receive little if any benefit, including but not limited to AT&T, are attempting to look out for millions of Georgia consumers who stand in the same shoes. These consumers would like to save money like everyone else, and they would also like to know that pubic resources are being managed responsibly. There is nothing sinister about that.

One of the most egregious examples of special interest pleading before the Federal Communications Commission and now possibly before Congress involves the pricing of “special access,” a private line service that high-volume customers purchase from telecommunications providers such as AT&T and Verizon.  Sprint, for example, purchases these services to connect its cell towers.

Sprint has been seeking government-mandated discounts in the prices charged by AT&T, Verizon and other incumbent local exchange carriers for years.  Although Sprint has failed to make a remotely plausible case for re-regulation, fuzzy-headed policymakers are considering using taxpayer’s money in an attempt to gather potentially useless data on Sprint’s behalf.

Sprint is trying to undo a regulatory policy adopted by the FCC during the Clinton era.  The commission ordered pricing flexibility for special access in 1999 as a result of massive investment in fiber optic networks.  Price caps, the commission explained, were designed to act as a “transitional regulatory scheme until actual competition makes price cap regulation unnecessary.”  The commission rejected proposals to grant pricing flexibility in geographic areas smaller than Metropolitan Statistical Areas, noting that

because regulation is not an exact science, we cannot time the grant of regulatory relief to coincide precisely with the advent of competitive alternatives for access to each individual end  user. We conclude that the costs of delaying regulatory relief outweigh the potential costs of granting it before [interexchange carriers] have a competitive alternative for each and every  end user. The Commission has determined on several occasions that retaining regulations longer than necessary is contrary to the public interest. Almost 20 years ago, the Commission determined that regulation imposes costs on common carriers and the public, and that a regulation should be eliminated when its costs outweigh its benefits. (footnotes omitted.)

Though many of the firms that were laying fiber during that period subsequently went bankrupt, the fiber is still in place.  According to the 1999 commission,

If a competitive LEC has made a substantial sunk investment in equipment, that equipment remains available and capable of providing service in competition with the incumbent, even if the incumbent succeeds in driving that competitor from the market.  Another firm can buy the facilities at a price that reflects expected future earnings and, as long as it can charge a price that covers average variable cost, will be able to compete with the incumbent LEC.  In telecommunications, where variable costs are a small fraction of total costs, the presence of  facilities-based competition with significant sunk investment makes exclusionary pricing behavior costly and highly unlikely to succeed. (footnotes omitted.)

Although many of the cell towers that require special access services today did not exist in 1999, investment in new fiber has resumed.  Citing research firm CRU Group, the Wall Street Journal reported in April that

Some 19 million miles of optical fiber were installed in the U.S. last year, the most since the boom year of 2000.  Corning Inc., a leading maker of fiber, sold record volumes last year and is telling new customers that it can’t guarantee their orders will be filled. (references omitted.)

Sprint nevertheless argues that “[r]easonably priced and broadly available private line services are particularly important for wireless carriers who depend on affordable backhaul to offer their wireless services,” and alleges that incumbent providers charge “supra-competitive rates” and “impose unreasonable and anti-competitive service terms that many purchasers of private line services are forced to accept because in many areas there are insufficient competitive alternatives.”

The last time someone looked carefully at this was early 2009, when Peter Bluhm and Dr. Robert Loube examined whether it was true that AT&T, Qwest (now CenturyLink) and Verizon were earning 138%, 175% and 62%, respectively, on the special access services they provided, as specialized accounting reports maintained by the FCC implied.  In the report that Bluhm and Loube prepared for the National Association of Regulatory Utility Commissioners (NARUC), they concluded that these figures were virtually meaningless and that the actual returns were more likely in the range of 30%, 38% and 15%, respectively.

These rates are higher than the 11.25% rate of return that telephone companies were entitled to earn when they were fully regulated.  On the other hand, the authorized rate of return was an average that concealed tremendous cost shifting from residential to business subscribers and from local to long distance.  Therefore, it is doubtful whether Sprint could have expected to purchase special access services for no more than 11.25% above cost even during the old days of fully regulated telecom markets.

Speaking of those days – celebrated by some as a golden era when regulators “protected” consumers – it is worth remembering that there was a dark side to telecom regulation, as Reed E. Hundt, chairman of the FCC when Congress passed the Telecommunications Act of 1996, referenced in his book ( You Say You Want a Revolution: A Story of Information Age Politics, 2000).

Behind the existing rules, however, were two unwritten principles.  First, by separating industries through regulation, government provided a balance of power in which each industry could be set against one another in order for elected figures to raise money from the different camps that sought advantageous regulation.  Second, by protecting monopolies, the Commission could essentially guarantee that no communications business would fail.  Repealing these implicit rules was a far less facile affair than promoting competition.

Sadly, this sort of thing is still alive and well.  Re-regulating special access pricing is one of the issues that may emerge at Tuesday’s FCC oversight hearing in the Subcommittee on Communications and Technology, and the FCC is reported to be working on an order that would require collection of additional data to evaluate the current regime, according to a majority committee staff background memo.

Based on the available evidence, Sprint appears to be looking for a handout.  The facts don’t justify re-regulation.  Why should taxpayers pay for gathering evidence that may or may not support a corporation’s plea for advantageous regulation?

Policymakers have much better things to do than entertain this vacuous debate.  If, as Sprint alleges, it is profitable for AT&T and Verizon to provide special access services, competitors will provide them, too, and competition will discipline prices.  If the current prices are not unreasonable, re-regulation will discourage private investment and diminish competition.

More this week on the efforts of Reed Hastings of Netflix to reignite the perennial debate over network access regulation, courtesy of the New York Times.  Hastings is seeking a free ride on Comcast’s multi-billion-dollar investment in broadband Internet access.

Times columnist Eduardo Porter apparently believes that he has seen the future and thinks it works: The French government forced France Télécom to lease capacity on its wires to rivals for a regulated price, he reports, and now competitor Iliad offers packages that include free international calls to 70 countries and a download speed of 100 megabits per second for less than $40.

It should be noted at the outset that the percentage of French households with broadband in 2009 (57%) was less than the percentage of U.S. households (63%)   according to statistics cited by the Federal Communications Commission.

There is a much stronger argument for unbundling in France – which lacks a fully-developed cable TV industry – than in the U.S.  As the Berkman Center paper to which Porter’s column links notes on pages 266-68, DSL subscriptions – most of which ride France Télécom’s network – make up 95% of all broadband connections in France.  Cable constitutes approximately only 5% of the overall broadband market.  Competition among DSL providers has produced lower prices for consumers, but at the expense of private investment in fiber networks.

Despite commitments by several of the major broadband companies … to invest in fiber roll-out, fiber-based broadband connections remain marginal in France …. In part, this may be due to the public controversy regarding access to the infrastructure of France Télécom … The delayed investment is also consistent with the argument that requiring open access to incumbent facilities delays investment.

This observation is from the same Berkman Center paper.  As a result of the delayed private investment, the paper acknowledges that “the French government has annouced its intention to help finance the deployment of fiber networks.”  Public subsidy is frequently the only option after politicians tax and/or regulate something to death.

The U.S. has already experimented with unbundling, and the trial was unsuccessful.  Prior to 2003, new entrants could purchase the high-frequency portion of local telephone loops to provide their own DSL service.  In February of 2003, the FCC eliminated line-sharing, which had allowed new entrants to offer DSL – but not voice – over incumbent loops (henceforth, new entrants could either purchase the entire loop or partner with a voice provider).

“There is no evidence that network sharing has increased competition in U.S. broadband markets,” according to Robert W. Crandall of the Brookings Institution.  “At the end of 2003, the FCC reported that only 1.7 percent of all broadband lines were DSL lines offered by nonincumbent telephone companies.”  (See Crandall, Competition and Chaos, 2005.)

Porter also claims that cable is often the only choice for consumers who desire very high speeds.  He is insinuating that there is monopoly problem in broadband, which might justify common carrier regulation pursuant to ancient legal theory.  The legal scholar Blackstone wrote an early text book on this subject in the 18th century.  Common carrier regulation guarded against monopolist misbehavior, but it also defended government-awarded monopolies from “ruinous” competition or unlimited liability.  It turned out to be a sweet deal for monopolists.  The fact that it victimized consumers became apparent by the 1970s.

Although telecommunications carriers are not investing in fiber-to-the-premises at the moment, they are investing in 4G wireless technologies that promise download speeds of 100 megabits per second or higher.  Verizon Chairman and CEO Lowell C. McAdam predicted earlier this week in Tampa that “mobile devices will generate more Internet traffic than all wired devices combined” by the middle of this decade.  And Wall Street Journal columnist Holman W. Jenkins, Jr. wrote this week that it seems, at least for now, that “wireless is the future of broadband.”

None of us can be sure what this market will look like in the future.  If big cable companies seem frightening now, it is worth recalling that for years doomsayers predicted that telecommunications carriers would monopolize data processing, video services, classified advertising, alarm monitoring, etc.  None of these predictions proved accurate.  Most successful commercial enterprises are one-trick ponies.

What is clear is that we never seem to tire of the network access regulation debate.  After many years of consideration, the FCC ruled  in 1984 that providers of “computer enhanced services” would not be regulated as common carriers.  Under pressure to reverse course in the late 1990s, FCC Chairman William E. Kennard (Democrat) declared that “the best decision government ever made with respect to the Internet was the decision that the FCC made 15 years ago NOT to impose regulation on it.”  In 2010, the FCC voted along party lines to “preserve the Internet as an open network.”  That decision is the subject of pending litigation.

Hastings apparently hopes to write the next version of this debate.

The airline would not let coach passenger Susan Crawford stow her viola in first class on a crowded flight from DC to Boston, she writes at Wired (Be Very Afraid: The Cable-ization of Online Life Is Upon Us).

Just imagine trying to run a business that is utterly dependent on a single delivery network — a gatekeeper — that can make up the rules on the fly and knows you have nowhere else to go. To get the predictability you need to stay solvent, you’ll be told to pay a “first class” premium to reach your customers. From your perspective, the whole situation will feel like you’re being shaken down: It’s arbitrary, unfair, and coercive.

Most people don’t own a viola, nor do they want to subsidize viola travel. They want to pay the lowest fare. Differential pricing (prices set according to the differing costs of supplying products and services) has democratized air travel since Congress deregulated the airlines in 1978. First class helps make it possible for airlines to offer both lower economy ticket prices and more frequent service. Which is probably why Crawford’s column isn’t about airlines.

For one thing, Crawford seems to be annoyed that the “open Internet protections” adopted by the Federal Communications Commission in 2010 do not curtail specialized services — such as an offering from Comcast that lets Xbox 360 owners get thousands of movies and TV shows from XFINITY On Demand. As the commission explained,

“[S]pecialized services,” such as some broadband providers’ existing facilities-based VoIP and Internet Protocol-video offerings, differ from broadband Internet access service and may drive additional private investment in broadband networks and provide end users valued services, supplementing the benefits of the open Internet. (emphasis mine)

Since XFINITY on Xbox is a specialized service similar to traditional cable television service, it doesn’t have to count towards the data usage threshold that applies to broadband Internet access services provided by Comcast. Netflix doesn’t want to be “shaken down” or pay “tribute” to get similar treatment, according to Crawford.

For the data usage threshold exemption to be provided at no charge to Netflix, however, Comcast would have to recover the cost and/or the value from somewhere else. Broadband providers invested nearly $65 billion in 2010 alone. FCC staff have estimated the cost of universal broadband availability is $350 billion for 100 Mbps or faster.

Neither taxpayers nor lenders are going to sustain this level of investment in the current economic and political environment. It will have to come from private investors, who have many options for managing their money and demand competitive returns on equity. Since specialized services share last-mile facility capacity with broadband Internet access services, they provide a valuable additional source of revenue for fueling investment in the network. The concept is the same as first class and economy class passengers sharing the cost of air travel.

Increasing broadband adoption is justifiably a major objective of FCC Chairman Julius Genachowski, who estimated that more than 100 million Americans (roughly 35% of U.S. households) could but did not have broadband in 2010 in part because they felt they could not afford it.

Making broadband universally affordable and preventing businesses from having the option to pay a first class premium to reach their customers (if they want) are not compatible goals. If anything, there is a need to reduce broadband prices, not subsidize Netflix sales. Broadband providers must be allowed to let customers who value their products and services pay more money so broadband providers will be in a stronger position to appeal to price-conscious consumers.

Kindle users, for example, pay for the content and get the wireless connectivity for free.

Crawford falsely claims that broadband is a “single delivery network — a gatekeeper — that can make up the rules on the fly and knows you have nowhere else to go.” She makes this untrue claim because “natural monopoly” is the classic legal justification for close government scrutiny and pervasive regulation.

The fact is that cable, telephone and mobile wireless providers all compete to offer similar broadband Internet access services. Fourth-generation wireless technologies being deployed now are believed to be capable of delivering peak download speeds of 100 Mbps or higher, comparable to DOCSIS 3.0 and Verizon’s FiOS service. There is no gatekeeper problem, only a desire on the part of some firms to seek political favors instead of undertaking the difficult and uncertain task of creating real consumer value.

Netflix’s success derives in large part because FedEx, UPS and the U.S. Postal Service did not rent out DVDs. Delivering video is a Comcast speciality, however, and Netflix has no obvious source of competitive advantage. That’s unfortunate, but a bailout would impose hidden costs on consumers in the form of high prices for broadband Internet access.

When government intrudes in the free market to perform a rescue of the type Netflix is seeking, it is picking winners and losers. Capricious government intervention frightens private investors and can lead to crony capitalism and corruption.

I’m not sure what Susan Crawford can do to avoid having to gate check her viola in the future. But not even she is advocating that Congress repeal airline deregulation so airlines are treated the same as telecommunications carriers again. Which is exactly what she is advocating for broadband.

Cecilia Kang of the Washington Post reports that

the telecom industry is forcing policymakers to re-examine what has long been a basic guarantee of government – that every American home should have access to a phone, along with other utilities such as water or electricity. Industry executives and state lawmakers who support this effort want to expand the definition of the phone utility beyond the century-old icon of the American home to include Web-based devices or mobile phones.

The quid pro quo for a monopoly franchise was an obligation to provide timely service upon reasonable request to anyone, subject to regulated rates, terms and conditions.  The Telecommunications Act of 1996 eliminated the monopoly franchise, but the obligation to serve remains in the statute books of most states.  Telecom providers, aka carriers-of-last-resort (COLR), are stuck with the quid without the quo.

This has become a problem as more and more consumers are “cutting the cord” in favor of wireless or VoIP services.  AT&T, for example, has lost nearly half of its consumer switched access lines since the end of 2006.  However, most of the loops, switches, cables and other infrastructure which comprise the telephone network must be maintained if telecom providers have to furnish telephone service to anyone who wants it within days.

The network consists of approximately 45 million tons of copper, not to mention thousands of supercomputers (optimized for switching calls, not routing packets), plus cavernous central offices with nearly vacant employee parking lots in most of the nation’s towns, suburbs and urban districts, and so on.  The cost of this massive capital base is recovered according to insanely long depreciation schedules and other gimmicks established by politicians serving on “expert” public utility commissions intent on keeping rates for basic local telephone service far below cost.

In other words, there are high fixed costs in the telecom business which do not vary in direct proportion to the number of consumers who choose to pay for telephone service in any given month or year.  When millions of consumers cut the cord, there are far fewer customers to share these substantial fixed costs.

The legacy telephone network, which is extremely reliable but horribly inefficient, cannot be sustained indefinitely.  Voice services will be delivered over broadband platforms along with data and video.  Once networks are optimized for video, incidentally, voice may become a free app.  “The challenge for the country,” according to the National Broadband Plan at page 59, “is to ensure that as [Internet Protocol]-based services replace circuit-switched services, there is a smooth transition for Americans who use traditional phone service and for the businesses that provide it.”

States with legacy COLR requirements will have no choice but to act. Where consumers have a choice between voice service providers, no provider should be saddled with a monopoly-era COLR obligation.

If it is necessary to require an incumbent to provide service, the incumbent should be free to choose the technology(ies) it will use to serve its customers.  It might be cheaper, for example, to serve consumers in some remote areas by satellite than by other means.

What about Susan Shaw cited in the Washington Post, the 53-year-old grandmother who is not interested in paying for cellular service, which would probably be costlier than the $12 a month she pays for her plain old phone?

Ms. Shaw’s landline phone service is heavily subsidized, costing far in excess of the $12 a month she pays.  Telecom providers no longer have captive ratepayers.  They are struggling to compete and cannot continue to act as private-sector tax collectors.

If $12 a month voice service for Ms. Shaw is a national priority, Congress should commit general tax revenues for that purpose.  In that case, Congress might want to consider that the economics of fixed-line telephone service doesn’t compute anymore and there may be a range of more efficient alternatives.

When the federal government torpedoed the AT&T/T-Mobile USA merger in December pursuant to the current administration’s commitment to “reinvigorate antitrust enforcement,” it created a new client in search of official protection and favors.

It was clear there is no way T-Mobile – which lost 802,000 contract customers in the fourth quarter – is capable of becoming a significant competitor in the near future.  T-Mobile doesn’t have the capital or rights to the necessary electromagnetic spectrum to build an advanced fourth-generation wireless broadband network of its own.

T-Mobile’s parent, Deutsche Telekom AG, has been losing money in Europe and expected its American affiliate to become self-reliant.  In 2008, T-Mobile sat out the last major auction for spectrum the company needs.

The company received cash and spectrum worth $4 billion from AT&T when the merger fell apart, from which T-Mobile plans to spend only $1.4 billion this year and next on the construction of a limited 4G network in the U.S.  But it must acquire additional capital and spectrum to become a viable competitor.

Unfortunately, every wireless service provider requires additional spectrum. “[P]rojected growth in data traffic can be achieved only by making more spectrum available for wireless use,” according to the President’s Council of Economic Advisers.  Congress recently gave the FCC new authority to auction more spectrum, but it failed – in the words of FCC Chairman Julius Genachowski – to “eliminate traditional FCC tools for setting terms for participation in auctions.”

Everyone fears it will take the FCC years to successfully conduct the next round of auctions while it fiddles “in the public interest.”  That’s why Verizon Wireless is seeking to acquire airwaves from a consortium of cable companies, and why T-Mobile will do anything to stop it.

T-Mobile previously looked into buying the spectrum for itself, but it didn’t happen.  If regulators can be persuaded to block the Verizon Wireless from acquiring it, that would reduce the market value of the spectrum and create an opening for T-Mobile to acquire it at a significant savings.

When government intervenes to protect an underdog, it diminishes the rewards for success and the penalties for failure that drive competition and innovation.

In this case, T-Mobile is arguing that (1) spectrum is not created equal, (2) Verizon Wireless has acquired more than its “fair” share of the most valuable frequencies, (3) Verizon Wireless is acting with anticompetitive animus to foreclose T-Mobile’s access to a critical input, i.e., low-frequency spectrum, which (4) Verizon Wireless itself does not need but intends to “warehouse.”

The argument that Verizon Wireless has ended up with valuable frequencies while T-Mobile has not does not stand up to close scrutiny.  The FCC has wisely declined to take this bait in the past.

Although it is true that it takes fewer towers or cell sites to serve a geographical area at a lower frequency, superior coverage counts for less in urban areas where heavier demand requires more towers to boost capacity.  In higher population densities, low and high frequencies offer almost equivalent performance, according to Peter Rysavy.  Operating in the higher frequencies in congested areas, as T-Mobile does, if anything, provides a competitive advantage, because those frequencies have a lower market value and therefore cost less to acquire.

Verizon Wireless does require additional spectrum, just like every other wireless provider.  The issue here is simply who is more “deserving” of spectrum that is available for purchase now on a secondary market while the rest of the industry waits for the FCC to play its political games.  No one is suggesting that any entity has more spectrum than needed to accommodate rapidly increasing demand for wireless services.

The contention that Verizon Wireless plans to warehouse the spectrum it seeks to purchase ignores the fact that the FCC imposes performance requirements on licensees.  There are buildout deadlines, plus the necessity to demonstrate that substantial service was provided in order to win a license renewal every ten years or so.

When the Department of Justice and the FCC prevented AT&T from acquiring T-Mobile last year, they apparently thought they were promoting competition.  But government efforts to enhance competition, accelerate private investment or attract new entrants almost always have unintended consequences.

The principle of moral hazard posits that if the cost of failure will be borne by someone else, those who are in the best position to minimize risk will have little incentive to do so.  When government partners with private companies, it often ends in bankruptcy.  As a nation, we depend on businesspeople to manage firms with skill and foresight, not on taxpayers to bail them out.

If T-Mobile can’t make it on its own, which seems more likely than not, the FCC and DOJ have merely laid the foundation for a vicious cycle of regulatory battles, of which Verizon Wireless/SpectrumCo/Cox Wireless transaction is just the beginning.  One suspects the agencies have signed on a high-maintenance client.

Congress freed up much-needed electromagnetic spectrum for mobile communications services Friday (H.R. 3630), but it set the stage for years of wasteful lobbying and litigating over whether regulators should be allowed to pick winners and losers among mobile service providers.

The wireless industry has thrived in the near absence of any regulation since 1993.  But lately the Federal Communications Commission has been hard at work attempting to change that.

A leaked staff report in December helped sink AT&T’s attempted acquisition of T-Mobile.  And the commission has taken the extraordinary step of requesting public comments on an agreement between Comcast and Verizon Wireless to jointly market their respective cable TV, voice and Internet services, beginning in Portland and Seattle.  Nothing in the Communications Act prohibits cable operators and mobile phone service providers from jointly marketing their products.

FCC Chairman Julius Genachowski objected to a previous version of the spectrum bill which, among other things, would have prohibited the commission from manipulating spectrum auctions for the benefit of preferred entities.  The limitation was removed, and Sec. 6404 provides that nothing in the legislation “affects any authority the Commission has to adopt and enforce rules of general applicability, including rules concerning spectrum aggregation that promote competition.

The common thread is a determination limit the size of leading firms for the benefit of smaller or less successful wireless competitors, such as Sprint, T-Mobile or approximately 100 other entities.  Conventional theory implies that more equally-sized competitors yield lower prices for consumers.  In this case, however, if a wireless service provider cannot obtain additional spectrum to meet growing demand for its service, it could be forced to raise prices in order to reduce network congestion rather than lower prices to sell more service.

The FCC tried a similar “pro-competition” experiment in the late 1990s.  Seeking to promote retail competition in local telephone service, the commission ensured that new entrants got below-cost wholesale access to incumbent networks.  It also delayed the incumbents from competing in the long-distance market to ensure their obedience.  These policies precipitated a disastrous investment bubble that burst in 2000-02.  Meaningful voice competition eventually emerged from the wireless and cable industries, which are subject to minimal FCC oversight.

Congress gave the commission wide-ranging powers in 1934 to tame telephone monopolies and award “scarce” broadcasting rights to “worthy” men.  Although technological innovation has radically reduced the economic and physical barriers to competition, influential commercial and ideological special interest groups refuse to let go of power and privilege.

Free Press, one of the most strident of the FCC’s ideological clients, claims that the Comcast-Verizon Wireless joint marketing agreement would “put an end to any hope for nationwide competition between truly high-speed Internet service providers, while dousing any chance of next-generation wireless services competing against cable and telco broadband.”

Free Press is the same group that argued in 2007 that wireless and wireline broadband services are completely different products.  “They are not comparable in either performance or price; they are not substitutable services; and they are certainly not direct competitors.”  That was a snapshot, not a trending analysis.  Pew Research found in 2010 that 59 percent of U.S. adults now access the internet wirelessly.  And according to the FCC, nearly 70 percent of the U.S. population can choose between four or more wireless broadband providers.  Now even Free Press acknowledges that next-generation wireless services can compete against cable and telco broadband.

Free Press also predicted in 2007 that “carriers that dominate the wireline broadband market are highly unlikely to offer a wireless broadband product that can potentially cannibalize their wireline marketshare.”  But this is exactly what Verizon and AT&T are doing with the roll out of faster fourth generation mobile broadband networks.

If the wireless market is difficult to predict, that is because it’s still a dynamic arena where innovative providers compete to offer superior coverage, reliability and functionality.  It is not a mature commodity market where retail price is the only basis of competition, everything else being equal.

If regulators create obstacles for firms that have invested wisely and operate efficiently, to make it easier for rivals catch up, they reduce the incentive to innovate.  Ultimately the best way to achieve the lowest prices is to maintain incentives for private investment in bigger and faster networks.  If investment is discouraged as a result of regulation, there is a danger wireless service providers will have no choice but to ration service to relieve network congestion.

With wireless device and service providers delivering constantly improving products and services, it is not clear there is anything regulators can or should do to promote consumer welfare besides conducting efficient auctions in which spectrum can be assigned to the highest bidders and approving spectrum license transfers between willing buyers and sellers.

AT&T and T-Mobile withdrew their merger application from the Federal Communications Commission Nov. 29 after it became clear that rigid ideologues at the FCC with no idea how to promote economic growth were determined to create as much trouble as possible.

The companies will continue to battle the U.S. Department of Justice on behalf of their deal.  They can contend with the FCC later, perhaps after the next election.  The conflict with DOJ will take place in a court of law, where usually there is scrupulous regard for facts, law and procedure.  By comparison, the FCC is a playground for politicians, bureaucrats and lobbyists that tends to do whatever it wants.

In an unusual move, the agency released a preliminary analysis by the staff that is critical of the merger.  Although the analysis has no legal significance whatsoever, publishing it is one way the zealots hope to influence the course of events given that they may no longer be in a position to judge the merger, eventually, as a result of the 2012 election.

This is not about promoting good government; this is about ideological preferences and a determination to obtain results by hook or crook.The staff analysis makes it painfully clear that the people in charge have learned very little from the failure of government to reboot the nation’s economy.  For starters, the analysis notes points out that “there will be fewer total direct jobs across the business,” notwithstanding various commitments the companies have made to protect many existing jobs and add many new ones.   The staff should have checked with the chairman of President Obama’s jobs council, for one.  CEO Jeff Immelt drives growth at GE through productivity and innovation, not by subsidizing inefficiency (see, e.g., this).

Immelt realizes that when government tries to preserve wasteful methods, firms become uncompetitive and lose market share.  That’s a recipe for unemployment.  The FCC staff analysis has got it completely backwards.  When politicians set out to “create” jobs, it is often at the expense of productivity.  We don’t need that kind of “help” from Washington.  Russell Roberts recounts in a recent column a story that bears repeating here.

The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren’t there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman’s response: “Then why not use spoons instead of shovels?”

FCC Chairman Julius Genachowski got it essentially correct when he remarked in a recent speech that, “Our country faces tremendous economic challenges.  Millions of Americans are struggling.  And new technologies and a hyper-connected, flat world mean unprecedented competition for American businesses and workers.”  Sadly, he does not realize that a merger between AT&T and T-Mobile provides a vehicle for that.

The combined company would have the “necessary scale, scope, resources and spectrum” to deploy fourth generation wireless services to more than 97% percent of Americans (instead of 80%), according to a filing they made in April.  That would make our nation more productive and improve our competitiveness, which is we want.  An analysis by Ethan Pollack at the Economic Policy Institute predicts that every $1 billion invested in wireless infrastructure will create the equivalent of approximately 12,000 jobs held for one year throughout the economy, and that if the combined company’s net investment were to increase by $8 billion, the total impact would be between 55,000 and 96,000 job-years.  The FCC staff thinks this is an irrelevant consideration, because it might happen anyway.

Several commenters respond that even absent the proposed transaction, AT&T would likely upgrade its full footprint to LTE in response to competition from Verizon Wireless and other mobile and other mobile wireless providers * * * * Nothing in this record suggests that AT&T is likely to depart from its historical practice of footprint-wide technological upgrades with respect to LTE even absent this transaction.

They may be right, but this is wishful thinking at a time when millions of Americans are struggling.  The best course of action at this point is to improve incentives for corporations to increase capital investment, improve productivity, capture market share and create more jobs.   The Feds should obviously approve this merger, because the record clearly shows that the companies are willing to undertake a massive net increase in capital investment, now.

What about the counter-argument that if there are fewer wireless providers, that may lead to consumer price increases down the road?  We can worry about that later.  Right now, we need to worry about the unemployed.  Incidentally, increasing supply in wireless is very simple.  The FCC can simply award additional spectrum for mobile communications.  Almost everyone agrees that this is the best tool the government has to promote competition in wireless.

The FCC committed another unforgivable error when it tried to blow up this merger.  This is not the first time the commission has recklessly put entire sectors of our nation’s economy at risk while it conducts  idealistic experiments for attaining consumer savings through rate regulation or regulatory mischief in pursuit perfectly competitive markets.  The FCC’s cable rate regulation experiment in the early 1990s and its local telephone competition experiment in the late 1990s were both total failures and complete disasters.

This agency could use some humility, or some adult supervision.

Futurists have been predicting for years that there will be diminished privacy in the future, and we will just have to adapt. In 1999, for example, Sun Mcrosystems CEO Scott McNealy posited that we have “zero privacy.” Now, Wall Street Journal columnist Gordon Crovitz is suggesting that technology has the “power to rewrite constitutional protections.” He is referring to GPS tracking devices, of all things.

The Supreme Court is considering whether it was unreasonable for police to hide a GPS tracking device on a vehicle belonging to a suspected drug dealer. The Bill of Rights protects each of us against unreasonable searches and seizures. According to the Fourth Amendment,

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

In the case before the Supreme Court, U.S. v. Antoine Jones, the requirement to obtain a warrant was not problematic. In fact, the police established probable cause to suspect Jones of a crime and obtained a warrant. The problem is, the police violated the terms of the warrant, which had expired and which was never valid in the jurisdiction where the tracking occurred. Therefore, first and foremost, this is a case about police misconduct.

If police are free to ignore the express terms of a warrant issued by a judge, then the police are essentially free to do whatever they think is necessary to get their job done. We are all human, subject occasionally to passionate and greedy impulses, and no one in a position of authority should be free to do exactly as they please.

Sometimes the requirement to obtain a warrant may be problematic. For example, Judge Richard A. Posner, among others, has  argued that the warrant requirement makes it too difficult for police to prevent terrorism.

The administration is right to point out that [Foreign Intelligence Surveillance Act], enacted in 1978 — long before the danger of global terrorism was recognized and electronic surveillance was transformed by the digital revolution — is dangerously obsolete. It retains value as a framework for monitoring the communications of known terrorists, but it is hopeless as a framework for detecting terrorists. It requires that surveillance be conducted pursuant to warrants based on probable cause to believe that the target of surveillance is a terrorist, when the desperate need is to find out who is a terrorist.

No one can make a compelling argument why the Fourth Amendment imposed an undue burden on police in the case of Antoine Jones. Naturally, it is understandable that police, prosecutors and some over-zealous law-and-order types would want to take full advantage of new technologies for keeping up with the bad guys. Some techno-futurists, such as Crovitz, who understand that privacy in the digital world will be different than what we became accustomed to in the analog world, are insufficiently sensitive to the dangers posed by unfettered investigative and prosecutorial discretion in the hands of government agents.

Crovitz offers the quaint example of cameras to remind us that at one time, way back when, it was considered an invasion of privacy to take a photo of someone else in a public setting without their permission. “What was unreasonable before may be reasonable now,” he concludes. What Crovitz overlooks is that it may take decades for the public’s reasonable privacy expectations to change, as it certainly did with respect to photography in public spaces. Should judges be guided by the privacy expectations we have today, or should they try to predict how privacy expectations will evolve so they can impose new norms? Isn’t the latter a dangerous form of judicial activism?

The real problem here, as Justice Stephen G. Breyer warns, is that if the government wins the Jones case, “then there is nothing to prevent the police or the government from monitoring 24 hours a day the public movement of every citizen of the United States.” The police have always had the right to tail a suspect, and they can still do that. They have never had sufficient resources to potentially surveil the entire population.

No one is suggesting that the police should not be free to take advantage of the opportunities that new technologies offer. The requirement to obtain a warrant hardly prevents them from doing that. But it does force the police to focus on the people who are reasonably suspected of committing particular crimes, and not on the rest of us. The Fourth Amendment protects us from harassment and intimidation just because we express, or may even be suspected of holding, unfavorable views about the people in power. Protecting the Fourth Amendment is vital for protecting our liberty.

Since there is no reason why police cannot obtain a warrant before they hide a GPS tracking device on a suspected criminal’s vehicle, there is no novel conflict with the Fourth Amendment. Jones, therefore would seem to present a fairly straightforward question between whether we want to live in a police state or not.

GPS tracking devices have no intrinsic “power to rewrite constitutional protections.” We do not have to relinquish our fundamental liberties so long as we remain vigilant patriots determined to keep them.

Is it “insane” for free market oriented thinkers to support the AT&T/T-Mobile merger?  Although AT&T says there are five choices of wireless providers to choose from in 18 of 20 major markets, Milton Mueller argues that 93 percent of wireless subscribers prefer a seamless, nationwide provider.  If the merger is approved, there would only be three such providers.

A market dominated by three major providers is neither competitive nor noncompetitive as a definitional matter.  Factual analysis is necessary to determine competitiveness.

And it may be premature to conclude that there is no competitive significance either to the fact there are over a hundred providers currently delivering nationwide service on the basis of voluntary roaming agreements that are common in the industry, or to assume that the possibility the FCC will double the amount of spectrum available for wireless services will not impact the structure of the industry.

The trouble with antitrust generally is the possibility that government will choose to protect weak or inefficient competitors, thus preventing meaningful competition that attracts private investment which leads to innovation, better services and lower prices.  Antitrust is supposed to protect consumers, not politically influential producers.  Although this sounds simple in theory, it can get confusing in practice.  As free market oriented thinkers, we do not want government picking winners and losers.

As Larry Downes correctly points out, if concentration leads to higher prices there will be more profits for competitors and more competition.  Schumpeter teaches that short-run monopolies come and go, while long-run monopolies are exceedingly rare – unless “buttressed by public authority.”

Mueller makes a couple other important points that reflect the thinking of a lot of people.  One is AT&T’s customer satisfaction ratings, prices and network performance.   This merger would provide extra spectrum the carrier needs to address each of these issues, however.

Although there are other ways to increase network capacity, they won’t be enough.  The National Broadband Plan notes that data traffic on AT&T’s mobile network increased 5,000% between 2006 and 2009.  According to the chairman of the FCC, “We need to tackle the looming spectrum crunch by dramatically increasing the new spectrum available for mobile broadband, and the efficiency of its use.”  That’s why the broadband plan is proposing to double the amount of spectrum available for wireless, a process that could take several years.  Historically, it has taken 6-13 years to reallocate spectrum.

Mueller also points out that AT&T cited network capacity issues when it opposed microwave-based competition in long-distance (in the 1960s).  AT&T has been criticized for the advocacy it used in those days.  The real problem the company faced then was being saddled with a pricing structure that was incompatible with competition, but policymakers were not about to change that.  Regulation mandated that AT&T charge high prices for long-distance to subsidize “affordable” ( i.e., at-or-below cost) local service.  That set up an attractive cream-skimming opportunity for potential competitors such as MCI.  The new entrant’s business plan was to compete for the fat long-distance profits and not get stuck with money-losing local service obligations.  That was a real problem.

Finally, Mueller suggests limited government intervention as a preventative for excessive government intervention.

If you support a competitive industry where one can reasonably expect the public and legislators to rely on market forces as the primary industry regulator, this merger has to be stopped. On the other hand, if you welcome the growing pressures for regulating carriers and making them the policemen and chokepoints for network control, a bigger AT&T is just what the doctor ordered.

A similar argument was made in the early 1980s with regard to local and long-distance service.  Regulate local so long-distance can be free.  This is so defeatist.  As free market thinkers, we need to stand for principle.  Unwarranted government intervention in the free market should be opposed.

If the FTC, Department of Justice and/or FCC do find that such a merger would substantially lessen competition, they could also impose specific conditions to ameliorate the impact – making it unnecessary to block a merger outright.  Minimum intervention ought to be the first choice for free market thinkers.